What Is the Advanced Manufacturing Investment Credit?

The Advanced Manufacturing Investment Credit is a federal tax incentive established by the CHIPS Act of 2022. Its purpose is to encourage private investment in the domestic production of semiconductors and the specialized equipment required for their manufacture. The policy aims to strengthen the U.S. position in the global semiconductor ecosystem, enhance national security by reducing reliance on foreign supply chains, and stimulate job growth.

Core Eligibility Requirements

To qualify for the Advanced Manufacturing Investment Credit, both the taxpayer and the property must meet specific criteria. An “eligible taxpayer” is any entity that is not a foreign entity of concern, a designation that excludes certain foreign-controlled companies and organizations. This ensures the benefits of the credit are directed toward entities aligned with U.S. economic and national security interests.

The property itself must be integral to an “advanced manufacturing facility.” This is defined as a facility whose primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment. Final regulations have clarified that this includes the production of semiconductor wafers. The scope is designed to cover the core activities of the semiconductor supply chain located within the United States.

Qualified property includes a range of assets for these specialized operations. This encompasses the building or structure itself and its structural components. It also covers tangible personal property, such as the highly specialized machinery and tools used in the fabrication process. However, property used for ancillary functions like administrative offices or storage of materials not yet in the production cycle are excluded from the credit calculation. The rules are also designed to prevent the credit from being claimed for investments in facilities that only perform later-stage assembly, packaging, or testing of semiconductors.

Calculating the Qualified Investment and Credit

The Advanced Manufacturing Investment Credit is calculated as 25% of a taxpayer’s qualified investment in an advanced manufacturing facility for a given tax year. The foundation of this calculation is the “basis of any qualified property.” The basis is the cost of acquiring or constructing the property, including the purchase price of machinery and equipment, as well as costs for the construction of buildings and their structural components.

For constructed property, the basis includes all costs properly chargeable to the capital account. This encompasses direct costs like labor and materials, as well as indirect costs such as certain architectural and engineering fees. The credit applies to property placed in service after December 31, 2022, and for construction that began before January 1, 2023, it is limited to the basis attributable to construction occurring after August 9, 2022.

A primary element in the timing of the credit is the “placed in service” date. Property is considered placed in service in the taxable year that it is ready and available for its specific use. For a piece of equipment, this would be the point at which it is installed and capable of performing its function. For a building, it is when the structure is ready for use in the manufacturing operation. This date determines the tax year for which the qualified investment is made and the credit can be claimed.

Taxpayers also have the option to make an election to claim the credit on the basis of “progress expenditures.” This allows a taxpayer to treat certain costs for property with a long construction period as part of the qualified investment before the property is fully completed and placed in service. It allows the taxpayer to receive the benefit of the credit incrementally as construction progresses, rather than waiting until the entire facility is operational.

Claiming the Credit and Special Monetization Rules

The credit is claimed on Form 3468, Investment Credit, which is filed with the taxpayer’s annual federal income tax return. The calculated credit from Form 3468 is then carried to Form 3800, General Business Credit, where it is combined with other business credits and applied against the taxpayer’s tax liability, subject to certain limitations.

The credit includes monetization options through “direct pay” (also known as elective pay) and transferability. Before a taxpayer can utilize either of these options, they must complete a mandatory pre-filing registration process electronically with the IRS. This process provides the IRS with details about the intended credit and results in the issuance of a unique registration number, which is required to make a valid direct pay or transfer election on the tax return.

The direct pay option allows an eligible taxpayer to receive a cash payment from the IRS equal to the full value of the credit, even if they have no tax liability to offset. This election is made on the tax return for the year the credit is claimed. Direct pay is beneficial for new ventures or companies in a growth phase that may have significant startup costs and little to no taxable income, allowing them to realize the cash benefit of the credit immediately.

Alternatively, an eligible taxpayer can elect to sell all or a portion of the credit to an unrelated third-party buyer in exchange for cash. This transfer is a one-time event for each portion of the credit sold. The buyer of the credit can then use it to offset their own federal tax liability. The cash received by the seller for the credit is not included in their gross income, and the buyer is not allowed to deduct the amount they paid.

Credit Recapture Provisions

The Advanced Manufacturing Investment Credit comes with recapture provisions to ensure that the incentivized property remains in service for a designated period. If the property for which the credit was claimed is disposed of or ceases to be qualifying investment credit property within five full years from the date it was placed in service, a portion of the credit must be paid back. This recapture is reported and paid on the taxpayer’s income tax return for the year the disqualifying event occurs.

The amount of the credit that is recaptured is based on a tiered schedule.

• Within the first full year after being placed in service: 100% of the credit is recaptured.
• Within the second year: 80% is recaptured.
• Within the third year: 60% is recaptured.
• Within the fourth year: 40% is recaptured.
• Within the fifth year: 20% is recaptured.

After the property has been in service for five full years, there is no recapture. The most common trigger is the sale or disposition of the qualified property. Other events include the property no longer being used for its qualifying purpose or the facility itself ceasing to qualify. These rules are designed to prevent taxpayers from claiming the full benefit of the credit for a long-term investment and then quickly selling the asset.

There is also a special, more stringent recapture rule tied to the CHIPS Act’s national security goals. If a taxpayer engages in a significant transaction involving a foreign country of concern within a 10-year period, it can trigger a full recapture of the credit. This provision is intended to discourage the transfer of sensitive technology or the expansion of manufacturing capabilities in designated countries.