The CHIPS Act’s advantageous direct-pay election

Congress enacted the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act)¹ out of concern about the United States’ declining share of global production of semiconductor chips. The act’s purpose was to bolster domestic production of these complex electronic devices that are crucial to everything from personal computers and household appliances to defense systems.

One of the incentives the CHIPS Act offers is an advanced manufacturing investment tax credit under Sec. 48D equal to 25% of qualified investment in new buildings, facilities, and other depreciable tangible property integral to the operation of a facility to manufacture semiconductors or semiconductor manufacturing equipment. Because these manufacturing facilities can easily cost more than $1 billion to build or expand, this can be a valuable credit.²

Under Sec. 48D, a business that meets the eligibility requirements for the advanced manufacturing investment tax credit can make what is officially described as an “elective-payment election” — but which is often termed a direct-pay election (both names are used interchangeably in this article).³ A taxpayer making this election treats the credit as a direct payment made against its federal income tax, thereby allowing it a refund of the amount in excess of any tax liability. In effect, the election makes the advanced manufacturing investment tax credit refundable.

On March 11, 2024, the IRS published final regulations on the Sec. 48D direct-pay election⁴ and removed certain temporary regulations.⁵ The final regulations generally apply to tax years ending on or after March 11, 2024, although taxpayers may rely on them for prior tax years, provided they are followed in their entirety and in a consistent manner and that the property was placed in service after Dec. 31, 2022.

This article summarizes the key features of the Sec. 48D(d) direct-pay election, focusing on the recently issued final regulations. While a similar election is available in some circumstances for energy-related tax credits under the Inflation Reduction Act of 2022,⁶ the present focus is on the direct-pay election for the CHIPS Act’s advanced manufacturing investment tax credit.

Description of provisions

Consistent with the proposed regulations, the final regulations on the Sec. 48D(d) direct-pay election are divided into six sections:

• Regs. Sec. 1.48D-6(a) provides an overview of rules and procedures for the elective-payment election process;
• Regs. Sec. 1.48D-6(b) provides a detailed overview of the prefiling registration and elective-payment election process under Sec. 48D(d) (1) for qualified property in an advanced manufacturing facility;
• Regs. Sec. 1.48D-6(c) provides the rules and procedures for making an elective-payment election under Sec. 48D(d)(1);
• Regs. Sec. 1.48D-6(d) provides the rules and procedures for partnerships and S corporations;
• Regs. Sec. 1.48D-6(e) provides the rules for the denial of a double benefit;
• Regs. Sec. 1.48D-6(f) provides the rules for excessive payment penalties; and
• Regs. Sec. 1.48D-6(g) details the rules for basis reduction and recapture.

Who can get a direct payment?

Generally, any eligible taxpayer that completes the prefiling registration requirements can make a direct-pay election regarding any Sec. 48D credit. Upon making this election, which is irrevocable,⁷ the taxpayer is treated as making a payment against its federal income taxes for the tax year in which a Sec. 48D credit is determined. This payment equals the amount of the Sec. 48D credit for any qualified property permitted to the taxpayer. The payment will be treated as made on the later of the due date of the tax return, including extensions, or the date the return is filed.⁸

Prefiling registration requirements

The final regulations clarify in Regs. Sec. 1.48D-6(b) that before making an elective-payment election, a taxpayer must complete a prefiling registration and receive a valid registration number for their investment in the facility. The prefiling registration process must be completed electronically via the IRS portal, in accordance with the specific instructions provided.⁹ Members of a consolidated group must also complete prefiling registration prior to making an elective-payment election. Each qualified investment in an advanced manufacturing facility needs its own registration number. Specific information, including the taxpayer’s general information, tax year, type of annual returns, list of qualified investments, additional data required by the IRS portal, contact person details, and a statement made under penalties of perjury, must be provided to complete the prefiling registration process.

For each qualified investment, the portal requires additional information including the type of qualified investment; physical location information; supporting documentation relating to the construction, reconstruction, or acquisition of the advanced manufacturing facility; beginning-of-construction and placed-in-service date information; the source of funds the taxpayer used to acquire the qualified investment; and any other information the taxpayer believes will help the IRS evaluate the registration request.

