March 27, 2023

Treasury Department Issues Section 48D Guidance on CHIPS Act Semiconductor Tax Incentive

Proposed Regulations Provide Direction on Advanced Manufacturing Investment Credit
Holland & Knight Alert
Nicole M. Elliott | Joshua David Odintz | Christopher DeLacy | Nicholas Alexander Leibham | Greg M. Louer


  • The Chips and Science Act of 2022 (CHIPS Act) added Section 48D to the Internal Revenue Code to incentivize the manufacture 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.
  • The U.S. Department of the Treasury and Internal Revenue Service recently released proposed regulations under Section 48D, providing helpful clarifications.
  • Comments to these proposed regulations are due May 22, 2023. Taxpayers can rely on the proposed regulations until final regulations are issued.

The Chips and Science Act of 2022 (CHIPS Act) added Section 48D to the Internal Revenue Code to incentivize the manufacture 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.

On March 23, 2023, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued proposed regulations that provide some helpful guidance and can be relied on pending the issuance of final regulations. The Treasury Department and IRS are seeking comments on several topics – including the key definition of the term "semiconductor." Public comments must be submitted by May 22, 2023.

This Holland & Knight alert addresses the basics of Section 48D as further clarified in the proposed regulations.

What Is a Qualified Investment?

By statute, a qualified investment is the basis of any qualified property placed in service by the taxpayer during such taxable year which is part of an advanced manufacturing facility. Among other requirements,1 qualified property is that which is integral to the operation of an advanced manufacturing facility.

Importantly, the proposed regulations define the term "integral" as property 1) used directly in the manufacturing operation, 2) essential to the completeness of the manufacturing operation and 3) not transformed in any material way as a result of the manufacturing operation.

In defining integral, the proposed regulations make clear that materials, supplies or other inventoriable items that are transformed into a finished product would not be considered integral.

Though the list should not be considered exhaustive, the proposed regulations provide some examples of property that would be considered integral, including:

  • deposition equipment used in the processes of chemical vapor deposition (CVD), and physical vapor deposition (PVD), etching equipment, lithography equipment, including extreme ultraviolet lithography (EUV)
  • wet process tools, analytical tools, electron beam operation tools, mask manufacturing equipment, chemical mechanical polishing equipment, reticle handlers and stockers
  • inspection and metrology equipment
  • clean room facilities, including specialized lighting systems, automated material systems for wafer handling, locker and growing rooms, specialized recirculating air handlers, to maintain the cleanroom free from particles, control temperature and humidity levels, and specialized ceilings comprised of HEPA filters
  • electrical power facilities, cooling facilities, chemical supply systems and wastewater systems
  • sub-fab levels containing pumps, transformers, abatement systems, ultrapure water systems, uninterruptible power supply, and boilers, pipes, storage systems, wafer routing systems and databases, backup systems, quality assurance equipment and computer data centers
  • utility level equipment, including chillers, systems to handle nitrogen, argon and other gases, as well as compressor systems and pipes

What Is an Advanced Manufacturing Facility?

Section 48D defines an advanced manufacturing facility as one whose primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment.

The proposed regulations provide guidance defining these key terms:

Primary Purpose

The proposed regulations rely on a facts and circumstances test to determine a facility's primary purpose. The proposed regulations provide some factors that could be considered, including reviewing designs of the facility and supply contracts. One example provided in the proposed regulations look to what percentage of property is placed in the facility that is dedicated to the manufacture of semiconductor equipment, as compared with other manufacturing. The example concludes that the primary purpose test is satisfied because 75 percent of the property placed in service is dedicated to semiconductor manufacture. The 75 percent threshold is included in the example for illustrative purposes. Some entities have previously proposed that the Treasury Department and IRS adopt a definition with a lower threshold. The propose regulations did not address this issue with particularity.

By contrast, the proposed regulations are very clear that a facility that manufactures, produces, grows or extracts materials such as chemicals or gas that are supplied to another advanced manufacturing facility are not facilities that meet the primary purpose test.


The proposed regulations define semiconductor consistent with 15 CFR 231.117, an integrated electronic device or system most commonly manufactured using materials such as, but not limited to, silicon, silicon carbide or III-V compounds, and processes such as, but not limited to, lithography, deposition and etching.

