Earlier this spring, the Department of Treasury published proposed rules with respect to the advanced manufacturing investment credit established under the CHIPS and Science Act (which was signed into law on August 9, 2022).
While these are just proposed rules surrounding the potential tax credit and are not yet set in stone, companies and manufacturers may already have questions about whether they stand to benefit. Below we've provided a short summary and clarity on some of the larger components of the credit.
Q: What is the new tax credit?
A: The advanced manufacturing investment credit is a tax credit of 25% of the basis of any qualified property that is part of an eligible taxpayer's advanced manufacturing facility if the property is placed in service during such a taxable year and after December 31, 2022.
Q: What qualifies as an advanced manufacturing facility?
A: An advanced manufacturing facility is defined as a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment. Qualified property is generally tangible property (a) for which depreciation or amortization in lieu of depreciation is permitted; (b) that is constructed, reconstructed, or erected by the eligible taxpayer, or acquired by the taxpayer so long as that property has not been used previously; and (c) which is integral to the operation of the advanced manufacturing facility.
However, the proposed regulations state that human resources, personnel services, payroll, legal, accounting, sales, distribution, and non-cyber security functions do not qualify as property eligible for the tax credit because they are unrelated to the manufacturing of semiconductors or semiconductor manufacturing equipment. Research and storage facilities may, in certain instances, constitute qualified property.
Q: What about any previously claimed tax credits?
A: The proposed rules provide for a recapture of all tax credits previously claimed if the taxpayer undertakes a significant transaction involving a material expansion in a "foreign country of concern" within 10 years of claiming a tax credit.
A significant transaction involving a material expansion includes, among other things:
- Any investment or series of investments, whether proposed, pending, or completed that is valued at $100,000 or more, including a merger, acquisition, consolidation, formation of a joint venture, or long-term lease or concession arrangement.
- A transaction that involves the expansion of manufacturing capacity for legacy semiconductors (other than with respect to an existing facility or equipment of an applicable taxpayer for manufacturing legacy semiconductors) if less than 85% of the output of the semiconductor manufacturing facility by value is incorporated into final products that are used or consumed in the market of a foreign country of concern.
- The licensing of technology or any joint research arrangement with a foreign entity of concern that relates to a technology or product that raises national security concerns.
- Any other investment, including capital expenditures or the formation of a subsidiary.
As stated, the proposed rules are still subject to comment and, if requested, a public hearing, prior to taking effect. Should you have additional questions on the eligibility of your company or facility, please contact the attorneys at Calfee to assist in the process.
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