The IRS will issue a unique registration number for each qualified investment for which the taxpayer provided sufficient verifiable information. The registration number is only valid for one year and for the taxpayer who obtained it. As provided in instructions to the prefiling registration portal, if there are changes to the registered investment before using the registration number, the taxpayer must amend the registration or submit a new one.

If an elective-payment election will be made with respect to any Sec. 48D credit for a qualified investment in an advanced manufacturing facility for a tax year after the taxpayer has obtained a registration number, the taxpayer must renew the registration for that subsequent year according to applicable guidance. This includes the taxpayer’s attesting that all the facts previously provided are still correct or updating any facts as necessary.

The final regulations are generally consistent with the proposed regulations; however, Treasury and the IRS clarified in the final regulations that a taxpayer does not need to provide all supporting documentation available for a qualified investment in the prefiling process but, rather, only information that would sufficiently allow the IRS to process the prefiling request.¹⁰

How to elect

The final regulations stipulate in Regs. Sec. 1.48D-6(c)(1) that the direct-pay election for Sec. 48D credits must be made on the taxpayer’s original tax return not later than the due date (including extension) for the tax year for which the Sec. 48D credit is determined. The election should include any required completed source credit form(s); a completed Form 3800, General Business Credit; and any additional information required in instructions, including supporting calculations.

The taxpayer must provide a valid registration number for each qualified investment on the completed Form 3800 and on any source credit forms. The taxpayer must also include a statement attesting that the taxpayer is not a foreign entity of concern, has not made an applicable transaction (as defined under the Sec. 50 regulations) during the tax year the property was placed in service, and will not claim a double benefit with respect to any elective-payment election.

The final regulations also state that no elective-payment election can be made for the first time on an amended return, withdrawn on an amended return, or made or withdrawn by filing a Sec. 6227 administrative adjustment request. However, a numerical error with respect to a properly claimed elective-payment election may be corrected on an amended return or by filing a Sec. 6227 administrative adjustment request if necessary.¹¹

Rules for partnerships and S corporations

The final regulations state that if a partnership or S corporation makes an elective-payment election, the election must be made by the partnership or S corporation, not by individual partners or shareholders. The elective-payment election is subject to the same timing, manner, and prefiling registration requirements as outlined above.¹² The IRS will make a payment equal to the amount of the credit unless the entity owes a federal tax liability, in which case the payment may be reduced by the tax liability. The amount with respect to which the election is made is considered tax-exempt income and treated as arising from an investment activity, not from the conduct of a trade or business. As such, it is not treated as passive income to any partners or shareholders who do not materially participate in the partnership or S corporation.¹³ The partnership or S corporation must compute the amount of the credit allowable as if an elective-payment election were not made.¹⁴

The following rules also apply:

• The amount of Sec. 48D credit determined with respect to qualified property held directly by a partnership or S corporation must take into account the Sec. 49 at-risk rules at the partner or shareholder level.¹⁵
• In the case of a qualified property held directly by an entity disregarded as separate from a partnership or S corporation for federal income tax purposes, such qualified property will be treated as held directly by the partnership or S corporation.¹⁶
• If a partnership is a direct or indirect partner of a partnership that makes an elective-payment election, the upper-tier partnership must determine its partners’ distributive shares of such tax-exempt income in proportion to each partner’s distributive share of its otherwise allocable basis in qualified property.¹⁷
• Any changes in at-risk amounts under Sec. 49 for partners or S corporation shareholders after the close of the tax year in which the qualified property is placed in service do not affect the Sec. 48D credit determined by the partnership or S corporation but must be considered at the partner or shareholder level.¹⁸
• A partnership or S corporation that directly holds qualified property must request from each of its partners or shareholders, respectively, that is subject to at-risk rules under Sec. 49 the amount of such partner’s or shareholder’s nonqualified nonre-course financing with respect to the qualified property as of the close of the tax year in which the property is placed in service.¹⁹

The final rules provide that if a written binding partnership agreement was entered into after Dec. 31, 2021, and before June 22, 2023, and if the partnership was formed for the purpose of owning and operating an advanced manufacturing facility or qualified property, a partner’s distributive share of the tax-exempt income may be determined in accordance with the partnership agreement instead of in accordance with the manner in which the otherwise applicable Sec. 48D credits would have been allocated, which is generally in the manner in which the partners share general profits.²⁰

