Proposed Rule2023-05871
Advanced Manufacturing Investment Credit
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 23, 2023
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations to implement the advanced manufacturing investment credit established by the CHIPS Act of 2022 to incentivize the manufacture of semiconductors and semiconductor manufacturing equipment within the United States. The regulations address the credit's eligibility requirements, an election that eligible taxpayers may make to be treated as making a payment of tax (including an overpayment of tax), or for an eligible partnership or S corporation to receive an elective payment, instead of claiming a credit, and a special 10-year credit recapture rule that applies if there is a significant transaction involving the material expansion of semiconductor manufacturing capacity in a foreign country of concern. This document also requests comments on the proposed regulations, including the definition of the term "semiconductor." These proposed regulations affect taxpayers that claim the advanced manufacturing investment credit or instead make an elective payment election.
Full Text
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<title>Federal Register, Volume 88 Issue 56 (Thursday, March 23, 2023)</title>
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[Federal Register Volume 88, Number 56 (Thursday, March 23, 2023)]
[Proposed Rules]
[Pages 17451-17466]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-05871]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-120653-22]
RIN 1545-BQ54
Advanced Manufacturing Investment Credit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations to implement the
advanced manufacturing investment credit established by the CHIPS Act
of 2022 to incentivize the manufacture of semiconductors and
semiconductor manufacturing equipment within the United States. The
regulations address the credit's eligibility requirements, an election
that eligible taxpayers may make to be treated as making a payment of
tax (including an overpayment of tax), or for an eligible partnership
or S corporation to receive an elective payment, instead of claiming a
credit, and a special 10-year credit recapture rule that applies if
there is a significant transaction involving the material expansion of
semiconductor manufacturing capacity in a foreign country of concern.
This document also requests comments on the proposed regulations,
including the definition of the term ``semiconductor.'' These proposed
regulations affect taxpayers that claim the advanced manufacturing
investment credit or instead make an elective payment election.
DATES: Written or electronic comments and requests for a public hearing
must be received by May 22, 2023. Requests for a public hearing must be
submitted as prescribed in the ``Comments and Requests for a Public
Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-120653-
22) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury (Treasury Department) and
the IRS will publish for public availability any comments submitted
electronically and comments submitted on paper to its public docket.
Send hard copy submissions to: CC:PA:LPD:PR (REG-120653-22), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Jason P. Deirmenjian of the Office of Associate Chief Counsel
(Passthroughs and Special Industries), (202) 317-4137 (not a toll-free
number); concerning submissions of comments and requests for a public
hearing, call Vivian Hayes (202-317-5306) (not a toll-free number) or
by email to <a href="/cdn-cgi/l/email-protection#f8888d9a94919b909d998a91969f8bb8918a8bd69f978e"><span class="__cf_email__" data-cfemail="dcaca9beb0b5bfb4b9bdaeb5b2bbaf9cb5aeaff2bbb3aa">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under section 48D of the Internal Revenue
Code (Code).
Section 107(a) of the CHIPS Act of 2022 (CHIPS Act), enacted as
Division A of Public Law 117-167, 136 Stat. 1366, 1393 (August 9,
2022), added section 48D to the Code to establish the advanced
manufacturing investment credit (section 48D credit) as an investment
credit for purposes of section 46 of the Code, which is a current year
general business credit under section 38 of the Code.
The amount of the section 48D credit allowable to a taxpayer for
any taxable year is generally an amount equal to 25 percent of the
basis of any qualified property that is part of an eligible taxpayer's
advanced manufacturing facility if the qualified property is placed in
service during such taxable year and after December 31, 2022. See
section 48D(a), and (b)(1) of the Code and section 107(f)(1) of the
CHIPS Act. However, section 48D(e) provides that the section 48D credit
does not apply to property the construction of which begins after
December 31, 2026. In addition, in the case of any qualified property
placed in service after December 31, 2022, but the construction of
which began prior to January 1, 2023, the section 48D credit is
available only to the extent of the basis of qualified property
attributable to the construction, reconstruction, or erection after
August 9, 2022 (the date of enactment of the CHIPS Act). See section
107(f)(1) of the CHIPS Act. In addition, the portion of the basis of
any such property that is attributable to qualified rehabilitation
expenditures (as defined in section 47(c)(2) of the Code) in
determining the rehabilitation credit under section 47 is excluded from
a taxpayer's qualified investment with respect to any advanced
manufacturing facility for any taxable year.
For purposes of the section 48D credit, an ``eligible taxpayer'' is
any taxpayer that (1) 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, as amended by section 103 of
the CHIPS Act), and (2) has not made an applicable transaction (as
defined in section 50(a) of the Code) during the taxable year. See
section 48D(c).
Section 48D(b)(1) provides that the ``qualified investment'' with
respect to any advanced manufacturing facility for any taxable year 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. Section 48D(b)(2) provides that for purposes of section
48D(b), the term ``qualified property'' means tangible property with
respect to which depreciation (or amortization in lieu of depreciation)
is allowable that is integral to the operation of the advanced
manufacturing facility if (I) constructed, reconstructed, or erected by
the taxpayer, or (II) acquired by the taxpayer, if the original use of
such property commences with the taxpayer. Qualified property includes
any building or its structural components satisfying such requirements
unless the building or portion of the building is used for offices,
administrative services, or other functions unrelated to manufacturing.
Section 48D(b)(3) provides that the term ``advanced manufacturing
facility'' means a facility for which the primary purpose is the
manufacturing of semiconductors or semiconductor manufacturing
equipment.
Section 48D(d)(1) allows a taxpayer to elect to treat the section
48D credit determined for the taxpayer for a taxable year as a payment
against the tax imposed by subtitle A of the Code (that is, treated as
a payment of Federal income tax) equal to the amount of the credit
rather than a credit against the taxpayer's Federal income tax
liability for that taxable year (elective payment election). Section
48D(d)(2) provides special rules relating to an elective payment
election made for (A) property held directly by a partnership (within
the meaning of section 761(a) of the Code) or an S corporation (as
defined in section 1361(a)(1) of the Code) in which the partnership or
S corporation actually receives a payment rather than a credit, (B) the
period during which an elective payment election can be made, (C) the
timing of the elective payment, (D) appropriations for making elective
payments to partnerships and S
[[Page 17452]]
corporations, (E) authority of the Secretary of the Treasury or her
delegate (Secretary) to require additional information or registration
of taxpayers, and (F) repayment of an excessive elective payment, plus
a penalty of an amount equal to 20 percent of such excessive payment.
Section 48D(d)(3) provides that the section 48D credit is zero for a
taxpayer making an elective payment election.
Section 48D(d)(4) provides that the elective payment election will
not be treated as part of the income tax laws of any U.S. territory
with a mirror code tax system (as defined in section 24(k) of the Code)
unless the U.S. territory elects to have the elective payment election
apply under its income tax laws. Under section 48D(d)(5), basis
reduction and recapture rules similar to the rules of section 50(a) and
(c) of the Code apply with respect to amounts treated as paid or
actually received by a taxpayer under an elective payment election.
Finally, section 48D(d)(6) authorizes the Secretary to issue
regulations or other guidance determined to be necessary or appropriate
to carry out the elective payment election provisions of section
48D(d), including (A) regulations or other guidance providing rules for
determining a partner's distributive share of deemed tax-exempt income,
and (B) guidance to ensure that the amount treated as a payment made or
the payment received by a taxpayer is commensurate with the amount of
the section 48D credit that generally would be otherwise allowable
(determined without regard to section 38(c)).
Pursuant to section 107(c) of the CHIPS Act, payments made to a
partnership or S corporation pursuant to the elective payment election,
as well as amounts treated as payments against tax by taxpayers making
an elective payment election, are exempt from reduction under any
sequestration order issued under the Balanced Budget and Emergency
Deficit Control Act of 1985 (2 U.S.C. 900 et seq.) on or after December
31, 2022.
Section 107(b) of the CHIPS Act added new sections 50(a)(3) and
(6)(D) and (E) to the Code to provide special recapture rules for
certain expansions in connection with advanced manufacturing
facilities. Under section 50(a)(3)(A), if there is an applicable
transaction by an applicable taxpayer before the close of the 10-year
period beginning on the date such taxpayer placed in service property
that is eligible for the section 48D credit, then the taxpayer's
Federal income tax liability under chapter 1 of the Code (chapter 1)
for the taxable year in which such transaction occurs must be increased
by 100 percent of the aggregate decrease in the credits allowed under
section 38 for all prior taxable years which would have resulted solely
from reducing to zero any investment credit determined under section 46
that is attributable to the section 48D credit with respect to such
property (applicable transaction recapture rule). Section 50(a)(3)(B)
provides an exception to the applicable transaction recapture rule for
an applicable taxpayer that demonstrates to the satisfaction of the
Secretary that the applicable transaction has been ceased or abandoned
within 45 days of a determination and notice by the Secretary. Section
50(a)(3)(C) authorizes the Secretary to issue such regulations or other
guidance as the Secretary determines necessary or appropriate to carry
out the purposes of the applicable transaction recapture rule,
including regulations or other guidance providing for recordkeeping
requirements or information reporting for purposes of administering the
requirements of section 50(a)(3).
As added to the Code by section 107(b)(2) of the CHIPS Act, section
50(a)(6)(D) provides that for purposes of section 50(a), the term
``applicable transaction'' means, with respect to any applicable
taxpayer, any significant transaction (as determined by the Secretary,
in coordination with the Secretary of Commerce and the Secretary of
Defense) involving the material expansion of semiconductor
manufacturing capacity of such applicable taxpayer in a foreign country
of concern (as defined in section 9901(7) of the William M. (Mac)
Thornberry National Defense Authorization Act for Fiscal Year 2021, as
amended by section 103 of the CHIPS Act) other than certain
transactions that primarily involve the expansion of manufacturing
capacity for legacy semiconductors (as defined in section 9902(a)(6) of
the William M. (Mac) Thornberry National Defense Authorization Act for
Fiscal Year 2021, as amended by section 103 of the CHIPS Act). As
discussed in the Explanation of Provisions section of this preamble,
the proposed regulations primarily apply long-established credit
mechanics and procedures common to all investment tax credits
(including the section 48D credit) previously set forth in regulations
and subregulatory guidance and, consistent with statute, incorporate
definitional concepts as determined by the Secretary of Commerce, which
are provided in proposed 15 CFR part 231, as contained in the proposed
rule, Preventing the Improper Use of CHIPS Act Funding, issued by the
CHIPS Program Office, National Institute of Standards and Technology,
Department of Commerce (Commerce Proposed Rule). The Commerce Proposed
Rule provides guardrails to prevent the improper use of CHIPS Act
funding overseen by the Department of Commerce.
Section 50(a)(6)(E) defines an ``applicable taxpayer'' for purposes
of section 50(a) as any taxpayer who has been allowed a section 48D
credit for any prior taxable year.
