On November 26, 2024, the IRS issued Announcement 2024-40 in which it confirmed that an agreement with the Department of Commerce required under the CHIPS Act of 2022, Pub. L. 117-167, 136 Stat. 1366, (August 9, 2022), is not a long-term contract subject to the percentage of completion method under section 460. Accordingly, amounts paid or incurred pursuant to such an agreement may be taken into account for purposes of determining the section 48D advanced manufacturing investment credit (the ITC). Announcement 2024-40 provides welcome clarity to taxpayers that plan to claim the ITC and enter into agreements with Commerce. 

The ITC is equal to 25 percent of a taxpayer's qualified investment with respect to a facility the primary purpose of which is to manufacture semiconductors or semiconductor manufacturing equipment. The "qualified investment" means the basis of any qualified property placed in service by the taxpayer in the relevant tax year that is part of an advanced manufacturing facility. For purposes of the ITC, the basis of any qualified property is limited to capital expenditures.

In addition to the ITC, the CHIPS Act established a series of funding programs to incentivize the domestic production of semiconductors and semiconductor manufacturing materials and equipment. To receive grants or loans under the CHIPS Act incentive programs, each participant must enter into an agreement with Commerce that sets out the terms and conditions of the funding award, including the projects that the participant intends to undertake and the circumstances under which Commerce may claw back the award. These grants are generally included in taxable income. The IRS confirmed in Announcement 2024-40 that these award agreements are not long-term contracts for purposes of section 460 and the regulations thereunder because they are not agreements with a customer for construction in exchange for the payment of a contract price. Because award agreements are not long-term contracts, investments made pursuant to the agreements are not subject to the percentage of completion method under section 460, but rather are capitalized under section 263 and the regulations thereunder. Thus, capital expenditures made pursuant to an award agreement may constitute qualified investment for purposes of determining the ITC.

Announcement 2024-20 closely follows regulations issued by Treasury and the IRS in October to implement the ITC. See our prior coverage here.

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.