The Chips and Science Act of 2022 (CHIPS Act) added Section 48D to the Internal Revenue Code (Code) to incentivize the manufacture of semiconductors and semiconductor manufacturing equipment in the U.S. The credit is equal to 25 percent of the “qualified investment” for such taxable year with respect to any “advanced manufacturing facility” (the primary purpose of which is manufacturing semiconductors or semiconductor manufacturing equipment) of an “eligible taxpayer.” At election, the credit can be directly paid to the taxpayer.

On Oct. 23, 2024, the U.S. Department of the Treasury and IRS issued final regulations that provide the finishing contours of eligibility of Section 48D including the unique credit recapture rules that apply where a taxpayer engages in an “applicable transaction,” as described below. Compared to the proposed regulations, the final regulations generally expand eligibility for the Section 48D credit by modifying certain key terms, such as “semiconductor manufacturing” and making changes to conform with the U.S. Department of Commerce final rules issues under the CHIPS Act. These final regulations (covering Sections 1.48D-1 through Section 1.48D-5, and Section 1.50-2) follow the finalization of the regulations on the direct payment election (Section 1.48D-6) that were issued in March 2024. (See Holland & Knight’s previous alert, “Treasury Department, IRS Release Final Regulations on Direct Pay Under CHIPS Act Section 48D,” March 26, 2024.)

This Holland & Knight alert addresses the basics of Section 48D as further clarified in the final regulations.

What Is a Qualified Investment Under Section 48D?

By statute, a qualified investment is the basis of any qualified property placed in service by the taxpayer during such taxable year which is part of an advanced manufacturing facility. Among other requirements,¹ qualified property is that which is integral to the operation of an advanced manufacturing facility.

Importantly, the final regulations made clear that a taxpayer’s ownership of an advanced manufacturing facility is not a prerequisite – a taxpayer could own property that is part of, and integral to, another taxpayer’s advanced manufacturing facility and still be eligible for Section 48D with respect to such owned property. The example provided is a taxpayer who owns an air separation unit that supplies on demand nitrogen to another taxpayer’s co-located advanced manufacturing facility.

Expanding on the proposed regulations, the final regulations helpfully provide a long list of property that normally would be considered integral to an advanced manufacturing facility. This list is not exhaustive but includes, for example, the following items:

• equipment and tools used in the processes of Chemical Vapor Deposition (CVD), Physical Vapor Deposition (PVD), Atomic Layer Deposition (ALD), oxidation, annealing and epitaxy; such equipment includes deposition and thin-film growth equipment, etching equipment and lithography equipment (including Extreme Ultraviolet Lithography (EUV))
• wet process tools, analytical tools, E-Beam operation tools (to repair masks), mask manufacturing equipment, chemical mechanical polishing equipment, reticle handlers and stockers
• inspection and metrology equipment, including scanning electron microscopes, atomic force microscopes, ion milling tools, optical inspection systems, wafer probes and optical scatterometers
• clean room facilities, including locker and gowning rooms, specialized lighting systems, automated material systems for wafer handling, specialized recirculating air handlers to maintain the clean room free from particles, control temperature and humidity levels, and specialized ceilings comprised of HEPA filters
• clean room equipment (including jogs, hand tools, calibration equipment and temperature pollution monitoring tools) and specialty cleaning equipment
• electrical power facilities, cooling facilities, chemical supply systems, and wastewater and wastewater treatment systems, including water management, water conservation and water treatment equipment, materials and technologies
• electricity distribution equipment, including connectors, capacitors, meters and sockets, switchgear, surge arresters and transformers
• sub-fab levels containing pumps, transformers, abatement systems, ultrapure water systems, uninterruptible power supplies, boilers, pipes, storage systems, wafer routing systems and databases, backup systems, quality assurance equipment and computer data centers
• utility level equipment including chillers, systems to handle nitrogen, argon and other gases, as well as compressor systems and pipes
• industrial automation and control equipment (including, but not limited to, programmable logic controllers, process controllers, distributed control systems, human machine interface and motor controls and accessories)
• industrial automation communications devices, networks and software for industrial automation control products and systems including automated material handling systems (AMHS) and advance wafer routing software systems and databases

What Is an Advanced Manufacturing Facility?

Section 48D defines an advanced manufacturing facility as one whose primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment. The final regulations provide guidance defining these key terms, generally expanding on those definitions provided in the proposed regulations in a manner that is favorable to taxpayers.