Explanation of Provisions
I. Advanced Manufacturing Investment Credit Determined
The proposed regulations provide rules for calculating the amount
of a taxpayer's qualified investment pursuant to section 48D(b)(1),
generally, and in the context of certain passthrough entities. Section
48D(b)(1) specifies that 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.'' The
statute is silent as to manner in which a taxpayer's basis in qualified
property is allocated in the context of passthrough entities. The
proposed regulations clarify that a partner's share of basis in the
qualified property of a partnership is determined under the rules in
Sec. 1.46-3(f). Section 1.46-3(f) contains rules for determining a
partner's share of the qualified basis of a partnership under the
former investment tax credit provisions (former sections 46(a) (amount
of investment credit) and (c) (qualified basis)). Under those
regulations and consistent with section 48D(b)(1), a partner is treated
as the taxpayer with respect to its share of the basis of the
partnership's qualified property for calculating its qualified
investment. A partner's share of the partnership's basis generally is
determined in accordance with the ratio in which the partners divide
the general profits of the partnership (that is, taxable income of the
partnership as described in section 702(a)(8)).
The proposed regulations specify that an S corporation must
apportion the basis of qualified property pro rata among its
shareholders. A shareholder is treated as the taxpayer with respect to
the shareholder's share of basis in the qualified property of the S
corporation. The proposed regulations further specify that an estate or
trust must apportion the basis of the estate or trust's qualified
property among the estate or trust and its beneficiaries on the basis
of the income of the estate or trust allocable to each for that taxable
[[Page 17453]]
year. A beneficiary to which the basis of qualified property is
apportioned is, for purposes of the section 48D credit, treated as the
taxpayer with respect to the property. The proposed regulations are
consistent with the rules for allocating basis with respect to an
electing small business corporation and estates and trusts under Sec.
1.48-5 and Sec. 1.48-6, respectively, which contain rules for
allocating basis for purposes of former sections 48(e) and (f),
respectively. Comments are requested as to whether it would be helpful
for the final regulations or other guidance to further address the
manner in which a taxpayer's basis in qualified property is allocated
in the context of passthrough entities.
Under section 48D(b)(5), ``rules similar to the rules of
subsections (c)(4) and (d) of section 46 (as in effect on the day
before the date of the enactment of the Revenue Reconciliation Act of
1990) shall apply for purposes of section 48D(a).'' The proposed
regulations address a taxpayer's ability to make a qualified progress
expenditure election, as provided in Sec. 1.46-5, to increase its
qualified investment by any qualified progress expenditures, made after
December 31, 2022. Comments are requested as to whether it would be
helpful for the final regulations or other guidance to expand or
clarify a taxpayer's ability to claim a section 48D credit for
qualified progress expenditures.
Section 48D(b)(4) excludes from qualified investment ``that portion
of the basis of any property which is attributable to qualified
rehabilitation expenditures (as defined in section 47(c)(2)).'' The
proposed regulations clarify that a taxpayer's qualified investment
does not include the amount of any capital expenditures that meet the
definition of a qualified rehabilitation expenditure.
II. Qualified Property
Section 48D(b)(2)(B)(ii) excepts from the definition of qualified
property ``a building, or a portion of a building, used for offices,
administrative services, or other functions unrelated to
manufacturing.'' The proposed regulations clarify that human resources
or personnel services, payroll services, legal and accounting services,
and procurement services; sales and distribution functions; and
security services (not including cybersecurity operations) are among
functions unrelated to manufacturing semiconductors or semiconductor
manufacturing equipment.
Under section 48D(b)(2)(A)(iii)(II), the term ``qualified
property'' means property acquired by the taxpayer if the original use
of such property commences with the taxpayer. The proposed regulations
define the term ``original use'' generally as the first use to which
the property is put by any taxpayer in connection with a trade or
business or for the production of income. In addition, the proposed
regulations add rules related to the definition of ``original use'' for
inventory.
Under section 48D(b)(2)(A)(iv) property must be ``integral to the
operation of the advanced manufacturing facility'' to meet the
definition of qualified property. The proposed regulations specify that
property is integral to the manufacturing of semiconductors or
semiconductor manufacturing equipment if it is used directly in the
manufacturing operation and is essential to the completeness of the
manufacturing operation. The proposed regulations further specify that
property, including a building and its structural components, that
constitutes a research or storage facility may qualify as integral to
the operation of an advanced manufacturing facility if the property is
used in connection with the manufacturing of semiconductors or
semiconductor manufacturing equipment. Conversely, a research facility
that does not manufacture any type of semiconductors or semiconductor
manufacturing equipment does not qualify.
III. Advanced Manufacturing Facility
Section 48D(b)(3) provides that an advanced manufacturing facility
must be a ``facility for which the primary purpose is the manufacturing
of semiconductors or semiconductor manufacturing equipment.'' The
proposed regulations explain that the determination of whether the
primary purpose of a facility is manufacturing finished semiconductors
or manufacturing finished semiconductor manufacturing equipment will be
made based on all the facts and circumstances and list certain facts
and circumstances relevant to this test. The proposed regulations make
clear that a facility that manufactures, produces, grows, or extracts
materials or chemicals that are supplied to an advanced manufacturing
facility that manufactures semiconductors, or semiconductor
manufacturing equipment, does not meet the primary purpose requirement.
The proposed regulations also define the terms ``semiconductor
manufacturing'' or ``manufacturing of semiconductors'' and
``manufacturing of semiconductor manufacturing equipment'' for purposes
of section 48D.
The Treasury Department and the IRS specifically request comments
on the scope of the definition in proposed Sec. 1.48-2(k) of the term
``semiconductor.'' Specifically, comments are requested as to whether
this term, for purposes of the section 48D credit, should include
semiconductive substances--materials with electronic properties
controllable by the addition of, typically small, quantities of
specific elements or dopants--on which an electronic device or system
is manufactured, such as, but not limited to polysilicon and compound
semiconductor wafers. If so, commenters are requested to explain in
detail what principle, standard, or parameters could be incorporated in
a definition of the term ``semiconductor'' so as to prevent extending
the definition of that term to also include other materials and
supplies used in the manufacture of finished semiconductors.
IV. Beginning of Construction
The proposed regulations provide guidance regarding the beginning
of construction requirement for purposes of the effective date
provision in section 107(f)(1) of the CHIPS Act, and the credit
termination rule in section 48D(e). The proposed regulations specify
that a taxpayer can establish that construction of a property has begun
by meeting the Physical Work Test or the Five Percent Safe Harbor, as
that test and safe harbor are described in the proposed regulation. The
proposed regulations define what is considered the unit of property for
purposes of determining the beginning of construction under section
48D(e). Solely for purposes of determining whether construction of a
property has begun for purposes of section 48D and the section 48D
regulations, multiple items of qualified property or advanced
manufacturing facilities that are operated as part of a single advanced
manufacturing facility project are treated as a single item of
property. Whether multiple qualified properties or advanced
manufacturing facilities are operated as part of a single advanced
manufacturing facility project will depend on all the relevant facts
and circumstances. Thus, whether the beginning of construction
requirement is satisfied with respect to any item of property generally
is determined based on the date construction of the item of property
began, or the date construction of the single advanced manufacturing
facility project that the item is part of began.
In addition, the proposed regulations further explain that under
either the
[[Page 17454]]
Physical Work Test or the Five Percent Safe Harbor, a taxpayer must
meet the Continuity Requirement, as described in the proposed
regulation, to establish the beginning of construction. For this
requirement, a taxpayer must demonstrate that either continuous
construction or continuous efforts have occurred. Whether a taxpayer
meets the Continuity Requirement under either test is determined by all
the relevant facts and circumstances. The IRS will closely scrutinize a
unit of property and may determine that the beginning of construction
is not satisfied with respect to property if a taxpayer does not meet
the Continuity Requirement.
Finally, section 1 of Executive Order 14080 of August 25, 2022
(E.O. 14080), Implementation of the CHIPS Act of 2022 (87 FR 52847),
states that the policy underlying the CHIPS Act (which established the
section 48D credit) is, in part, to ``make transformative investments
to restore and advance our Nation's leadership in the research,
development, and manufacturing of semiconductors'' and to ``bolster
United States technology leadership; and reduce our dependence on
critical technologies from China and other vulnerable or overly
concentrated foreign supply chains.'' In this regard, section 2 of E.O.
14080 directs, in part, that in implementing the CHIPS Act, as
appropriate, and to the extent consistent with the law, the Treasury
Department and the IRS prioritize, economic, sustainability, and
national security needs, by building domestic manufacturing capacity
that reduces reliance on vulnerable or overly concentrated foreign
production for both leading-edge and mature microelectronics, and
ensuring long-term United States leadership in the microelectronics
sector. Given the critical national security and foreign policies of
the United States that the section 48D credit, as part of the CHIPS
Act, is intended to achieve, the Department of the Treasury and the IRS
have determined that it is appropriate for the proposed regulations to
provide an extended safe harbor for satisfying the Continuity
Requirement in this unique case. Under the safe harbor provided in
proposed Sec. 1.48D-5(e)(6), a taxpayer is deemed to satisfy the
Continuity Requirement provided the property is placed in service no
more than 10 calendar years after the date that the Physical Work Test
or the Five Percent Safe Harbor is first satisfied with respect to that
item of property or the single advanced manufacturing facility project
that the item of property is part of.
V. Elective Payment Election
Section 48D(d)(2)(A)(i) provides that, in the case of a partnership
or an S corporation that makes an election under section 48D(d)(1) (in
such manner as the Secretary may provide) with respect to the section
48D credit, ``the Secretary shall make a payment to such partnership or
S corporation equal to the amount of such credit.'' Comments are
requested on any guidance needed to determine the extent to which, if
any, other Code provisions that limit the amount of a credit to a
taxpayer, such as section 469 (passive activity credits), section 49
(at-risk credit rules), and section 50, may be applied to limit the
amount of the Secretary's payment to the partnership or S corporation
pursuant to section 48D(d)(2)(A)(i)(I). Comments are also generally
requested on the treatment of the Secretary's payment to the
partnership or S corporation under the provisions of subchapters K and
S of chapter 1, respectively.
Section 48D(d)(2)(E) provides that ``as a condition of, and prior
to, any amount being treated as a payment which is made by the taxpayer
under [section 48D(d)(1)] or any payment being made pursuant to
[section 48D(d)(2)(A)(i)(I)], the Secretary may require such
information or registration as the Secretary deems necessary or
appropriate for purposes of preventing duplication, fraud, improper
payments or excessive payments under [section 48D].'' The IRS intends
to provide, through forms and instructions, the procedures for
registration of properties for which an election under section 48D(d)
will be made. Comments are requested on the registration requirements
and other procedures for purposes of section 48D(d)(2)(E).
Section 48D(d)(2)(F)(i) provides that in the case of an elective
payment election, that the Secretary determines constitutes an
excessive payment, the tax imposed on such taxpayer by chapter 1 for
the taxable year in which such determination is made will be increased
by an amount equal to the sum of (I) the amount of such excessive
payment, plus (II) an amount equal to 20 percent of such excessive
payment. Section 48D(d)(2)(F)(iii) defines an excessive payment as ``an
amount equal to the excess of--(I) the amount treated as a payment
under [section 48D(d)(1)], or the amount of the payment made pursuant
to [section 48D(d)(2)(A)], . . . over (II) the amount of the credit
which, without application of this subsection, would be otherwise
allowable (determined without regard to section 38(c)) under [section
48D(a)] with respect to such property for such taxable year.'' Comments
are requested on any guidance needed with respect to the amount that
``would be otherwise allowable'' for purposes of section
48D(d)(2)(F)(iii)(II).
