Final Rules on Direct Pay Under CHIPS Act Section 48D Released
TL/DR –
The Chips and Science Act of 2022 allows for a tax credit equal to 25% of the “qualified investment” in manufacturing semiconductors or semiconductor manufacturing equipment in the U.S. In March 2023, the U.S. Department of the Treasury and the IRS released proposed regulations for this tax credit, including eligibility and direct payment, with additional revisions and temporary regulations put in place in June 2023. The final regulations, which mainly remained consistent with earlier proposals, clarified issues such as the registration process for each qualified investment and introduced measures to prevent fraud and duplication of Section 48D credits.
The CHIPS Act and Section 48D Tax Credits Explained
The CHIPS Act of 2022 introduced Section 48D to the Internal Revenue Code to encourage U.S. production of semiconductors and related manufacturing equipment. Offering a credit equal to 25% of the “qualified investment” in any “advanced manufacturing facility”, the provision allows for direct payment to all taxpayers, a distinction from certain Inflation Reduction Act credit rules.
On March 23, 2023, proposed regulations for Section 48D were issued by the U.S. Department of the Treasury and the IRS, addressing eligibility and direct payment. All facets of the tax credit were considered (Source: “Treasury Department Issues Section 48D Guidance on CHIPS Act Semiconductor Tax Incentive“).
Revisions and Temporary Regulations in June 2023
Proposed regulations were revised in June 2023, with the introduction of temporary regulations for the preregistration process. While most regulations remain proposed, the Treasury Department and the IRS finalized regulations on direct payment of the credits (Source: “Elective Payment of Advanced Manufacturing Investment Credit“).
Clarifications for Direct Pay of Section 48D Credits
The final regulations provide crucial clarifications but no significant changes. One clarification is that each qualified investment requires its own registration number, and the taxpayer makes an election for direct pay on their income tax return. This election cannot be revoked (Source: “Inflation Reduction Act Direct Pay and Transfer Pre-Filing Registration Is Open for Business“).
Addressing Fraud and Duplication Concerns
The potential for fraud and duplication of Section 48D credits is a concern for IRS and Treasury. The credits can be claimed for qualified progress expenditures, and the regulations require preregistration for these investments. However, this rule doesn’t apply to expenditures made in 2022. The final regulations warn of heightened scrutiny to prevent fraud and duplication.
Partnership Allocation of Tax Credits
The regulations provide flexibility for partnerships. Some partners made binding agreements in anticipation of the CHIPS Act, and others before the reproposed Section 48D regulations in June 2023. These agreements can significantly impact direct pay benefits. The final regulations include an interim rule for partnerships formed to operate an advanced manufacturing facility or qualified property.
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