The denial of double benefit

To prevent a double benefit, the following rule applies: For a taxpayer making a direct-pay election with respect to any Sec. 48D credit, the credit is reduced to zero and is, for any other purposes under the Code, deemed to have been allowed to the taxpayer for the tax year.²¹ To address commenters’ concern that the application of the denial-of-double-benefit rule under the proposed regulations would have limited taxpayers’ use of other general business credits (GBCs) not entitled to an elective payment under Sec. 48D, the final regulations modify the denial-of-double-benefit rule to clarify that taxpayers making a direct-pay election under Sec. 48D(d) will not have to delay using other GBCs, pursuant to the ordering rule set forth in Sec. 38(d).As a result, the final regulations allow a taxpayer to benefit from a reduction of taxability from Sec. 48D credits and other GBCs for purposes of Sec. 38, up to the Sec. 38(c) limitation, with the remainder of the Sec. 48D credit for which a directpay election is made treated as a payment against tax as of the due date of the taxpayer’s return.²²

Under the final regulations for Sec. 48D(d), like those promulgated under Sec. 6417 for Inflation Reduction Act energy credits, the net elective-payment amount equals the lesser of the Sec. 48D credit for which an elective-payment election is made or the excess of total GBC credits over the amount of the federal income tax liability that may be offset by GBCs.²³ The Sec. 48D credit for which an elective-payment election is made is reduced by the net elective-payment amount and by the amount allowed as a GBC under Sec. 38 for the tax year, which results in the Sec. 48D credit being reduced to zero.²⁴ The full amount of the Sec. 48D credit for which an elective-payment election is made is deemed to have been allowed for all other purposes of the Code, including the basis reduction and recapture rules imposed by Sec. 50 and the calculation of tax.²⁵ The final regulations provide examples to clarify that, unlike under the proposed regulations, taxpayers making a direct-pay election under Sec. 48D(d) will generally be able to claim the full amount of the deemed payment against tax in excess of the amount of the Sec. 48D credit applied with other GBCs under the Sec. 38(c) limit against 75% of net regular tax liability over $25,000.²⁶

The following example illustrates the denial-of-double-benefit rule:

Example: For simplicity, assume ABC Corp. correctly calculates its tax liability to be $80,000. With given maximum allowable GBCs of $60,000, ABC Corp. determines its Sec. 48D credit to be $100,000. ABC Corp. also claims a research-and-development (R&D) tax credit of $30,000. The net elective-payment amount is $70,000 (the lesser of (1) the total Sec. 48D credit of $100,000 or (2) the excess of total GBCs of $130,000 less the maximum allowable GBCs of $60,000). ABC Corp. reduces its Sec. 48D credit by the $30,000 used against tax and the $70,000 net elective-payment amount, resulting in the final Sec. 48D credit being reduced to zero. Despite this, the $100,000 Sec. 48D credit is deemed to have been allowed for all other purposes.

The final regulations are generally taxpayer-favorable by generally disregarding the Sec. 38(d) ordering rules when it comes to applying the elective payment against tax liability.

Excessive-payment penalties

An excessive payment is defined as the amount by which a payment made by the taxpayer or the IRS exceeds the Sec. 48D credit that would have been allowable without the application of the direct-pay election. If the IRS determines that an excessive payment was made, the taxpayer’s tax for the year of determination is increased by the excessive payment amount plus 20% of that amount. This 20% increase does not apply if the taxpayer can show that the excessive payment was due to reasonable cause.²⁷

Treasury and the IRS have determined that clarification was needed to address situations in which it is appropriate to allow taxpayers to correct errors that would result in a larger payment than indicated on the original return, as long as such larger amount is accurate.

As a result, the final regulations remove the words “or revised” in Prop. Regs. Sec. 1.48D-6(c)(2), which now states, in final form:

No elective payment election may be made for the first time on an amended return, withdrawn on an amended return, or made or withdrawn by filing an administrative adjustment request under section 6227 of the Code, although a numerical error with respect to a properly claimed elective payment election may be corrected on an amended return or by filing an administrative adjustment request under section 6227 if necessary.