Section 48D(d)(5) provides that ``rules similar to the rules of
[sections 50(a) and (c)] shall apply with respect to--(A) any amount
treated as a payment which is made by the taxpayer under [section
48D(d)(1)], and (B) any payment made pursuant to [section
48D(d)(2)(A)].'' Comments are requested on the guidance necessary to
clarify the rules that are similar to the rules of sections 50(a)
(investment credit recapture in the case of dispositions, etc.) and (c)
(basis adjustment to investment credit property) for purposes of
section 48D(d)(5).
VI. Recapture in the Case of Certain Expansions
The statutory applicable transaction recapture rule in section
50(a)(3) is intended to dissuade an ``applicable taxpayer'' from
engaging in an ``applicable transaction'' after property qualifying for
a section 48D credit is placed in service.
Section 50(a)(6)(D) defines an applicable transaction to mean, with
respect to any applicable taxpayer, any significant transaction (as
determined by the Secretary, in coordination with the Secretary of
Commerce and the Secretary of Defense) involving the material expansion
of semiconductor manufacturing capacity of such applicable taxpayer in
a foreign country of concern. The term ``foreign country of concern''
is defined in section 9901(a)(7) of the William M. (Mac) Thornberry
National Defense Authorization Act for Fiscal Year 2021, as amended by
section 103 of the CHIPS Act, to mean a country that is a covered
nation (as defined in section 4872(d) of title 10) and any country that
the Secretary of Commerce, in consultation with the Secretary of
Defense, the Secretary of State, and the Director of National
Intelligence, determines to be engaged in conduct that is detrimental
to the national security or foreign policy of the United States. The
proposed regulations define a foreign country of concern consistent
with the statute. Additionally, in coordination with the Secretary of
Commerce and the Secretary of Defense and pursuant to the Secretary's
authority under section 50(a)(6)(D)(i) to determine whether
transactions are significant transactions, the proposed regulations
define the term ``significant transaction'' to align and harmonize the
scope of applicable transactions under section 50(a)(3) with
[[Page 17455]]
the scope of prohibited expansion transactions within the meaning of
proposed Sec. 231.202 (relating to the Prohibition on Certain
Expansion Transactions) as contained in the Commerce Proposed Rule.
Accordingly, proposed Sec. 1.50-2(b)(10) defines the term
``significant transaction'' consistent with proposed Sec. 231.202 as
contained in the Commerce Proposed Rule to include certain transactions
engaged in by an applicable taxpayer or an applicable taxpayer's
affiliates (within the meaning of proposed Sec. 231.101 as contained
in the Commerce Proposed Rule).
Section 50(a)(6)(E) defines an applicable taxpayer to mean ``any
taxpayer who has been allowed a credit under section 48D(a) for any
prior taxable year.'' The proposed regulations provide that an
applicable taxpayer also includes (i) any member of an affiliated group
under section 1504(a) of the Code, determined without regard to section
1504(b)(3) of the Code, that includes a taxpayer who has been allowed a
credit under section 48D(a) for any prior taxable year, (ii) any
taxpayer who has made an election under section 48D(d)(1), (iii) any
partnership or S corporation that has made an election under section
48D(d)(2), and (iv) any partner in a partnership (directly or
indirectly through one or more tiered partnerships) or shareholder in
an S corporation for which the entity has made an election under
section 48D(d)(2) with respect to a credit determined under section
48D(a)(1) for any taxable year prior to the taxable year in which such
entity entered into an applicable transaction.
If an applicable taxpayer engages in an applicable transaction
before the close of the 10-year period beginning on the date such
taxpayer placed in service any property eligible for the section 48D
credit, then the applicable taxpayer is subject to an increase in tax
under chapter 1 for the taxable year in which the applicable
transaction occurs, as provided in section 50(a)(3). The proposed
regulations generally address the amount of recapture required pursuant
to section 50(a)(3). For example, if a taxpayer claims a section 48D
credit on property it owns directly and also claims a section 48D
credit on property placed in service by a partnership in which it is a
partner, and that taxpayer subsequently enters into an applicable
transaction within 10 years of claiming those section 48D credits, then
the proposed regulations require that the taxpayer recapture all the
credits claimed (that is, credits for property owned directly and
through its investment in the partnership). The proposed regulations
provide for the same result if, instead of the taxpayer entering into
the applicable transaction, the partnership enters into the applicable
transaction. Comments are requested on the appropriate amount of
recapture required in the context of partnerships and S corporations,
including the appropriateness of the recapture results in the above
examples.
As noted in the Background section of this preamble, section
50(a)(3)(C) authorizes the Secretary to issue such regulations or other
guidance as the Secretary determines necessary or appropriate to carry
out the purposes of the applicable transaction recapture rule,
including regulations or other guidance providing for recordkeeping
requirements or information reporting for purposes of administering the
requirements of section 50(a)(3). The Treasury Department and the IRS
are considering proposing record retention and information reporting
requirements for applicable taxpayers in addition to those required
under current law such that the IRS would have sufficient knowledge
regarding proposed applicable transactions and applicable transactions
the taxpayer has engaged in. For example, record retention or
information reporting requirements may require an applicable taxpayer
to maintain records or file information with the IRS related to any
proposed or planned significant transaction for a period not ending
earlier than the applicable period of limitations under section 6501 of
the Code on assessment and collection of tax under chapter 1 with
respect to the applicable taxpayer's return filed for the taxable year
that includes the close of the 10-year period beginning on the date
such taxpayer placed in service investment credit property that is
eligible for the section 48D credit.
Additionally, the Treasury Department and the IRS are considering
information reporting requirements that would require notifying the IRS
regarding any planned significant transactions of the applicable
taxpayer involving the material expansion of semiconductor
manufacturing capacity in a foreign country of concern, including any
transaction the applicable taxpayer considers to be eligible for an
exception under section 50(a)(3) or proposed Sec. 1.50-2. For example,
such requirements may require the applicable taxpayer to report
accurate and complete information relating to the applicable
transaction, including: (i) the name, employer identification number,
and other identifying information regarding the applicable taxpayer
that is proposing or engaging in a planned applicable transaction, and
all other parties to the applicable transaction; (ii) the name and
location of any business in a foreign country of concern where
semiconductor manufacturing capacity may be materially expanded by the
applicable transaction; (iii) a brief description of the planned
applicable transaction, including the specific semiconductor products
currently manufactured, the current production technology node and
semiconductor manufacturing capacity, as well as the specific
semiconductor products proposed for manufacture, the proposed
production technology node, and proposed semiconductor manufacturing
capacity; (iv) if the planned applicable transaction involves the
material expansion of semiconductor manufacturing capacity that
produces legacy semiconductors for which the products will
predominately serve the market of a foreign country of concern,
documentation as to where the final products incorporating the legacy
semiconductors are to be used or consumed including the percentage of
semiconductor manufacturing capacity or percentage of sales revenue
that will be accounted for by use or consumption of the final goods in
the foreign country of concern, and (v) if applicable, a statement
explaining how the planned significant transaction meets the
requirements of an exception to the applicable transaction recapture
rule that involve the material expansion of semiconductor manufacturing
capacity in proposed Sec. 1.50-2. The Treasury Department and the IRS
request comments on the ability of applicable taxpayers to comply with
such requirements and what specific procedures should be considered to
ensure that the IRS has sufficient information to determine whether an
applicable taxpayer engages in an applicable transaction within the
meaning of section 50(a)(3) and proposed Sec. 1.50-2.
IV. Applicability Date
These regulations (Sec. Sec. 1.48D-1 through 1.48D-6, and Sec.
1.50-2) are proposed to apply to taxable years ending on or after the
date the Treasury decision adopting these regulations as final
regulations are published in the Federal Register. Taxpayers may rely
on these proposed regulations for property placed in service after
December 31, 2022, in taxable years ending before the date the Treasury
decision adopting these regulations as final regulations is published
in the Federal Register, provided the taxpayers follow proposed
Sec. Sec. 1.48D-1 through 1.48D-6, and Sec. 1.50-2 in their entirety
and in a consistent manner.
[[Page 17456]]
Special Analyses
I. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of the
Office of Management and Budget (OMB) before collecting information
from the public, whether such collection of information is mandatory,
voluntary, or required to obtain or retain a benefit.
For purposes of the PRA, the reporting burden associated with the
collection of information in proposed Sec. 1.48D-6(a)(1) and (2) will
be reflected in the Paperwork Reduction Act Submissions associated with
Form 3468 (OMB control number 1545-0155). The reporting burden
associated with the collection of information in proposed Sec. 1.48D-
6(c) will be reflected in the Paperwork Reduction Act Submissions
associated with Form 15396 (OMB control number pending). The reporting
burden associated with the collection of information proposed in Sec.
1.50-2(a) will be reflected in the Paperwork Reduction Act Submissions
associated with Form 4255 (OMB control number 1545-0166). The IRS
anticipates providing an opportunity to comment on any revisions to the
forms through subsequent notice in the Federal Register and on
<a href="http://www.irs.gov/draftforms">www.irs.gov/draftforms</a>.
II. Regulatory Flexibility Act
In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter
6), it is hereby certified that these proposed regulations will not
have a significant economic impact on a substantial number of small
entities. Although the rules may affect small entities, data are not
readily available about the number of taxpayers affected. The economic
impact of these regulations is not likely to be significant, because
these proposed regulations substantially incorporate statutory changes
by the CHIPS Act in establishing section 48D and amending section 50(a)
and assist taxpayers in understanding section 48D and the changes to
section 50(a). The proposed regulations will also make it easier for
taxpayers to comply with section 48D and the changes to section 50(a).
Notwithstanding this certification, the Treasury Department and the IRS
welcome comments on the impact of these regulations on small entities.
III. Section 7805(f)
Pursuant to section 7805(f), this notice of proposed rulemaking has
been submitted to the Chief Counsel for the Office of Advocacy of the
Small Business Administration for comment on its impact on small
business.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). This proposed
rule does not include any Federal mandate that may result in
expenditures by State, local, or Tribal governments, or by the private
sector in excess of that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. This proposed rule does not have
federalism implications and does not impose substantial direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
V. Regulatory Planning and Review
The Administrator of the Office of Information and Regulatory
Affairs (OIRA), Office of Management and Budget, has determined that
this proposed rule is not a significant regulatory action, as that term
is defined in section 3(f) of Executive Order 12866. Therefore, OIRA
has not reviewed this proposed rule pursuant to section 6(a)(3)(A) of
Executive Order 12866 and the April 11, 2018, Memorandum of Agreement
between the Treasury Department and the Office of Management and Budget
(OMB).
Comments and Requests for a Public Hearing
Before the proposed regulations are adopted as final regulations,
consideration will be given to comments that are submitted timely to
the IRS as prescribed in the preamble under the ADDRESSES section. The
Treasury Department and the IRS request comments on all aspects of the
proposed regulations. Any comments submitted will be made available at
<a href="http://www.regulations.gov">www.regulations.gov</a> or upon request. A public hearing will be scheduled
if requested in writing by any person who timely submits electronic or
written comments. Requests for a public hearing are encouraged to be
made electronically. If a public hearing is scheduled, notice of the
date and time for the public hearing will be published in the Federal
Register. Announcement 2020-4, 2020-17 IRB 1, provides that until
further notice, public hearings conducted by the IRS will be held
telephonically. Any telephonic hearing will be made accessible to
people requesting a reasonable accommodation.
Statement of Availability of IRS Documents
Guidance cited in this preamble is published in the Internal
Revenue Bulletin and is available from the Superintendent of Documents,
U.S. Government Publishing Office, Washington, DC 20402, or by visiting
the IRS website at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The principal author of these proposed regulations is Jason P.
