Article
Final regulations for the advanced manufacturing investment credit
Key updates and impacts of the CHIPS Act on semiconductor manufacturing
April 11, 2025 · Authored by Jowan Abouhosah, Jiyoon Choi, Sasha Klein
The Treasury Department and the Internal Revenue Service (IRS) published final regulations on the advanced manufacturing investment credit under section 48D of the Internal Revenue Code on Oct. 23, 2024. These regulations provide eligibility requirements for the credit, a special 10-year credit recapture provision and more. The credit, established by the CHIPS and Science Act of 2022 (CHIPS Act), is a targeted initiative under the Inflation Reduction Act (IRA) to boost the U.S. manufacturing sector. Section 48D incentivizes investment in semiconductor manufacturing and associated equipment, fostering domestic production and reducing reliance on foreign supply chains. These final regulations affect taxpayers intending to claim a section 48D advanced manufacturing investment credit for property placed in service on or after the tax year ending Oct. 23, 2024.
Overview of the advanced manufacturing investment credit
The 48D credit provides a 25% tax credit for investments in constructing advanced manufacturing facilities focused on semiconductor manufacturing or related equipment. Eligible properties include those essential to manufacturing processes, such as fabrication equipment and cleanrooms, which must be tangible property where depreciation is allowed. In contrast, unrelated properties, like corporate office buildings, are generally ineligible. Construction must begin by Dec. 31, 2026, with the property placed in service after Dec. 31, 2022, to qualify. For properties that began construction before Jan. 1, 2023, the credit will only apply to the basis of the property attributable to construction, reconstruction or erection of the property after Aug.9, 2022 (date of CHIPS Act enactment). Additionally, coordination with section 47 prevents benefits overlap, allowing only non-rehabilitation-related expenses to qualify for the 48D credit.
Updates and reiterations addressed in the final regulations
One key clarification is the definition of “produced by the taxpayer.” The final regulations expand upon the proposed rules to include both primary and secondary activities, confirming that “assembly activities that result in a substantial transformation, such as combining constituent components into a new eligible component,” qualify for the credit. Further updates replace the term “mere assembly” with “minor assembly” to ensure comprehensive coverage of manufacturing materials.
The final regulations expand what counts as semiconductor manufacturing to include wafer production, fabrication and packaging. Wafer production covers processes like growing single-crystal ingots, slicing and cleaning. Packaging is now more inclusive, covering assembly, testing and advanced methods for protecting and connecting integrated circuits. They also clarify that manufacturing equipment includes specialized tools critical to production but explicitly excludes consumables like chemicals or gases from eligibility under section 48D.
The qualified property requirements also saw significant updates. The final rules affirm that “cleanrooms, specialized HVAC systems, and automated manufacturing equipment” are essential to production and qualify. The final rules explicitly exclude facilities used for non-manufacturing purposes, offering additional clarity by specifying certain types of buildings or sections within a facility that are deemed to be associated with manufacturing rather than categorized as office spaces. However, determining whether a particular building or its function serves administrative purposes or is unrelated to manufacturing ultimately depends on the specific circumstances. Section 50(b)(1)(A) emphasizes that property used predominantly outside of the U.S. is deemed ineligible for the investment credit.
Recapture provisions were also strengthened in the final regulations to safeguard against misuse in foreign countries of concern. The final regulations specify that the credit will be recaptured if an “applicable taxpayer” engages in a significant transaction that materially expands semiconductor manufacturing capacity in a foreign country of concern within 10 years of the credit-eligible property being placed in service. Recapture is triggered by material expansions, such as adding cleanrooms, if these expansions exceed 5% of manufacturing capacity. Transactions like mergers or joint ventures that involve foreign influence also fall under these provisions, aligning with U.S. national security objectives.
The final regulations contain a single project test that aligns with current IRS guidance related to investment tax credits. Specifically, multiple properties or facilities will be treated as a single project if they are owned by a single entity at any point during construction and meet at least two of the following factors described in reg. 1.48D-5(a)(3)(i), such as (i) the properties or facilities are constructed on contiguous pieces of land and (ii) the properties or facilities share a common electricity and/or water supply. Further, the final regulations clarify on-site and off-site activities, including examples to help taxpayers meet the physical work test. Finally, the final regulations state that a taxpayer meets the continuous efforts requirement by spending or incurring at least five percent of the total property cost in each calendar year after the year construction on the property started.