While this provision cannot be relied on to revoke a direct-pay election under Sec. 48D(d) or to make an election for the first time on an amended return, taxpayers are expected to be able to rely on this modified provision to correct a numerical error in the calculation of the Sec. 48D credit made on the original return and, in the case of a numerical error that overstated the amount of the direct-pay election, potentially avoid excessive-payment penalties under certain circumstances through corrective action taken prior to the discovery of the error.

Basis reduction and recapture

The final regulations reiterate that the general rules of recapture and basis reduction from Secs. 50(a) and (c) apply to elective payments under Sec. 48D(d). Thus, if a Sec. 48D credit is determined for a property, including under the direct-pay provisions in Sec. 48D(d), the adjusted basis of the property must be reduced by the amount of the credit. For partnerships or S corporations, if an advanced manufacturing investment tax credit is determined for a property, the adjusted basis of the property must also be reduced by the amount of the credit. The adjusted basis of a partner’s interest in a partnership and a shareholder’s stock in an S corporation must be adjusted to account for adjustments made in the basis of property held by the partnership or S corporation. Any reporting of recapture is made on the taxpayer’s annual return in the manner prescribed by the IRS.²⁸

A valuable election

Because constructing or expanding a facility in the semiconductor manufacturing industry can easily cost more than $1 billion, the availability of a 25% tax credit may significantly affect the project’s financial viability. Therefore, potential credit claimants should be sure to understand the requirements for both the CHIPS Act’s advanced manufacturing investment tax credit and the related direct-pay election.

Footnotes

¹P.L. 117-167.

²See generally Wallwork et al., “The CHIPS Act’s Semiconductor Production Credit,” 54-4 The Tax Adviser 30 (April 2023).

³Sec. 48D(d).

⁴T.D. 9989, 89 Fed. Reg. 17596 (March 11, 2024).

⁵T.D. 9975.

⁶Inflation Reduction Act of 2022, P.L. 117-169. See Sec. 6417 and T.D. 9988, also, generally, Bernier et al., “The Inflation Reduction Act’s Energy- and Climate-Related Tax Provisions,” 54-1 The Tax Adviser 17 (January 2023).

⁷Sec. 48D(d)(2)(B).

⁸Sec. 48D(d)(2)(C).

⁹See IRS Publication 5884, Inflation Reduction Act (IRA) and CHIPS Act of 2022 (CHIPS) Pre-Filing Registration Tool: User Guide and Instructions.

¹⁰T.D. 9989, preamble, §III(B).

¹¹Regs. Sec. 1.48D-6(c)(2).

¹²Regs. Sec. 1.48D-6(d)(2)(i).

¹³Regs. Secs. 1.48D-6(d)(2)(iii) and (d)(5).

¹⁴Regs. Sec. 1.48D-6(d)(6)(i).

¹⁵Regs. Sec. 1.48D-6(d)(6)(ii).

¹⁶Regs. Sec. 1.48D-6(d)(3).

¹⁷Regs. Sec. 1.48D-6(d)(4)(i).

¹⁸Regs. Secs. 1.48D-6(d)(6)(ii) and (iii).

¹⁹Regs. Sec. 1.48D-6(d)(6)(ii).

²⁰Regs. Sec. 1.48D-6(d)(2)(iv).

²¹Regs. Sec. 1.48D-6(e).

²²T.D. 9989, preamble, §VI.

²³Regs. Sec. 1.48D-6(e)(2)(iii).

²⁴Regs. Sec. 1.48D-6(e)(2)(v).

²⁵Regs. Sec. 1.48D-6(e)(3).

²⁶Regs. Sec. 1.48D-6(e)(4).

²⁷Regs. Sec. 1.48D-6(f).

²⁸Regs. Sec. 1.48D-6(g).

Contributors

Adam Wallwork, J.D., LL.M., is a senior manager; Ekkehard Wende, CPA, is a senior manager;  Matthew
Normington, CPA, is a partner; Gary Hecimovich, CPA, is a partner; and Jeremy DeMuth, J.D., is a managing director, all with Deloitte Tax LLP. For more information about this article, contact thetaxadviser@aicpa.org.

AICPA & CIMA RESOURCES

Article

Wallwork et al., “The CHIPS Act’s Semiconductor Production Credit,” 54-4 The Tax Adviser 30 (April 2023). 

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