Deirmenjian Office of the Associate Chief Counsel (Passthroughs and
Special Industries), IRS. However, other personnel from the Treasury
Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding
sectional authorities for Sec. Sec. 1.48D-6 and 1.50-2 to read in part
as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.48D-6 also issued under 26 U.S.C. 48D(d)(6).
Section 1.50-2 also issued under 26 U.S.C. 50(a)(3)(C).
* * * * *
0
Par. 2. Sections 1.48D-0 through 1.48D-6 are added to read as follows:
Sec.
* * * * *
1.48D-0. Table of contents.
1.48D-1 Advanced manufacturing investment credit determined.
1.48D-2 Definitions.
1.48D-3 Qualified property.
1.48D-4 Advanced manufacturing facility of an eligible taxpayer.
1.48D-5 Beginning of construction.
1.48D-6 Elective payment election.
* * * * *
[[Page 17457]]
Sec. 1.48D-0. Table of contents.
This section lists the table of contents for Sec. Sec. 1.48D-1
through 1.48D-6.
Sec. 1.48D-1 Advanced manufacturing investment credit determined
(a) Overview.
(b) Determination of credit.
(c) Coordination with section 47.
(1) In general.
(2) Example.
(d) Applicability date.
Sec. 1.48D-2 Definitions
(a) In general.
(b) Applicable transaction.
(c) Basis.
(d) Beginning of construction.
(e) Eligible taxpayer.
(f) Foreign entities.
(1) Foreign entity.
(2) Foreign entity of concern.
(3) Owned by, controlled by, or subject to the jurisdiction or
direction of.
(g) Placed in service.
(h) Qualified investment.
(1) In general.
(2) Special rules for certain passthrough entities.
(i) Partnerships.
(ii) S corporations.
(iii) Estate or trust.
(3) Qualified progress expenditures election.
(4) Examples.
(i) Example 1.
(ii) Example 2.
(i) Section 48D credit.
(j) Section 48D regulations.
(k) Semiconductor.
(l) Semiconductor manufacturing.
(1) In general.
(2) Semiconductor manufacturing processes.
(i) Packaging.
(ii) Advanced Packaging.
(m) Semiconductor manufacturing equipment.
(n) Manufacturing semiconductor manufacturing equipment.
(o) Applicability date.
Sec. 1.48D-3 Qualified property
(a) In general.
(b) Qualified property.
(c) Tangible depreciable property.
(1) In general.
(2) Exception.
(d) Constructed, reconstructed, or erected by the taxpayer.
(e) Original use.
(1) In general.
(2) Treatment of inventory.
(f) Integral to the operation of an advanced manufacturing
facility.
(1) In general.
(2) Research or storage facilities.
(g) Applicability date.
Sec. 1.48D-4 Advanced manufacturing facility of an eligible
taxpayer
(a) In general.
(b) Advanced manufacturing facility.
(c) Primary purpose.
(1) In general.
(2) No primary purpose.
(3) Examples.
(i) Example (i).
(ii) Example (ii).
(d) Applicability date.
Sec. 1.48D-5 Beginning of construction
(a) Termination of credit.
(1) In general.
(2) Property.
(3) Single advanced manufacturing facility project.
(i) Factors used for single advanced manufacturing facility
project determination.
(ii) Example.
(iii) Timing of single advanced manufacturing facility project
determination.
(iv) Disaggregation.
(v) Example.
(b) Beginning of construction.
(1) In general.
(2) Continuity requirement.
(c) Physical work test.
(1) In general.
(2) Physical work of significant nature.
(i) In general.
(ii) Exceptions.
(d) Five percent safe harbor.
(1) In general.
(2) Costs.
(3) Cost overruns.
(i) Single advanced manufacturing facility project.
(ii) Example.
(iii) Single property.
(A) Example.
(B) [Reserved].
(e) Continuity requirement.
(1) In general.
(2) Continuous construction.
(3) Continuous efforts.
(4) Excusable disruptions to continuous construction and
continuous efforts tests.
(i) In general.
(ii) Effect of excusable disruptions on continuity safe harbor.
(iii) Non-exclusive list of construction disruptions.
(5) Timing of excusable disruption determination.
(6) Continuity safe harbor.
(i) In general.
(ii) Example.
(f) Applicability date.
Sec. 1.48D-6 Elective payment election
(a) Elective payment election.
(1) In general.
(2) Timing of election.
(3) Irrevocable.
(4) Denial of double benefit.
(5) Treatment of payment.
(b) Special rules for partnerships and S corporations.
(1) In general.
(2) [Reserved].
(c) Registration requirement.
(1) In general.
(2) [Reserved].
(d) Excessive payment.
(1) In general.
(2) Reasonable cause.
(3) Excessive payment defined.
(4) [Reserved].
(e) Basis reduction and recapture.
(1) In general.
(2) [Reserved].
(f) Mirror code territories.
(g) Applicability date.
Sec. 1.48D-1 Advanced manufacturing investment credit determined.
(a) Overview. For purposes of section 46 of the Internal Revenue
Code (Code), the amount of the advanced manufacturing investment credit
under section 48D of the Code determined for any taxable year is the
amount determined under section 48D and the section 48D regulations
(subject to any applicable provisions of the Code that may limit the
amount determined under section 48D), for such taxable year with
respect to any advanced manufacturing facility of an eligible taxpayer.
Paragraph (b) of this section provides the general rules for
determining the amount of a taxpayer's section 48D credit for a taxable
year. Paragraph (c) of this section provides rules coordinating the
section 48D credit with the rules of section 47 (relating to the
rehabilitation credit). Section 1.48D-2 provides definitions that apply
for purposes of section 48D and the section 48D regulations. Section
1.48D-3 provides rules relating to the definition of qualified property
for purposes of the section 48D credit. Section 1.48D-4 provides rules
relating to the definition of an advanced manufacturing facility of an
eligible taxpayer for purposes of the section 48D credit. Section
1.48D-5 provides rules regarding the beginning of construction of
property for purposes of the section 48D credit. Section 1.48D-6
provides rules relating to the elective payment election available to a
taxpayer under section 48D(d) to be treated as making a payment of tax,
or for a partnership or S corporation to receive an actual payment, in
lieu of claiming a section 48D credit. See Sec. 1.50-2 for additional
rules under section 50(a)(3) and (6) of the Code relating to applicable
transactions that result in the recapture of section 48D credits.
(b) Determination of credit. Subject to any applicable sections of
the Code that may limit the credit determined under section 48D, the
section 48D credit for any taxable year of an eligible taxpayer with
respect to any advanced manufacturing facility is an amount equal to 25
percent of the taxpayer's qualified investment for the taxable year
with respect to that advanced manufacturing facility. A section 48D
credit is available only with respect to qualified property that a
taxpayer places in service after December 31, 2022, and, for any
qualified property the construction of which began prior to January 1,
2023, but only to the extent of the basis of that property attributable
to the construction, reconstruction, or erection of that property
occurring after August 9, 2022. Under section 48D(e),
[[Page 17458]]
no section 48D credit is allowed to a taxpayer for placing qualified
property in service in any taxable year if the beginning of
construction of that qualified property as determined under Sec.
1.48D-5 begins after December 31, 2026 (the date specified in section
48D(e)).
(c) Coordination with section 47--(1) In general. The qualified
investment with respect to any advanced manufacturing facility of an
eligible taxpayer for any taxable year does not include that portion of
the basis of any property that is attributable to qualified
rehabilitation expenditures, as defined in section 47(c)(2) and Sec.
1.48-12(c), with respect to a qualified rehabilitated building, as
defined in section 47(c)(1) and Sec. 1.48-12(b).
(2) Example: Coordination with section 47. X Corp, a calendar-year
C corporation, owns Building A, a certified historic structure. X
Corp's adjusted basis in Building A is $100,000. Between August 1,
2024, and October 31, 2024, X Corp incurs $1 million to reconstruct,
within the meaning of section 48D(b)(2)(A)(iii)(I) and Sec. 1.48-
12(b)(2)(iv), Building A. X Corp places the reconstructed Building A, a
qualified rehabilitated building, in service on November 15, 2024. Of
the $1 million of capitalized expenditures incurred to reconstruct
Building A (all of which would meet the definition of qualified
investment), $250,000 also meets the definition of qualified
rehabilitation expenditures. As such, X's qualified investment in
Building A is $750,000 ($1 million-$250,000).
(d) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
Sec. 1.48D-2 Definitions.
(a) In general. The definitions in paragraphs (b) through (n) of
this section apply for purposes of sections 48D and 50 of the Internal
Revenue Code (Code) and the section 48D regulations.
(b) Applicable transaction. The term applicable transaction has the
meaning provided in section 50(a)(6) of the Code and Sec. 1.50-2.
(c) Basis. With respect to any qualified property, the term basis
means the the basis of the qualified property determined immediately
before the qualified property is placed in service by the taxpayer and
in accordance with the general rules of subtitle A of the Code
(subtitle A) for determining the basis of property (see subtitle A,
subchapter O, part II). Thus, the basis of qualified property would
generally be its cost (see section 1012) unreduced by any adjustments
to basis and would include all items properly included by the taxpayer
in the depreciable basis of the property.
(d) Beginning of construction. The term beginning of construction
has the meaning provided in Sec. 1.48D-4.
(e) Eligible taxpayer. The term eligible taxpayer means any
taxpayer that--
(1) Is not a foreign entity of concern; and
(2) Has not made an applicable transaction during the taxable year.
(f) Foreign entities--(1) Foreign entity. The term foreign entity
has the same meaning as provided in 15 CFR 231.105.
(2) Foreign entity of concern. The term foreign entity of concern
has the same meaning as provided in 15 CFR 231.106.
(3) Owned by, controlled by, or subject to the jurisdiction or
direction of. The term owned by, controlled by, or subject to the
jurisdiction or direction of has the same meaning as provided in 15 CFR
231.112 for purposes of determining whether an entity is a foreign
entity under paragraph (f)(1) of this section or a foreign entity of
concern under paragraph (f)(2) of this section.
(g) Placed in service. The term placed in service has the same
meaning as provided in Sec. 1.46-3(d).
(h) Qualified Investment--(1) In general. Except as provided in
paragraphs (h)(2) and (3) of this section, the term qualified
investment with respect to an advanced manufacturing facility means,
for any taxable year, the basis of any qualified property that is part
of an advanced manufacturing facility and placed in service by the
taxpayer during the taxable year.
(2) Special rules for certain passthrough entities. In the case of
any qualified property that is part of an advanced manufacturing
facility of an eligible taxpayer and placed in service by an entity
described in paragraphs (h)(2)(i) through (iii) of this section during
a taxable year, the rules of this paragraph (h)(2) apply to determine
the qualified investment for the taxable year with respect to the
advanced manufacturing facility.
(i) Partnership. In the case of a partnership that places in
service qualified property that is part of an advanced manufacturing
facility of an eligible taxpayer, each partner in the partnership must
take into account separately the partner's share of the basis of the
qualified property placed in service by the partnership during the
taxable year as provided in Sec. 1.46-3(f).
(ii) S corporation. The basis of qualified property that is part of
an advanced manufacturing facility of an eligible taxpayer and placed
in service during the taxable year by an S corporation (as defined in
section 1361(a) of the Code) must be apportioned pro rata among the S
corporation's shareholders on the last day of the S corporation's
taxable year as provided in section 1366.