Examples of such devices and systems include analog and digital electronics, power electronics, and photonics for memory, processing, sensing, actuation and communications applications.

The Treasury Department and IRS generally seek comment on the appropriateness of this definition, but identified wafer technology as a product class that could potentially fall under the definition of semiconductors in final regulations. Specifically, the Treasury Department asked whether it would be appropriate to amend the definition to include "semiconductive substances" such as polysilicon and compound semiconductor wafers, the manufacture of which would otherwise not be considered as within scope under the proposed regulations.

In a nod to the critical nature of wafers for the manufacture of semiconductors, the Treasury Department and IRS asked commenters to explain in detail how and why it would be appropriate to add wafers to the definition of a semiconductor, and "what principle, standard, or parameters could be incorporated in a definition of the term 'semiconductor' so as to prevent extending the definition of that term to also include other materials and supplies used in the manufacture of finished semiconductors."

Semiconductor Manufacturing Equipment

Under the proposed regulations, semiconductor manufacturing equipment is that equipment which is 1) specialized and 2) integral to the manufacture of semiconductors. Semiconductor manufacturing equipment also includes subsystems that 1) enable such manufacturing equipment or 2) are incorporated into such manufacturing equipment. The proposed regulations provide several non-exhaustive examples, including:

  • deposition equipment, including chemical vapor deposition (CVD), physical vapor deposition (PVD) and atomic layer deposition (ALD)
  • etching equipment (wet etch, dry etch)
  • lithography equipment (steppers, scanners, extreme ultraviolet (EUV))
  • wafer slicing equipment, wafer dicing equipment and wire bonders

Who Is an Eligible Taxpayer?

To be eligible to claim a Section 48D credit, the taxpayer cannot be a foreign entity of concern or one who has made an applicable transaction during the tax year. An applicable transaction is any significant transaction involving the material expansion of semiconductor manufacturing capacity in any foreign country of concern. The proposed regulations define all of these terms.

In addition, the Section 48D credits can be recaptured if a taxpayer engages in an application transaction in a foreign country of concern within 10 years of placing the property in service that qualifies for the credit. The proposed regulations describe a variety of transactions that are treated as significant, including an investment of $100,000 or more in the acquisition of an ownership interest in an entity or the formation of a joint venture with a party in such foreign country. The amount subject to recapture is 100 percent of the credit allowed.

The definitions of "significant transaction" and "material expansion" of semiconductor manufacturing capacity broadly align with the U.S. Department of Commerce's definitions under a proposed rule published on the same day as the Treasury Department rules that address a similar topic.2 There, the National Institute of Standards and Technology (NIST) proposed regulations implementing CHIPS Act provisions restricting CHIPS grant or loan recipients from engaging in significant transactions that would lead to material expansions of semiconductor capacity over a 10-year period.

What Is Direct Pay?

The Section 48D credit is a refundable credit, and a taxpayer must make the election for direct pay by the date for filing the income tax return (plus extensions). The election is irrevocable for the refundable portion of the credit. The proposed regulations note that as a condition of, and prior to any amount being treated as creditable or refundable, the taxpayer must timely comply with the registration procedures. The registration procedures are reserved, however. Presumably, these requirements will be the same or substantially similar to the requirements for refundable energy credits in the Inflation Reduction Act.

Comments Requested

The proposed regulations provide a good road map to eligibility for the Section 48D credit. The Treasury Department and IRS are requesting comments on these proposed regulations. Although comments can be submitted on any topic, the Treasury Department and IRS specifically request comments regarding the definition of semiconductor (as described above) and what registration and other procedures should be put in place for those taxpayers seeking elective payment. Comments are due May 22, 2023.

For additional information on the recently released guidance on Section 48D and the CHIPS Act advanced manufacturing investment credit, please contact one of the authors or another member of Holland & Knight's Tax Practice.


1 For instance, property must be tangible property with respect to which depreciation (or amortization) is allowable, which is constructed, reconstructed or erected by the taxpayer or that is acquired and original use commences with taxpayer. The term qualified property does not include buildings or portion of a building used for offices, administrative services or other functions unrelated to manufacturing.

2 See Preventing the Improper Use of CHIPS Act Funding, Fed. Reg. 17438 (March 23, 2023).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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