March 26, 2024

Treasury Department, IRS Release Final Regulations on Direct Pay Under CHIPS Act Section 48D

Holland & Knight Alert
Nicole M. Elliott | Joshua David Odintz | 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 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.


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.

For additional information 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, and subscribe to our alerts for future developments.

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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