(iii) Estate or trust. The basis of qualified property that is part
of an advanced manufacturing facility of an eligible taxpayer and
placed in service during the taxable year by an estate or trust must be
apportioned among the estate or trust and its beneficiaries on the
basis of the income of the estate or trust allocable to each for that
taxable year.
(3) Qualified progress expenditures election. A taxpayer may elect,
as provided in Sec. 1.46-5, to increase the qualified investment with
respect to any advanced manufacturing facility of an eligible taxpayer
for the taxable year, by any qualified progress expenditures made after
August 9, 2022.
(4) Examples. The provisions of this paragraph (h) are illustrated
by the following examples.
(i) Example 1: Advanced manufacturing investment credit--qualified
investment in general. On November 1, 2023, X, a calendar-year C
corporation, places in service qualified property with a basis of
$200,000, and on December 1, 2023, X places in service qualified
property with a basis of $300,000. X's qualified investment for the
taxable year is $500,000 ($200,000 + $300,000).
(ii) Example 2: Advanced manufacturing investment credit, qualified
investment for partnerships. A, B, C, and D, all calendar-year C
corporations, are partners in the ABCD partnership. Partners A, B, C,
and D share partnership profits equally. On November 1, 2023, the ABCD
partnership placed in service qualified property with a basis of $1
million. Each partner's share of the basis of the qualified property,
as determined in Sec. 1.46-3(f)(2), is $250,000 ($1m x 0.25) and each
partner's qualified investment is $250,000.
(i) Section 48D credit. The term section 48D credit means the
advanced manufacturing investment credit determined under section 48D
and the section 48D regulations.
(j) Section 48D regulations. The term section 48D regulations means
this section and Sec. Sec. 1.48D-2 through 1.48D-6 and 1.50-2.
(k) Semiconductor means, consistent with 15 CFR 231.117, an
integrated electronic device or system most commonly manufactured using
[[Page 17459]]
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.
(l) Semiconductor manufacturing--(1) In general. The term
semiconductor manufacturing and the term manufacturing of
semiconductors are synonymous and mean, consistent with 15 CFR 231.118,
semiconductor fabrication or semiconductor packaging. Semiconductor
fabrication includes the process of forming devices like transistors,
poly capacitors, non-metal resistors, and diodes, as well as
interconnects between such devices, on a wafer of semiconductor
material. Semiconductor packaging means the process of enclosing a
semiconductor in a protective container (package) and providing
external power and signal connectivity for the assembled integrated
circuit.
(2) Semiconductor manufacturing processes. The following
definitions apply for purposes of section 48D and the section 48D
regulations:
(i) Packaging means the process of enclosing a semiconductor in a
protective container (package) and providing external power and signal
connectivity for the assembled integrated circuit.
(ii) Advanced packaging means a subset of packaging technologies
that uses novel techniques and materials to increase the performance,
power, modularity, and/or durability of an integrated circuit. Advanced
packaging technologies include flip-chip, 2D, 2.5D, and 3D stacking,
fan-out and fan-in, and embedded die/system-in-package (SiP).
(m) Semiconductor manufacturing equipment. The term semiconductor
manufacturing equipment means the specialized equipment integral to the
manufacturing of semiconductors and subsystems that enable or are
incorporated into the manufacturing equipment. Specific examples of
semiconductor manufacturing equipment and subsystems that enable
semiconductor manufacturing equipment include:
(1) Deposition equipment, including, Chemical Vapor Deposition
(CVD), Physical Vapor Deposition (PVD), and Atomic Layer Deposition
(ALD);
(2) Etching equipment (wet etch, dry etch);
(3) Lithography equipment (steppers, scanners, extreme ultraviolet
(EUV));
(4) Wafer slicing equipment, wafer dicing equipment, and wire
bonders;
(5) Inspection and measuring equipment, including scanning electron
microscopes, atomic force microscopes, optical inspection systems, and
wafer probes;
(6) Certain metrology and inspection systems; and
(7) Ion implantation and diffusion/oxidation furnaces.
(n) Manufacturing semiconductor manufacturing equipment. The term
manufacturing semiconductor manufacturing equipment means the physical
production of semiconductor manufacturing equipment in a manufacturing
facility.
(o) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
Sec. 1.48D-3 Qualified property.
(a) In general. This section provides definitions and rules
relating to qualified property for purposes of section 48D of the
Internal Revenue Code and the section 48D regulations.
(b) Qualified property. The term qualified property means tangible
depreciable property that is integral to the operation of an advanced
manufacturing facility and that is either--
(1) Constructed, reconstructed, or erected by the taxpayer; or
(2) Acquired by the taxpayer if the original use of such property
commences with the taxpayer.
(c) Tangible depreciable property--(1) In general. The term
tangible depreciable property means tangible personal property (as
defined in Sec. 1.48-1(c)), other tangible property (as defined in
Sec. 1.48-1(d)), and building and structural components (as defined in
Sec. 1.48-1(e), except as provided in paragraph (c)(2) of this
section) with respect to which depreciation (or amortization in lieu of
depreciation) is allowable. The law of a State or local jurisdiction is
not controlling for purposes of determining whether property is
tangible property for purposes of section 48D or the section 48D
regulations.
(2) Exception. Pursuant to section 48D(b)(2)(B)(ii), the term
tangible depreciable property does not include a building and its
structural components, or a portion thereof, used for:
(i) Offices;
(ii) Administrative services such as human resources or personnel
services, payroll services, legal and accounting services, and
procurement services;
(iii) Sales or distribution functions;
(iv) Security services (not including cybersecurity operations); or
(v) Any other functions unrelated to manufacturing of
semiconductors or semiconductor manufacturing equipment.
(d) Constructed, reconstructed, or erected by the taxpayer.
Property is considered constructed, reconstructed, or erected by the
taxpayer if the work is done for the benefit of the taxpayer in
accordance with the taxpayer's specifications.
(e) Original use--(1) In general. Except as provided in paragraph
(e)(2) of this section, the term original use means with respect to any
property the first use to which the property is put by any taxpayer in
connection with a trade or business or for the production of income.
Additional capital expenditures paid or incurred by a taxpayer to
recondition or rebuild property acquired or owned by the taxpayer
satisfy the original use requirement to the extent of the amount of the
expenditures paid or incurred by a taxpayer. However, a taxpayer's cost
to acquire property reconditioned or rebuilt by another taxpayer does
not satisfy the original use requirement. Whether property is
reconditioned or rebuilt property will be determined based on the facts
and circumstances.
(2) Treatment of inventory. For purposes of paragraph (e)(1) of
this section, if a taxpayer initially acquires new property and holds
the property primarily for sale to customers in the ordinary course of
the taxpayer's trade or business and subsequently withdraws the
property from inventory and uses the property primarily in the
taxpayer's trade or business or primarily for the taxpayer's production
of income, the taxpayer is considered the original user of the
property. If a person initially acquires new property and holds the
property primarily for sale to customers in the ordinary course of the
person's business and a taxpayer subsequently acquires the property
from the person for use primarily in the taxpayer's trade or business
or primarily for the taxpayer's production of income, the taxpayer is
considered the original user of the property. For purposes of this
paragraph (e), the original use of the property by the taxpayer
commences on the date on which the taxpayer first uses the property
primarily in the taxpayer's trade or business or primarily for the
taxpayer's production of income.
(f) Integral to the operation of an advanced manufacturing
facility--(1) In general. To qualify for the section 48D credit,
property must be integral to the operation of manufacturing
[[Page 17460]]
semiconductors or manufacturing semiconductor manufacturing equipment,
both as provided in Sec. 1.48D-2. Property is integral to the
operation of manufacturing semiconductors or semiconductor
manufacturing equipment if such property is used directly in the
manufacturing operation, is essential to the completeness of the
manufacturing operation, and is not transformed in any material way as
a result of the manufacturing operation. Materials, supplies, and other
inventoriable items of property that are transformed into a finished
semiconductor or into a finished unit of semiconductor manufacturing
equipment are not considered property integral to the operation of
manufacturing semiconductors or semiconductor manufacturing equipment.
In addition, property such as pavements, parking areas, inherently
permanent advertising displays, or inherently permanent outdoor
lighting facilities, although used in the operation of a business,
ordinarily are not integral to the operation of manufacturing
semiconductors or semiconductor manufacturing equipment. Thus, for
example, all property used by the taxpayer to acquire or transport
materials or supplies to the point where the actual manufacturing
activity commences (such as docks, railroad tracks, and bridges), or
all property (other than materials or supplies) used by the taxpayer to
manufacture semiconductors or to manufacture semiconductor
manufacturing equipment within the meaning of Sec. 1.48D-2, would be
considered property integral to the operation of an advanced
manufacturing facility of an eligible taxpayer. Property is considered
integral to the operation of an advanced manufacturing facility of an
eligible taxpayer if so used either by the owner of the property or by
the lessee of the property. Specific examples of property which
normally would be integral to the operation of the advanced
manufacturing facility of an eligible taxpayer are:
(i) Deposition equipment used in the processes of Chemical Vapor
Deposition (CVD), and Physical Vapor Deposition (PVD), Etching
Equipment, lithography equipment, including Extreme Ultraviolet
Lithography (EUV);
(ii) Wet process tools, analytical tools, E-Beam operation tools,
mask manufacturing equipment, chemical mechanical polishing equipment,
reticle handlers, and stockers;
(iii) Inspection and metrology equipment;
(iv) Clean room facilities, including specialized lighting systems,
automated material systems for wafer handling, locker and growing
rooms, specialized recirculating air handlers, to maintain the
cleanroom free from particles, control temperature and humidity levels,
and specialized ceilings comprised of HEPA filters;
(v) Electrical power facilities, cooling facilities, chemical
supply systems, and wastewater systems;
(vi) Sub-fab levels containing pumps, transformers, abatement
systems, ultrapure water systems, uninterruptible power supply, and
boilers, pipes, storage systems, wafer routing systems and databases,
backup systems, quality assurance equipment, and computer data centers;
and
(vii) Utility level equipment including chillers, systems to handle
nitrogen, argon, and other gases, compressor systems, and pipes.
(2) Research or storage facilities. If property, including a
building and its structural components, constitutes a research or
storage facility and is used in connection with the manufacturing of
semiconductors or semiconductor manufacturing equipment, the property
may qualify as integral to the operation of the advanced manufacturing
facility under section 48D(b)(2)(A)(iv). Specific examples of research
facilities include research facilities that manufacture semiconductors
in connection with research, such as pre-pilot production lines and
prototypes, including semiconductor packaging. Specific examples of
storage facilities are mineral, chemical, and gas storage tanks,
including high pressure cylinders or specially designed tanks and
drums. A research facility that does not manufacture any type of
semiconductors, as provided in Sec. 1.48D-2(k), or semiconductor
manufacturing equipment, as provided in Sec. 1.48D-2(m), does not
qualify.
(g) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
Sec. 1.48D-4 Advanced manufacturing facility of an eligible taxpayer.
(a) In general. This section provides definitions and rules
relating to advanced manufacturing facilities of eligible taxpayers for
purposes of section 48D of the Internal Revenue Code and the section
48D regulations.
