On March 5, 2024, the Department of Treasury (Treasury) and the Internal Revenue Service (IRS) issued final regulations (Final Regulations) on the elective payment election of the advanced manufacturing investment credit under the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022 (CHIPS Act). The Final Regulations, which share similarities with the 6417 direct pay rule, are purely procedural regulations that provide certain revisions to the proposed regulations. Specifically, the Final Regulations modify the limitations for making an elective payment election, modify the denial of the double benefit rule, and provide an interim rule for determining a partner’s distributive share of the tax-exempt income. The Final Regulations will be effective May 10, 2024.

I. Background

The CHIPS Act (as described in a previous alert) provides significant funding over five years for loans and loan guarantees to support investment in semiconductor manufacturing and a new investment tax credit. Specifically, the CHIPS Act added section 48D to the Internal Revenue Code (Code), which established an investment credit equal to 25 percent of a taxpayer’s qualified investment in the taxable year with respect to certain advanced manufacturing facilities.

The Final Regulations address subsection 48D(d), which allows taxpayers to elect to treat the amount of the section 48D credit determined under section 48D(a) as a payment against their federal income tax liabilities. Subsection 48D(d) also provides special rules relating to elective payments to partnerships and S corporations and directs the Secretary of the Treasury to provide rules for making elections under section 48D and to require information or registration necessary for purposes of preventing duplication, fraud, improper payments, or excessive payments under section 48D. Prior to issuing the Final Regulations, proposed regulations were released by the IRS and Treasury in March 2023 and June 2023.

II. Pre-Filing Registration Requirement

The Final Regulations require a taxpayer to obtain a registration number for each qualified property placed in service during the taxable year in order to elect for direct pay. A taxpayer may register a single property, multiple properties, or an advanced manufacturing facility, however, they must be the owner of an advanced manufacturing facility to register the facility. Also, a taxpayer that places in service qualified property that is part of an advanced manufacturing facility must register the qualified property if such taxpayer is not the owner of the facility. Additionally, the registration number is only valid for the taxable year it is obtained and must be renewed in the subsequent year.

The Final Regulations provide for a pre-filing registration process that allows the IRS to verify certain information before the election is made and then to process the tax return on which the election is made. Similarly, the Final Regulations provide that the time and manner for making an elective payment election is the filing of the annual return including the completed source credit form and completed Form 3800. Further, the Final Regulations clarify that the documentation to support the existence of a valid qualified investment will vary by the property or properties for which the credit is being claimed, and a registrant does not need to provide all information that may be available.

III. Time and Manner of Election

A taxpayer can make a qualified progress expenditure election to increase its qualified investment with respect to an advanced manufacturing facility for the taxable year by any qualified expenditures made during such taxable year. Further, a taxpayer may make an elective payment election with respect to a section 48D credit determined under a qualified progress expenditure election.

If a taxpayer makes a direct pay election, they are treated as having made a payment of tax as of the due date or filing date of the return. Further, the Final Regulations now state that no elective payment election may be made for the first time on an amended return, withdrawn on an amended return, or made or withdrawn by filing an administrative adjustment request. A numerical error with respect to a properly claimed elective payment election, however, may be corrected on an amended return or by filing an administrative adjustment request if necessary.

The Final Regulations have remained mostly consistent with the proposed regulations. However, because of the deemed payment date estimated tax penalties and interest, are an issue. The denial of double benefits and ordering rules, discussed below, can alleviate this issue in some cases by reducing the estimated taxes due during the year. A taxpayer that files its return after the due date for filing (excluding extensions) may also be subject to a penalty for the failure to timely pay tax, even if it does not owe tax after applying the net elective payment amount against its net tax liability.

IV. Denial of Double Benefit Rule

In considering the denial of the double benefit rule, the IRS and Treasury provide further guidance on the method for computing the elective payment amount, specifically regarding general business credits (GBCs). The Final Regulations treat the section 48D credit as a credit for section 38 purposes to the extent that the credit can be applied to reduce tax liability up to the section 38(c) limitation. It is also noted that, for a taxpayer that is filing and making an election by the due date of their return, there should be no difference in outcome between treating the credit as reduced to $0 for section 38, or as a credit that reduces tax liability up to the section 38(c) limitation, and a payment beyond the section 38(c) limitation.

The Final Regulations provide a change in the ordering of the steps and how to calculate the net elective payment amount. The ordering rules in the Final Regulations allow for a taxpayer that has other GBCs to lower tax liability to the section 38(c) limitation using those GBCs without using up their section 48D credits. However, a taxpayer is required to use the section 48D credit as a current year GBC to the extent that it is necessary to reduce tax liability up to the limitation under section 38(c). In all other situations, the section 48D credit will be zero for purposes of section 38, and the section 48D credit can be treated as a payment of tax on the later of the due date of the return or filing. The IRS and Treasury clarified that a similar grace will not be extended to the interaction of Section 48D credits with the determination of BEAT and CAMT.

V. Special Rules for Partnerships and S Corporations

The Final Regulations provide an interim rule for determining a partner's distributive share of tax-exempt income if a partnership or S corporation makes a direct pay election. The rule provides that if a written binding partnership agreement was entered into after December 31, 2021, and before June 22, 2023, and if the partnership was formed for the purpose of owning and operating an advanced manufacturing facility or qualified property, a partner’s distributive share of the tax-exempt income may be determined in accordance with the basic principles for partnership income allocations outlined in the section 704(b) Treasury Regulations.

Further, in determining the amount of the section 48D credit that will result in a payment to the partnership or S corporation the Treasury Department and the IRS have clarified that a partnership or S corporation is not subject to section 38(b) and (c) because those sections apply at the partner or S shareholder level.

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