Primary Purpose

Like the proposed regulations, the final regulations apply a facts and circumstances test to determine a facility’s primary purpose. The final regulations provide a list of facts that may indicate a primary purpose of manufacturing semiconductors, including plans of the facility or the possession of permits or licenses. The final regulations also allow taxpayers to rely on a more definitive test: A facility has the primary purpose of manufacturing semiconductors or manufacturing semiconductor manufacturing equipment if more than 50 percent of its potential output, as measured by cost to produce, revenue received in an arm’s length transaction or units produced, constitutes manufacturing of semiconductors or manufacturing of semiconductor manufacturing equipment. This percentage is lower than proposed regulations rule of 75 percent.

Like the proposed regulations, the final regulations are also very clear that a facility for which the primary purpose is the manufacturing, producing, growing or extracting of materials or chemicals that are supplied to an advanced manufacturing facility is not a facility for which the primary purpose is the manufacturing of semiconductors or manufacturing of semiconductor manufacturing equipment.

Semiconductor

Significantly, the final regulations adopt the definition of “semiconductor” used by U.S. Department of Commerce in its final rule³ and define semiconductor manufacturing to include semiconductor wafer production, semiconductor fabrication and semiconductor packaging. Deviating from the Commerce Department final rule, the final regulations for purposes of Section 48D more broadly define semiconductor wafer production to include the processes of growing single-crystal ingots and boules, wafer slicing, etching and polishing, bonding, cleaning, epitaxial deposition and metrology. The final regulations are also broader from the Commerce Department final rule as it relates to semiconductor fabrication (defined to include interconnects between devices) and semiconductor packaging (defined to including assembly and testing).

Semiconductor Manufacturing Equipment

The final regulations made some important clarifications as they relate to semiconductor manufacturing equipment. Under the final regulations, semiconductor manufacturing equipment means the highly engineered and specialized equipment used in the manufacturing of semiconductors and the subsystems that enable or are incorporated into the manufacturing equipment. The final regulations provide an extensive (nonexhaustive) list but confirm that a consumable, such as a chemical or gas, is not equipment and, thus, ineligible under Section 48D.

Who Is an Eligible Taxpayer?

To be eligible to claim a Section 48D credit, a taxpayer cannot be a foreign entity of concern or one who has made an applicable transaction during the tax year. The final regulations under Section 48D again adopt the Commerce Department final rule as it relates to a foreign entity of concern, a broad rule that looks to whether 25 percent or more of voting, board or equity of an entity is held by certain individual/entities, including Chinese nationals or entities.

The final regulations closely mirror the proposed regulations, defining an “applicable transaction” as “any significant transaction involving the material expansion of semiconductor manufacturing capacity in any foreign country of concern.” A significant transaction includes, among other things, formation of a subsidiary, merger, acquisition or takeover, expansion of manufacturing capacity or certain long-term leases. Where a taxpayer engages in a significant transaction in the 10-year period following the date on which the qualified investment was placed in service (the Section 48D Recapture Period), the credit under Section 48D is subject to recapture.

What Is Direct Pay?

The Section 48D credit is a refundable credit, and a taxpayer must make the election for direct pay by the date for filing its federal income tax return (plus extensions). The election is irrevocable for the refundable portion of the credit. The regulations regarding direct pay, found at Section 1.48D-6, were issued earlier this year.

What Does It Mean to Begin Construction?

The final regulations also provide further guidance on the beginning of construction of an advanced manufacturing facility. The credit under Section 48D is not available for property that is part of an advanced manufacturing facility of an eligible taxpayer if the beginning of construction of the property begins after Dec. 31, 2026.

For additional information on the recently released guidance on the CHIPS Act advanced manufacturing investment credit found at Section 48D, please contact one of the authors or another member of Holland & Knight’s Tax Practice.

Notes

¹ For instance, property must be tangible property with respect to which depreciation (or amortization) is allowable, which is constructed, reconstructed or erected by the taxpayer or that is acquired and original use commences with taxpayer. The term qualified property does not include buildings or a portion of a building used for offices, administrative services or other functions unrelated to manufacturing, such as sales offices or payroll services.

² Property that is not located or co-located may still qualify if, for example, the property is owned by the same taxpayer as the entire advanced manufacturing facility, is connected to the advanced manufacturing facility and its sole purpose is dedicated to the advanced manufacturing facility.

³ Under the final Commerce Department rule, a semiconductor is “an integrated electronic device or system most commonly manufactured using materials such as, but not limited to, silicon, silicon carbide, or III-V compounds, and processes such as, but not limited to, lithography, deposition, and etching. Such devices and systems include, but are not limited to, analog and digital electronics, power electronics, and photonics, for memory, processing, sensing, actuation, and communications applications.”