(b) Advanced manufacturing facility. For purposes of section
48D(b)(3) and this section, the term advanced manufacturing facility
means a facility of an eligible taxpayer for which the primary purpose,
as determined under paragraph (c)(1) of this section, is the
manufacturing of finished semiconductors, as defined in Sec. 1.48D-
2(l), or the manufacturing of finished semiconductor manufacturing
equipment, as defined in Sec. 1.48D-2(n).
(c) Primary purpose--(1) In general. The determination of the
primary purpose of a facility will be made based on all the facts and
circumstances surrounding the construction, reconstruction, or erection
of the advanced manufacturing facility of an eligible taxpayer. Facts
that may indicate a facility has a primary purpose of manufacturing
finished semiconductors or manufacturing finished semiconductor
manufacturing equipment include designs or other documents for the
facility that demonstrate that the facility is designed to make
finished semiconductors or finished products consisting of specialized
equipment that can only be used for semiconductor manufacturing; the
possession of permits or licenses needed to manufacture finished
semiconductors or finished semiconductor manufacturing equipment; and
executed contracts to supply finished semiconductor manufacturing
equipment to a finished semiconductor manufacturer in place either
before or within 6 months after the facility is placed in service.
(2) No primary purpose. A facility that manufactures, produces,
grows, or extracts 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 semiconductor
manufacturing equipment. Thus, for example, facilities that grow wafers
or produce gases, or that manufacture components or parts, to supply an
advanced manufacturing facility that manufactures semiconductors or
semiconductor manufacturing equipment are not facilities for which the
primary purpose is the manufacturing of semiconductors or the
manufacturing of semiconductor manufacturing equipment.
(3) Examples. The following examples illustrate the rules of this
paragraph (c):
(i) Example (i)--Primary purpose. In January 2023, X Corp, a
calendar-year C corporation, begins construction of a facility that
will manufacture equipment that is integral to the manufacturing
operations of a manufacturer of semiconductors. A portion of the
equipment, however, could be used for other manufacturing operations. X
Corp enters into a contract with Y Corp, which is building a
semiconductor manufacturing facility to be placed in service in July
2024, to supply Y Corp
[[Page 17461]]
with the equipment it will need for its semiconductor manufacturing
operations. Such equipment represents approximately 75 percent of the
potential output of X Corp's facility (by cost to produce such
equipment) of X Corp's facility for the first year of operations. X
Corp will be considered as having a primary purpose of manufacturing
semiconductor manufacturing equipment.
(ii) Example (ii)--Primary purpose. In January 2023, Y Corp, a C
corporation, with a calendar-year taxable year, begins construction of
a facility that will manufacture scanning electron microscopes. Y Corp
enters into a contract with Z Corp, which is building a semiconductor
manufacturing facility to be placed in service in July 2024, to supply
Z Corp with equipment it will use as an integral part of its
semiconductor manufacturing operations. Such equipment represents
approximately 75 percent of the potential output (by cost) of Y Corp's
facility for the first year of operations. Y Corp will be considered as
having a primary purpose of manufacturing semiconductor manufacturing
equipment because scanning electron microscopes are specialized
equipment integral to the manufacturing of semiconductors.
(d) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
Sec. 1.48D-5 Beginning of construction.
(a) Termination of credit--(1) In general. The credit allowed under
section 48D of the Internal Revenue Code (Code) and the section 48D
regulations does not apply to property that is part of an advanced
manufacturing facility of an eligible taxpayer if the beginning of
construction of the property, as defined in paragraph (a)(2) of this
section, begins after December 31, 2026 (the date specified in section
48D(e)).
(2) Property. For purposes of determining beginning of construction
of property under this section, the unit of property is--
(i) A single advanced manufacturing facility project as described
in paragraph (a)(3) of this section; or
(ii) An item of qualified property (as defined in Sec. 1.48D-
3(b)).
(3) Single advanced manufacturing facility project. Solely for
purposes of determining whether construction of a qualified property
has begun for purposes of section 48D and the section 48D regulations,
multiple items of qualified property or advanced manufacturing
facilities that are operated as part of a single advanced manufacturing
facility project (along with any items of property, such as clean
rooms, chemical delivery systems, chemical storage facilities,
temperature control systems, and robotic handling systems that are
integral to the operation of the single advanced manufacturing facility
project) will be treated as a single item of qualified property.
Whether multiple qualified properties or advanced manufacturing
facilities are operated as part of a single advanced manufacturing
facility project will depend on all the relevant facts and
circumstances.
(i) Factors used for single advanced manufacturing facility project
determination. Factors indicating that multiple qualified properties or
advanced manufacturing facilities are operated as part of a single
advanced manufacturing facility project may include:
(A) The properties or facilities are owned by a single legal
entity;
(B) The properties or facilities are constructed on contiguous
pieces of land;
(C) The properties or facilities are described in a common supply
contract or other type of relevant contract;
(D) The properties or facilities share a common electricity and/or
water supply;
(E) The properties or facilities are described in one or more
common environmental or other regulatory permits;
(F) The properties or facilities were constructed pursuant to a
single master construction contract; or
(G) The construction of the properties or facilities was financed
pursuant to the same loan agreement or other financing arrangement.
(ii) Example. A taxpayer is developing Project C, a project that
will consist of 3 advanced manufacturing facilities constructed on the
same campus. Project C will share a common electricity supply, and
semiconductors manufactured by Project C will be sold to Buyer through
a single supply contract. In 2023, for 1 of the 3 advanced
manufacturing facilities, the taxpayer installs deposition equipment.
Thereafter, the taxpayer completes the construction of all 3 advanced
manufacturing facilities pursuant to a continuous program of
construction. For purposes of the section 48D credit, Project C is a
single project that will be treated as a single property, and the
taxpayer performed physical work of a significant nature that
constitutes the beginning of construction of Project C in 2023.
(iii) Timing of single advanced manufacturing facility project
determination. Whether multiple properties or advanced manufacturing
facilities are operated as part of a single advanced manufacturing
facility project and are treated as a single item of property for
purposes of the beginning of construction requirement of section 48D
and the section 48D regulations is determined in the taxable year
during which the last of the multiple properties or facilities is
placed in service.
(iv) Disaggregation. Multiple properties or advanced manufacturing
facilities that are operated as part of a single advanced manufacturing
facility project and treated as a single item of qualified property
under paragraph (a)(3) of this section for purposes of determining
whether construction of a qualified property or advanced manufacturing
facility has begun may be disaggregated and treated as separate items
of qualified property for purposes of determining whether a separate
advanced manufacturing facility or item of qualified property satisfies
the continuity safe harbor (as defined in paragraph (e) of this
section). Those disaggregated separate advanced manufacturing
facilities or items of qualified property that are placed in service
prior to the continuity safe harbor deadline will be eligible for the
continuity safe harbor. The remaining disaggregated separate items of
property or facilities may satisfy the continuity requirement under a
facts and circumstances determination.
(v) Example. A taxpayer is developing Project D, a project that
will consist of 4 separate properties. Project D will use the same
water supply and each property within Project D will be constructed
pursuant to a single master construction contract. Under the single
project rule provided in paragraph (a)(3) of this section, Project D is
a single project that will be treated as a single property. In 2024,
for 3 of the 4 separate properties, the taxpayer installs property
integral to the operation of the advanced manufacturing facility.
Accordingly, the taxpayer has performed physical work of a significant
nature that constitutes the beginning of construction of Project D for
purposes of section 48D(e). Thereafter, on the last day of the 10-year
continuity safe harbor period, the taxpayer places in service only 3 of
the 4 separate properties within Project D. The taxpayer disaggregates
Project D under paragraph (a)(3)(iv) of this section and accordingly,
only 3 of the 4 separate properties satisfy the Continuity Safe Harbor.
For
[[Page 17462]]
the remaining 1 separate property, the taxpayer may demonstrate that it
satisfies the continuity requirement provided in paragraph (e) of this
section based on the facts and circumstances, to enable the taxpayer to
claim the section 48D credit.
(b) Beginning of construction--(1) In general. For purposes of
section 48D, the section 48D regulations, and section 107(f)(1) of the
CHIPS Act of 2022, Public Law 117-167, div. A, 136 Stat. 1366, 1399
(August 9, 2022), a taxpayer may establish that construction of an item
of property (as defined in paragraph (a)(2) of this section) of the
taxpayer begins under either:
(i) The physical work test of paragraph (c) of this section; or
(ii) The five percent safe harbor of paragraph (d) of this section.
(2) Continuity requirement. See paragraph (e) of this section for
the continuity requirement applicable for purposes of the physical work
test and the five percent safe harbor, which must be demonstrated
either by maintaining continuous construction (as defined in paragraph
(e)(2) of this section) or continuous efforts (as defined in paragraph
(e)(3) of this section).
(c) Physical work test--(1) In general. Under the physical work
test, construction of an item of property begins when physical work of
a significant nature begins, provided that the taxpayer maintains
continuous construction or continuous efforts. This test focuses on
nature of the work performed, not the amount of the costs. Assuming the
work performed is of a significant nature, there is no fixed minimum
amount of work, monetary or percentage threshold required to satisfy
the physical work test.
(2) Physical work of significant nature--(i) In general. Work
performed by the taxpayer and work performed for the taxpayer by other
persons under a binding written contract that is entered into prior to
the manufacture, construction, or production of the property for use by
the taxpayer in the taxpayer's trade or business of manufacturing
semiconductors or semiconductor manufacturing equipment is taken into
account in determining whether physical work of a significant nature
has begun. Both on-site and off-site work (performed either by the
taxpayer or by another person under a binding written contract) may be
taken into account for purposes of demonstrating that physical work of
a significant nature has begun. A written contract is binding only if
it is enforceable under local law against the taxpayer or a predecessor
and does not limit damages to a specified amount (for example, by use
of a liquidated damages provision). For this purpose, a contractual
provision that limits damages to an amount equal to at least five
percent of the total contract price will not be treated as limiting
damages to a specified amount. For additional guidance regarding the
definition of a binding written contract, see Sec. 1.168(k)-
1(b)(4)(ii)(A) through (D).
(ii) Exceptions. Physical work of significant nature does not
include preliminary activities, including but not limited to planning
or designing, securing financing, exploring, researching, obtaining
permits, licensing, conducting surveys, environmental and engineering
studies, or clearing a site, even if the cost of those preliminary
activities is properly included in the depreciable basis of the
property. Physical work of a significant nature also does not include
work (performed either by the taxpayer or by another person under a
binding written contract) to produce property that is either in
existing inventory or is normally held in inventory by a vendor.
(d) Five percent safe harbor--(1) In general. Construction of a
property will be considered as having begun if:
(i) A taxpayer pays or incurs (within the meaning of Sec. 1.461-
1(a)(1) and (2)) five percent or more of the total cost of the
property; and
(ii) Thereafter, the taxpayer maintains continuous construction or
continuous efforts.
(2) Costs. All costs properly included in the basis of the property
are taken into account to determine whether the five percent safe
harbor has been met. For property that is manufactured, constructed, or
produced for the taxpayer by another person under a binding written
contract with the taxpayer, costs incurred with respect to the property
by the other person before the property is provided to the taxpayer are
deemed incurred by the taxpayer when the costs are incurred by the
other person under the principles of section 461 of the Code.
