Background and expected impact. The House and Senate have passed the CHIPS Bill of 2022 (HR 4346), and President Biden has said that he will sign it. In furtherance of the broad goal of reducing U.S. reliance on foreign suppliers of semiconductor chips, the Bill will add the Advanced Manufacturing Investment Credit (the “AMI Credit”) to the Internal Revenue Code (the “Code”).
The CHIPS Bill could produce more than $20 billion in AMI Credit for the semiconductor industry. However, its expected value could be significantly reduced if the minimum corporate tax on book earnings, revived as part of the Manchin-Schumer deal and endorsed by the President, is enacted.
General explanation of provisions. The AMI Credit for any taxable year is an amount equal to 25 percent of the qualified investment for such taxable year with respect to any advanced manufacturing facility of an eligible taxpayer. The AMI Credit is refundable; if a taxpayer elects in any taxable year, it will be treated as having made a payment against its income tax liability equal to the amount of the AMI Credit on the later of the due date of the return (determined without regard to the extensions), or the date on which the return is filed. This election is made on a year-by-year basis, and, once made for a taxable year, is irrevocable.
“Qualified investment” with respect to any advanced manufacturing facility is the basis of any qualified property placed in service by the taxpayer during the taxable year which is part of an advanced manufacturing facility.
“Qualified property” is defined as property which is tangible property with respect to which depreciation (or amortization in lieu of depreciation) is allowable, which is constructed, reconstructed, or erected by the taxpayer, or acquired by the taxpayer if the original use of such property commences with the taxpayer, and which is integral to the operation of the advanced manufacturing facility. Qualified property includes any building or its structural components which otherwise satisfy the above requirements with the exception of buildings or portions of buildings used for offices, administrative services, or other functions unrelated to manufacturing. The credit allowed under this section applies only to property the construction of which begins before December 31, 2026.
“Advanced manufacturing facility” is a facility with the primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment.
“Eligible taxpayer” is any taxpayer which is not a foreign entity of concern as defined in section 9901(6) of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (the “TNDA Act”), and has not made an applicable transaction (as defined in section 50(a)) during the taxable year. Under the TNDA Act, foreign entities of concern include entities:
- designated as a foreign terrorist organization by the Secretary of State under section 219 of the Immigration and Nationality Act (8 U.S.C. 1189);
- included on the list of specially designated nationals and blocked persons maintained by the Office of Foreign Assets Control of the Department of the Treasury;
- owned by, controlled by, or subject to the jurisdiction or direction of a government of China, North Korea, Russia and Iran;
- alleged by the Attorney General to have been involved in espionage, economic espionage and certain other criminal activities for which a conviction was obtained; or
- determined by the Secretary of Commerce, in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States under this Act.
Coordination with rehabilitation credit. The qualified investment with respect to any advanced manufacturing facility for any taxable year shall not include that portion of the basis of any property which is attributable to qualified rehabilitation expenditures (as defined in section 47(c)(2)). The Bill extends progress expenditure limitation rules addressed in rehabilitation credit regulations (Section 1.46-5) to AMI Credit.
Basis reduction and recapture. The basis of qualified property will be reduced by the amount of AMI Credit claimed with respect to such property under the rules similar to the rules provided in Section 50(c) of the Code.
The claimed AMI Credit is subject to recapture in case the qualified property is sold or otherwise disposed of. The recapture provisions are based on the investment tax credit recapture rules of Section 50. The CHIPS Bill also includes new recapture rules for certain expansions of advanced manufacturing facilities. The new recapture provisions apply if a taxpayer, having claimed AMI Credit, materially expands semiconductor manufacturing capacity to China, North Korea, Russia, Iran, or other non-aligned countries identified as countries of concern under the TNDA Act. This recapture provision would not apply if the taxpayer demonstrates to the satisfaction of the IRS that it ceased or abandoned the recapture-triggering transaction within 45 days of a determination and notice by the IRS.
Application to partnerships and S corporations. The election to claim AMI Credit is made at a partnership or an S corporation level in the manner determined by the Treasury and the IRS. The IRS would then make payment to the partnership or the S corporation in the amount equal to the claimed AMI Credit.
AMI Credit should be treated as tax exempt income for purposes of sections 705 and 1366, and a partner’s distributive share of such tax-exempt income shall be based on such partner’s distributive share of the otherwise applicable credit for each taxable year.
The Bill does not address the treatment of recapture in the hands of the partners or S corporation shareholders. We expect this to be addressed in future regulations and other guidance issued by the Treasury and the IRS. It will be important for such guidance to address the treatment of partners and S shareholders who benefit from AMI Credit payments but separate from their partnership or S corporation before a recapture event occurs. Partners and S-corporation shareholders also should ensure that their partnership agreements address this issue. Presumably, the Treasury and the IRS will lean on the lessons learned from the work they’ve done on the similar provisions of the Section 50.
Effective date. The initial election to claim AMI Credit should be made not later than the due date of a return (including extensions), but in no event earlier than 270 days after the date of enactment, which means that calendar year taxpayers will not be able to make the election for the 2021 taxable year.
Penalties. In the case of any AMI Credit payment amount treated as excessive, the tax imposed on such taxpayer for the taxable year in which such determination is made shall be increased by an amount equal to the sum of the amount of such excessive payment, plus an amount equal to 20 percent of such excessive payment. The penalty does not apply if the taxpayer demonstrates to the satisfaction of the IRS that the excessive payment resulted from reasonable cause.
Expected Treasury regulations. The Bill tasks Treasury and the IRS with issuing regulations and any other administrative guidance necessary to implement its provisions, including issuing regulations or other guidance providing rules for determining a partner’s distributive share of the tax-exempt income arising as a result of claiming AMI Credit and the new recapture provisions inserted in Section 50(a). Taxpayers planning to take advantage of the AMI Credit should begin to compile a list of issues they think require guidance and develop a strategy for communicating those issues to the Treasury and IRS.