President Biden is expected to sign the CHIPS Act of 2022 (CHIPS Act) into law establishing the “Advanced Manufacturing Tax Credit” (AMTC), a temporary, refundable, non-transferable 25 percent tax credit for investments in semiconductor manufacturing facilities in the United States.

Generally, an eligible taxpayer that constructs or acquires (for original use) tangible, depreciable property that is integral to a facility the primary purpose of which is manufacturing semiconductors or semiconductor equipment (Qualified Property) may claim an AMTC equal to 25 percent of the costs of such Qualified Property in the year such Qualified Property is placed in service. Qualified Property includes buildings and structural components, except those portions used for offices, administrative services, or other functions not related to manufacturing.

To be eligible for the AMTC: (1) Qualified Property must be placed in service after December 31, 2022, and (2) construction must begin on such Qualified Property before January 1, 2027. For Qualified Property the construction of which begins before January 1, 2023, only costs added to the tax basis of such Qualified Property after the date the President signs the Act, are eligible for the AMTC. For Qualified Property the construction of which begins after the date President signs the Act, all relevant costs are eligible for the AMTC.

A taxpayer generally will be required to reduce its tax basis for an applicable advanced manufacturing facility on a dollar for dollar basis by the amount of AMTCs claimed by such taxpayer. There will be a recapture of all or a portion of the credit (1) on a sliding scale if the Qualified Property or a pass-through entity interest owned by a taxpayer is disposed of within five years, (2) on a sliding scale if the property no longer is Qualified Property within five years, or (3) the taxpayer enters into a transaction that materially expands its semiconductor manufacturing capacity in China or another country on the Office of Foreign Assets Control (OFAC) list within 10 years.

Taxpayers that are ineligible to claim AMTCs include: (1) certain foreign entities and (2) taxpayers who have engaged in certain significant transactions involving the material expansion of semiconductor manufacturing capacity in China or another foreign country on the OFAC list.

The AMTC features a “direct pay” option that turns the credit into a refundable credit. As a result, a taxpayer that does not have sufficient federal income tax liability to absorb the AMTC may obtain a refund of the difference between the AMTC and the taxpayer’s income tax liability. Special rules enable partnerships or S corporations that claim an AMTC to make a “direct pay” election and pass the credit through to the partners or S corporation shareholders. Treasury guidance is necessary to implement these rules.

The AMTC is subject to the passive activity loss rules, therefore, like other tax credits (e.g., New Markets Tax Credit, Investment Tax Credit, Production Tax Credit), C corporations are better positioned than individuals to claim the AMTC. Moreover, partners in a partnership who are not subject to the passive activity loss rules or REITs may be well positioned to take advantage of the AMTC.

The CHIPS Act also authorizes various grants, all of which will be taxable to the recipient.

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