The Internal Revenue Service (IRS) published a final rule to implement the section 48D 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. Section 48D(a) of the Internal Revenue Code (IRC), as amended by the CHIPS Act, provides a tax credit which is generally equal to 25% of an eligible taxpayer’s investment in an “advanced manufacturing facility” (which section 48D(b)(3) defines as a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment, excluding buildings and facilities used for offices, administrative services, or other functions unrelated to manufacturing). A taxpayer’s qualified investment equals its basis in any qualified property placed in service during the taxable year that is part of an advanced manufacturing property. The credit is available for qualified property that began construction after enactment of the CHIPS Act (August 9, 2022) and placed in service after December 31, 2022. The credit will not apply to property the construction of which begins after December 31, 2026.
In particular, the final rule provides that a taxpayer can establish that construction has begun by meeting the “Physical Work Test” (providing that construction begins when physical work of a significant nature commences) or the “Five Percent Safe Harbor” (providing that construction is considered having begun if a taxpayer pays or incurs five percent or more of the total cost of the property). Under either the Physical Work Test or the Five Percent Safe Harbor, a taxpayer must meet the “Continuity Requirement,” providing that a taxpayer must demonstrate that either continuous construction or continuous efforts have occurred. The final rule includes a safe harbor for the Continuity Requirement that deems that a taxpayer has satisfied the Continuity Requirement so long as the property at issue is placed in service within ten calendar years after the date that the Physical Work Test or the Five Percent Safe Harbor is first satisfied.
The final rule is effective beginning December 23, 2024.