(3) Cost overruns--(i) Single advanced manufacturing facility
project. If the total cost of a property that is a single advanced
manufacturing facility project comprised of multiple properties (as
described in paragraph (a)(3) of this section) exceeds its anticipated
total cost such that the amount the taxpayer actually paid or incurred
with respect to the single advanced manufacturing facility project to
establish the beginning of its construction under paragraph (b)(1)(ii)
of this section is less than five percent of the total cost at the time
it is placed in service, the five percent safe harbor is not fully
satisfied. However, the five percent safe harbor will be satisfied with
respect to some, but not all, of the separate properties or facilities
(as described in paragraph (a)(3) of this section) comprising the
single advanced manufacturing facility project, as long as the total
aggregate cost of those properties is not more than twenty times
greater than the amount the taxpayer paid or incurred.
(ii) Example. In 2023, taxpayer incurs $300,000 in costs to
construct Project A, comprised of six advanced manufacturing facilities
that will be operated as a single project. Taxpayer anticipates that
each advanced manufacturing facility will cost $1,000,000 for a total
cost for Project A of $6,000,000. Thereafter, the taxpayer makes
continuous efforts to advance towards completion of Project A. The
taxpayer timely places Project A in service in 2025. In 2025, the
actual total cost of Project A amounts to $7,500,000, with each
advanced manufacturing facility costing $1,250,000. Although the
taxpayer did not pay or incur five percent of the actual total cost of
Project A in 2023, the taxpayer will be treated as satisfying the Five
Percent Safe Harbor in 2023 with respect to four of the advanced
manufacturing facilities, as their actual total cost of $5,000,000 is
not more than twenty times greater than the $300,000 in costs incurred
by the taxpayer. The taxpayer will not be treated as satisfying the
five percent safe harbor in 2023 with respect to two of the properties.
Thus, the taxpayer may claim the section 48D credit based on $5,000,000
the cost of four of the properties.
(iii) Single property. If the total cost of a single property,
which is not part of a single advanced manufacturing facility project
comprised of multiple properties or facilities (as described in
paragraph (a)(3) of this section) and cannot be separated into multiple
properties or facilities, exceeds its anticipated total cost so that
the amount a taxpayer actually paid or incurred with respect to the
single property as of an earlier year is less than five percent of the
total cost of the single property at the time it is placed in service,
then the taxpayer will not satisfy the five percent safe harbor with
respect to any portion of the single property in such earlier year.
(A) Example. In 2023, a taxpayer incurs $250,000 in costs to
construct Project B, a single property. The taxpayer anticipates that
the total cost of Project B will be $5,000,000. Thereafter, the
taxpayer makes continuous efforts to advance towards completion of
Project B. The taxpayer places Project B in service in a later year. At
that time, its actual total cost amounts to $6,000,000.
[[Page 17463]]
Because Project B is a single property that is not a single project
comprised of multiple properties, the taxpayer will not satisfy the
five percent safe harbor as of 2023. However, if the construction of
Project B satisfies the requirements of the physical work test by also
beginning physical work of a significant nature in 2024, the taxpayer
may be able to demonstrate that construction began in 2024.
(B) [Reserved]
(e) Continuity requirement--(1) In general. For purposes of the
physical work test and five percent safe harbor, taxpayers must satisfy
the continuity requirement by demonstrating either continuous
construction or continuous efforts regardless of whether the physical
work test or the five percent safe harbor was used to establish the
beginning of construction. Whether a taxpayer meets the continuity
requirement under either test is determined by the relevant facts and
circumstances. The Commissioner will closely scrutinize a property and
may determine that the beginning of construction is not satisfied with
respect to a property if a taxpayer does not meet the continuity
requirement.
(2) Continuous construction. The term continuous construction means
a continuous program of construction that involves continuing physical
work of a significant nature. Whether a taxpayer maintains a continuous
program of construction to satisfy the continuity requirement will be
determined based on all the relevant facts and circumstances.
(3) Continuous efforts. The term continuous efforts means
continuous efforts to advance towards completion of a property to
satisfy the continuity requirement. Whether a taxpayer makes continuous
efforts to advance towards completion of a property will be determined
by the relevant facts and circumstances. Facts and circumstances
indicating continuous efforts to advance towards completion of a
property may include:
(i) Paying or incurring additional amounts included in the total
cost of the property;
(ii) Entering into binding written contracts for the manufacture,
construction, or production of the property or for future work to
construct the property;
(iii) Obtaining necessary permits; and
(iv) Performing physical work of a significant nature.
(4) Excusable disruptions to continuous construction and continuous
efforts tests--(i) In general. Certain disruptions in a taxpayer's
continuous construction or continuous efforts to advance towards
completion of a property that are beyond the taxpayer's control will
not be considered as indicating that a taxpayer has failed to satisfy
the continuity requirement.
(ii) Effect of excusable disruptions on continuity safe harbor. The
excusable disruptions provided in this paragraph (e)(4) will not extend
the continuity safe harbor deadline that is provided in paragraph
(e)(6) of this section.
(iii) Non-exclusive list of construction disruptions. The following
is a non-exclusive list of construction disruptions that will not be
considered as indicating that a taxpayer has failed to satisfy the
continuity requirement:
(A) Delays due to severe weather conditions;
(B) Delays due to natural disasters;
(C) Delays in obtaining permits or licenses from Federal, Indian
Tribal, State, territorial, or local governments, including--
(1) Delays in obtaining air emissions, water discharge, or
hazardous waste management permits or chemical handling licenses from
the Environmental Protection Agency (EPA) or another environmental
protection authority;
(2) Delays as a result of the review process under State, local, or
Federal environmental laws, for example, a review under the National
Environmental Policy Act; and
(3) Delays in obtaining construction permits;
(D) Delays at the written request of a Federal, State, local, or
Indian Tribal government regarding matters of public health, public
safety, security, or similar concerns, including hazardous chemical
transport;
(E) Delays related to electrical or water supply, such as those
relating to the completion of construction on a distribution line or
water supply line that may be associated with a project's electrical
and water needs, whether constructed by the eligible taxpayer that is
the owner of the advanced manufacturing facility, a governmental
entity, or another person;
(F) Delays in the manufacture of custom components or equipment;
(G) Delays due to the inability to obtain specialized equipment of
limited availability;
(H) Delays due to supply shortages;
(I) Delays due to the presence of endangered species;
(J) Financing delays; and
(K) Delays due to specialized labor shortages or labor stoppages.
(5) Timing of excusable disruption determination. In the case of a
single advanced manufacturing facility project comprised of a single
property, whether an excusable disruption has occurred for purposes of
the beginning of construction requirement of section 48D and the
section 48D regulations must be determined in the taxable year during
which the property is placed in service. In the case of a single
advanced manufacturing facility project comprised of multiple
properties or facilities, whether an excusable disruption has occurred
for purposes of the beginning of construction requirement of section
48D and the section 48D regulations must be determined in the taxable
year during which the last of multiple properties or facilities is
placed in service.
(6) Continuity safe harbor--(i) In general. A taxpayer will be
deemed to satisfy the continuity requirement provided the property is
placed in service no more than 10 calendar years after the calendar
year during which construction of the property began for purposes of
section 48D and the section 48D regulations.
(ii) Example. If construction begins on a property on January 15,
2023, and the property is placed in service by December 31, 2033, the
property will be considered to satisfy the Continuity Safe Harbor. If
the property is not placed in service before January 1, 2034, whether
the continuity requirement was satisfied will be determined based on
all the relevant facts and circumstances.
(f) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
Sec. 1.48D-6 Elective payment election.
(a) Elective payment election--(1) In general. Except as provided
in paragraph (b) of this section, a taxpayer may elect under section
48D(d)(1) of the Internal Revenue Code (Code) and this section with
respect to the section 48D credit to be treated as making a payment
against the tax imposed by subtitle A of the Code (for the taxable year
with respect to which such credit was determined) equal to the amount
of the credit with respect to any property otherwise allowable to the
taxpayer (determined without regard to section 38(c) of the Code).
(2) Timing of election. Any election under section 48D(d)(1) and
this section must be made not later than the due date (including
extensions of time) for the return of tax imposed by subtitle A of the
Code for the taxable year for which the election is made, but in no
event earlier than May 8, 2023.
(3) Irrevocable. Any election under section 48D(d)(1) and this
section, once
[[Page 17464]]
made, will be irrevocable and, except as otherwise provided, will apply
with respect to any amount of section 48D credit for the taxable year
for which the election is made.
(4) Denial of double benefit. In the case of a taxpayer making an
election under section 48D(d) and this section with respect to any
section 48D credit determined under section 48D(a) and Sec. 1.48D-1,
such credit will be reduced to zero and will, for any other purposes
under the Code, be deemed to have been allowed to the taxpayer for such
taxable year.
(5) Treatment of payment. The payment described in section
48D(d)(1) and paragraph (a)(1) of this section will be treated as made
on the later of the due date (determined without regard to extensions)
of the return of tax imposed by subtitle A of the Code for the taxable
year or the date on which such return is filed.
(b) Special rules for partnerships and S corporations--(1) In
general. If a partnership or S corporation directly holds any property
for which an advanced manufacturing investment credit is determined,
any election under paragraph (a) must be made by the partnership or S
corporation. No election under 48D(d) and this section by any partner
or shareholder is allowed.
(2) [Reserved]
(c) Registration required--(1) In general. As a condition of, and
prior to, any amount being treated as a payment that is made by the
taxpayer under section 48D(d)(1) or any payment made pursuant to
section 48D(d)(2)(A)(i)(I), the eligible taxpayer or partnership or S
corporation must timely comply with the registration procedures set
forth in this paragraph (c).
(2) [Reserved]
(d) Excessive payment--(1) In general. Except as provided in
paragraph (d)(2) of this section, in the case of any amount treated as
a payment which is made by the taxpayer under section 48D(d)(1) and
paragraph (a) of this section, or any payment made pursuant to section
48D(d)(2)(A)(i)(II) and paragraph (b) of this section, with respect to
any property, which amount the Commissioner determines constitutes an
excessive payment as defined in paragraph (d)(3) of this section, the
tax imposed on such taxpayer by chapter 1 of the Code for the taxable
year in which such determination is made is increased by an amount
equal to the sum of--
(i) The amount of such excessive payment; plus
(ii) An amount equal to 20 percent of such excessive payment.
(2) Reasonable cause. Paragraph (d)(1) of this section will not
apply if the taxpayer demonstrates to the satisfaction of the
Commissioner that the excessive payment resulted from reasonable cause.
(3) Excessive payment defined. For purposes of section 48D(d) and
this paragraph (d), the term excessive payment means, with respect to
any property for which an election is made under section 48D(d) and
this section for any taxable year, an amount equal to the excess of--
(i) The amount treated as a payment which is made by the taxpayer
pursuant to section 48D(d)(1) and paragraph (a) of this section, or any
payment made by the Commissioner pursuant to section 48D(d)(2)(A)(I)(i)
and paragraph (b) of this section, with respect to such property for
such taxable year; over
(ii) The amount of the section 48D credit which, without
application of section 48D(d) and this section, would be otherwise
allowable (determined without regard to section 38(c)) under section
48D(a) and the section 48D regulations with respect to such property
for such taxable year.
(4) [Reserved]
(e) Basis reduction and recapture--(1) In general. The rules in
sections 50(a) and (c) of the Code apply with respect to elective
payments under paragraphs (a) and (b) of this section.
(2) [Reserved]
(f) Mirror code territories. In the case of any possessions of the
United States (U.S. territory) with a mirror code tax system (as
defined in section 24(k) of the Code), section 48D(d) and this section
are not treated as part of the income tax laws of the United States for
purposes of determining the income tax law of such U.S. territory
unless such territory elects to have section 48D(d) and this section so
treated. Taxpayers must consult the applicable territory tax authority
on whether such an election was made for the particular U.S. territory.
