Treasury Department, IRS Release Final Regulations On Direct Pay Under CHIPS Act Section 48D – Income Tax

Highlights

• The Chips and Science Act of 2022 (CHIPS Act) added Section 48D
  to the Internal Revenue Code to incentivize the production of
  semiconductors and semiconductor manufacturing equipment. The
  Section 48D credit is generally 25 percent of the basis of any
  qualified property that is part of an eligible taxpayer’s
  advanced manufacturing facility.




• Similar to many of the tax credits included in the Inflation
  Reduction Act (IRA), the Section 48D credit enables taxpayers to
  receive direct payment (sometimes referred to as elective
  payment).




• Unlike some of the IRA credits, direct payment of Section 48D
  credits is not limited to tax-exempt entities. Rather, any taxpayer
  undertaking activities provided for in Section 48D can request
  direct pay.




• The U.S. Department of the Treasury and IRS recently finalized
  the rules regarding direct pay, although final regulations on other
  topics – including eligibility to claim Section 48D credits
  – are still pending.

The Chips and Science Act of 2022 (CHIPS Act) added Section 48D
to the Internal Revenue Code to incentivize the production of
semiconductors and semiconductor manufacturing equipment in the
United States. The credit is equal to 25 percent of the
“qualified investment” for such taxable year with respect
to any “advanced manufacturing facility” (the primary
purpose of which is manufacturing semiconductors or semiconductor
manufacturing equipment) of an “eligible taxpayer.” At
election, the credit can be directly paid to the taxpayer. Unlike
some of the Inflation Reduction Act (IRA) credit stipulations,
direct payment of Section 48D credits is not limited to tax-exempt
entities. Rather, any taxpayer undertaking activities provided for
in Section 48D can request direct pay.

On March 23, 2023, the U.S. Department of the Treasury and the
IRS issued proposed regulations under Section 48D. Those
regulations addressed all aspects of the tax credit including
eligibility and direct payment. (See Holland & Knight’s
previous alert, “Treasury Department Issues Section 48D Guidance on
CHIPS Act Semiconductor Tax Incentive,” March 27,
2023.)

In June 2023, the Treasury Department and the IRS revised the
proposed regulation relating to direct payment and issued temporary
regulations to implement the preregistration process, a required
prerequisite for seeking direct payment. Though the majority of
regulations under Section 48D remain in proposed form (e.g., those
on eligibility), the Treasury Department and the IRS recently finalized the regulations (specifically,
Treas. Reg. § 1.48D-6) related to direct payment of the
credits.

This Holland & Knight alert addresses the final regulations
under Section 48D as they relate to direct payment of Section 48D
credits.

Modifications for Direct Pay of Section 48D Credits

The final regulations made a few key clarifications to the June
2023 proposed and temporary regulations but do not make any
significant changes. For example, there was confusion regarding
whether a taxpayer was considered to have made an elective payment
election upon completing the IRS pre-filing registration
requirement. (See Holland & Knight’s previous alert,
“Inflation Reduction Act Direct Pay and Transfer
Pre-Filing Registration Is Open for Business,” Feb. 6,
2024.) The final regulations clarify each qualified investment in
an advanced manufacturing facility must have its own registration
number. However, as with the IRA credits, the taxpayer makes an
election for direct pay on its income tax return, and this election
is not revocable.

Qualified Progress Expenditures

The Treasury Department and the IRS are concerned about the
potential for fraud and duplication for Section 48D credits. This
theme is woven throughout the preamble of the final regulations and
is used as a rational for rejecting many stakeholder comments.

For example, the Section 48D credit can be claimed for qualified
progress expenditures. Though the regulations require a taxpayer to
complete the preregistration process for qualified investments, the
portal was unavailable for expenditures made in 2022. The preamble
to the final regulations states that a calendar-year taxpayer with
qualifying progress expenditures between Aug. 9, 2022, and Dec. 31,
2022, may be able to claim the credit without preregistration.
However, the preamble warns that the taxpayer should expect that
the elective payment election made on the income tax return may be
subject to heightened scrutiny before the payment is issued. This
heightened review is designed to reduce fraud and duplication.

Partnership Allocation of Tax Credits

The final regulations provide flexibility for partnerships. Some
partners entered into written binding agreements in anticipation of
the CHIPS Act, while others entered into such agreements prior to
the publication of the reproposed Section 48D regulations in June
2023. In recognition that such binding agreements regarding the
allocation of tax-exempt income may significantly reduce or
eliminate the benefit of direct pay, the final regulations include
an interim rule for a written binding partnership agreement entered
into after Dec. 31, 2021, and before June 22, 2023, if the
partnership was formed for the purpose of owning and operating an
advanced manufacturing facility or qualified property.

Under the interim rule, a partner’s distributive share of
the direct pay is determined in accordance with the allocation of
income rules under Treas. Reg. § 1.704-1(b)(i) (i.e., the
substantial allocation rules). The partnership tax rules for
allocations of credits do not apply.

Conclusion

Though the final regulations regarding direct payment of Section
48D credits are welcome and unsurprisingly consistent with the
rules and procedures for other IRA tax credits, many continue to
wait for the finalization of other rules under Section 48D
regarding eligibility.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.