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New Proposed Regulations Provide Clarity on Advanced Manufacturing Investment Credit

The Internal Revenue Service (IRS) has proposed new regulations for advanced manufacturing investment credit. These regulations clarify eligibility requirements, define key terms, clarify how to calculate the credit, set forth direct-payment procedures, and outline special rules for recapturing the credit resulting from certain transactions with foreign entities. In addition, IRC Section 48D allows taxpayers to claim the Advanced Manufacturing Incentive (AMIC) equal to 25% of the basis of qualified property placed in service after December 31, 2022.

IRC Section 50(a)(1) requires a taxpayer’s tax liability to be increased by the recapture percentage of the aggregate decrease in credits allowed under IRC Section 38 from all prior tax years. In addition, new IRC Section 50(a)(3)(A) includes a recapture rule requiring the taxpayer’s federal income tax liability for the tax year in which an applicable transaction occurs to be increased by 100% of the aggregate decrease in the credits allowed under IRC Section 38 for all prior tax years.

IRC Section 48D(b)(2)(A) defines qualified property as tangible property that can be depreciated or amortized and is constructed, reconstructed, or erected by the taxpayer. In addition, the proposed regulations would define “original use” as the first use to which the property is put in connection with a trade or business or for the production of income. They would also define “semiconductor manufacturing,” “manufacturing of semiconductors,” “semiconductor manufacturing equipment,” and “manufacturing of semiconductor manufacturing equipment.”

The proposed regulations define “significant transactions” as transactions involving an applicable taxpayer or its affiliates. A relevant taxpayer includes any member of the taxpayer’s affiliated group that has been allowed an AMIC for a prior tax year, any taxpayer that has made an IRC Section 48D(d)(1) election, any partnership or S corporation that has made an IRC Section 48D(d)(2) election, and any partner in a partnership or shareholder in an S corporation for which the entity has made an IRC Section 48D(d)(2) election.

The proposed regulations will apply to tax years ending after the final regulations are published in the Federal Register. The IRS has requested comments on topics such as how a taxpayer’s basis in the qualified property is allocated, claiming the credit for qualified progress expenditures, and the scope of the term “semiconductor.” Comments must be submitted electronically or on paper by May 22, 2023.

The proposed regulations provide much-needed clarity on the AMIC, which has been a complex and confusing credit for taxpayers. By defining important terms, clarifying eligibility requirements, and providing direct-payment procedures, the proposed regulations will make it easier for taxpayers to understand and claim the AMIC. Taxpayers should carefully review the proposed regulations and consider submitting comments before the May 22, 2023, deadline.