(g) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 3. Section 1.50-2 is added to read as follows:
Sec. 1.50-2 Recapture of the advanced manufacturing investment credit
in the case of certain expansions.
(a) Recapture in connection with certain expansions--(1) In
general. Except as provided in section 50(a)(3)(B) of the Internal
Revenue Code (Code) and paragraph (a)(2) of this section, if an
applicable taxpayer engages in an applicable transaction before the
close of the applicable period, then the tax under chapter 1 of the
Code for the taxable year in which such transaction occurs is increased
by 100 percent of the applicable transaction recapture amount. Any
applicable taxpayer that engages in an applicable transaction during a
taxable year does not meet the definition of an eligible taxpayer under
section 48D(c) and the section 48D regulations and is ineligible for
the section 48D credit for that taxable year. See paragraph (b) of this
section for definitions of terms used in section 50(a)(3) and this
section.
(2) Exception. Section 50(a)(3)(A) and paragraph (a)(1) of this
section do not apply if the applicable taxpayer demonstrates to the
satisfaction of the Commissioner that the applicable transaction has
been ceased or abandoned within 45 days of a determination and notice
by the Commissioner. A taxpayer that ceases or abandons an applicable
transaction for a taxable year may still be treated as engaging in a
separate applicable transaction for a taxable year. However, a taxpayer
may not circumvent the application of section 50(a)(3) and this section
by engaging in a series of applicable transactions, multiple applicable
transactions, or other similar arrangements.
(3) Carrybacks and carryover adjusted. In the case of any cessation
described in section 50(a)(1) or (2), or any applicable transaction to
which section 50(a)(3) and paragraph (a)(1) of this section apply, any
carryback or carryover under section 39 is appropriately adjusted by
reason of such cessation or applicable transaction.
(b) Definitions. The following definitions apply for purposes of
section 50(a)(3) and this section.
(1) Applicable period. The term applicable period means the 10-year
period beginning on the date that an applicable taxpayer placed in
service property that is eligible for the section 48D credit.
(2) Applicable taxpayer--(i) In general. The term applicable
taxpayer means--
(A) Any taxpayer who was allowed a section 48D credit or made an
election under section 48D(d)(1) and Sec. 1.48D-6(a) with respect to
such credit, for any taxable year prior to the taxable year in which
such taxpayer entered into an applicable transaction;
(B) Any partnership or S corporation that made an election under
section 48D(d)(2) and Sec. 1.48D-6(b) with respect to a credit
determined under section 48D(a)(1) for any taxable year prior to
[[Page 17465]]
the taxable year in which such partnership or S corporation entered
into an applicable transaction; and
(C) Any partner in a partnership (directly or indirectly through
one or more tiered partnerships) or shareholder in an S corporation for
which the partnership or S corporation made an election under section
48D(d)(2) and Sec. 1.48D-6(b) with respect to a credit determined
under section 48D(a) for any taxable year prior to when such partner or
shareholder entered into an applicable transaction.
(ii) Affiliated groups. For purposes of this paragraph (b)(2), all
members of an affiliated group under section 1504(a) of the Code,
determined without regard to section 1504(b)(3) of the Code, are
treated as one taxpayer.
(3) Applicable transaction. Except as provided in section
50(a)(6)(D)(ii) and paragraph (c)(1) of this section, the term
applicable transaction means, with respect to any applicable taxpayer,
any significant transaction involving the material expansion of
semiconductor manufacturing capacity of such applicable taxpayer in any
foreign country of concern.
(4) Applicable transaction recapture amount--(i) In general. The
term applicable transaction recapture amount means, with respect to an
applicable taxpayer, the aggregate decrease in the credits allowed
under section 38 of the Code for all prior taxable years that would
have resulted solely from reducing to zero any credit determined under
section 46 of the Code that is attributable to the advanced
manufacturing investment credit under section 48D(a), with respect to
property that has been placed in service during the applicable period.
(ii) [Reserved]
(5) Existing facility. The term existing facility, consistent with
15 CFR 231.103, means any facility built, equipped, and operating at
the semiconductor manufacturing capacity level for which it was
designed prior to being placed in service by the taxpayer. Existing
facilities are defined by their semiconductor manufacturing capacity at
the time the qualified property is placed in service; facilities that
undergo significant renovations after being placed in service will no
longer qualify as existing facilities within the meaning of this
paragraph (b)(5).
(6) Foreign country of concern. The term foreign country of concern
has the same meaning as provided in 15 CFR 231.104.
(7) Material expansion. The term material expansion means,
consistent with 15 CFR 231.111, the addition of physical space or
equipment that has the purpose or effect of increasing semiconductor
manufacturing capacity of a facility by more than 5 percent; or a
series of such expansions which, in the aggregate at any time during
the applicable period, increasing the semiconductor manufacturing
capacity of a facility by more than 5 percent.
(8) Semiconductor manufacturing capacity. The term semiconductor
manufacturing capacity means, consistent with 15 CFR 231.119, the
productive capacity of a semiconductor facility. In the case of a
semiconductor fabrication facility, semiconductor manufacturing
capacity is measured in wafer starts per month. In the case of a
packaging facility, semiconductor manufacturing capacity is measured in
packages per month.
(9) Significant renovations. The term significant renovations
means, consistent with 15 CFR 231.122, any set of changes to a facility
that, in the aggregate during the applicable period, increase
semiconductor manufacturing capacity by adding an additional line, or
otherwise increasing semiconductor manufacturing capacity by 10 percent
or more.
(10) Significant transaction. As determined in coordination with
the Secretary of Commerce and the Secretary of Defense, the term
significant transaction means--
(i) Any investment, whether proposed, pending, or completed, that
is valued at $100,000 or more, including:
(A) A merger, acquisition, or takeover, including:
(1) The acquisition of an ownership interest in an entity;
(2) A consolidation;
(3) The formation of a joint venture; or
(4) A long-term lease or concession arrangement under which a
lessee (or equivalent) makes substantially all business decisions
concerning the operation of a leased entity (or equivalent), as if it
were the owner; or
(B) Any other investment, including any capital expenditures or the
formation of a subsidiary;
(ii) A series of transactions described in paragraph (b)(10)(i) of
this section, which, in the aggregate at any time during, the
applicable period, are valued at $100,000 or more;
(iii) 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 percent of the
output of the semiconductor manufacturing facility (for example,
wafers, semiconductor devices, or packages) by value, is incorporated
into final products (that is, not an intermediate product that is used
as a factory inputs for producing other goods) that are used or
consumed in the market of a foreign country of concern;
(iv) A transaction during the applicable period in which an
applicable taxpayer knowingly (within the meaning of 15 CFR 231.109)
engages in any joint research, as defined in 15 CFR 231.108, or
technology licensing effort with a foreign entity of concern that
relates to a technology or product that raises national security
concerns; or
(v) Any of the transactions described in paragraphs (b)(10)(i)
through (iv) of this section engaged in by any entity described in this
paragraph (b)(10)(v) (consistent with the definition of affiliate in 15
CFR 231.101):
(A) Any entity if an applicable taxpayer directly or indirectly
owns at least 50 percent of the outstanding voting interests in such
entity.
(B) Any entity if such entity directly or indirectly owns at least
50 percent of the outstanding voting interests in an applicable
taxpayer.
(C) Any entity if one or more entities described in paragraph
(b)(10)(v)(B) of this section directly or indirectly owns at least 50
percent of the outstanding voting interests.
(11) Technology licensing. The term technology licensing has the
same meaning as provided in 15 CFR 231.123.
(12) Technology or product that raises national security concerns.
The term technology or product that raises national security concerns
means, consistent with 15 CFR 231.124, any semiconductors critical to
national security, as defined in 15 CFR 231.120, or any technology or
product listed in Category 3 of the Commerce Control List (supplement
No. 1 to part 774 of the Export Administration Regulations, 15 CFR part
774) that is controlled for National Security (``NS'') reasons, as
described in 15 CFR 742.4, or Regional Stability (``RS'') reasons, as
described in 15 CFR 742.6.
(c) Exception from the definition of applicable transaction for the
manufacturing of legacy semiconductors--(1) In general. The term
applicable transaction, as defined in section 50(a)(6)(D) and paragraph
(b)(3) of this section, does not include a transaction that primarily
involves the expansion of manufacturing capacity for legacy
semiconductors, but only to the extent not described in paragraph
(b)(10)(iii) of this section.
(2) Legacy semiconductor. The term legacy semiconductor means,
consistent with 15 CFR 231.110--
[[Page 17466]]
(i) A digital or analog logic semiconductor that is of the 28
nanometer generation or older (that is, has a gate length of 28
nanometers or more for a planar transistor);
(ii) A memory semiconductor with a half-pitch greater than 18
nanometers for Dynamic Random Access Memory (DRAM) or less than 128
layers for Not AND (NAND) Flash that does not utilize emerging memory
technologies, such as transition metal oxides, phase-change memory,
perovskites, ferromagnetics relevant to advanced memory fabrication; or
(iii) A semiconductor identified by the Secretary of Commerce in a
public notice issued under 15 U.S.C. 4652(a)(6)(A)(ii).
(3) Exception from the definition of legacy semiconductor.
Notwithstanding paragraph (c)(2) of this section, the following are not
legacy semiconductors:
(i) Semiconductors critical to national security, as defined in 15
CFR 231.120; or
(ii) A semiconductor with a post-planar transistor architecture
(such as fin-shaped field field-effect transistor (FinFET) or gate all
around field-effect transistor); and
(iii) For the purposes of packaging facilities, semiconductors
packaged utilizing three-dimensional (3D) integration.
(d) Example. The provisions of this section are illustrated by the
following example.
(1) Example: Applicable transaction credit claimed. On October 15,
2024, X Corp, a C corporation that is a calendar-year taxpayer, placed
in service Property A, qualified property with a basis of $1 million. X
Corp's qualified investment, as determined in Sec. 1.46-3(c), for the
taxable year is $1 million. X Corp's advanced manufacturing investment
credit for the taxable year is $250,000 ($1 million x 0.25) and, assume
that X Corp's income tax liability is $400,000. X Corp does not
determine any other credits in 2024. X claims an advanced manufacturing
investment credit of $250,000 for its 2024 taxable year. On January 15,
2026, X Corp engages in an applicable transaction, as defined in
section 50(a)(6)(D) and paragraph (b)(3) of this section and did not
cease or abandon the transaction within 45 days of a determination and
notice by the Commissioner. X Corp has not determined or claimed any
general business credits since its 2024 taxable year. The aggregate
decrease in credits allowed under section 38 for all prior years
resulting from reducing to zero any credit determined under section 46
that is attributable to the advanced manufacturing investment credit is
$250,000 ($250,000 (credit allowed)-$0 (credit that would have been
allowed). X Corp's tax under chapter 1 is increased by $250,000 (1.0 x
$250,000). Pursuant to section 48D(c), for the 2026 taxable year, X
Corp is not an eligible taxpayer and is ineligible to claim or
carryforward the advanced manufacturing investment credit.
(2) [Reserved]
(f) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-05871 Filed 3-21-23; 11:15 am]
BILLING CODE 4830-01-P
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</html>Indexed from Federal Register on March 23, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.