[Federal Register Volume 89, Number 205 (Wednesday, October 23, 2024)]
[Rules and Regulations]
[Pages 84732-84763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-23857]



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Vol. 89

Wednesday,

No. 205

October 23, 2024

Part III





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Advanced Manufacturing Investment Credit Rules Under Sections 48D and 
50; Final Rule

Federal Register / Vol. 89 , No. 205 / Wednesday, October 23, 2024 / 
Rules and Regulations

[[Page 84732]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10009]
RIN 1545-BQ54


Advanced Manufacturing Investment Credit Rules Under Sections 48D 
and 50

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule.

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SUMMARY: This document contains final regulations to implement the 
advanced manufacturing investment credit established by the CHIPS Act 
of 2022 to incentivize the manufacture of semiconductors and 
semiconductor manufacturing equipment within the United States. The 
final regulations adopt with certain modifications rules proposed in 
the first of two notices of proposed rulemaking to implement the 
credit, other than proposed rules regarding the elective payment 
election that were addressed in the final rule adopted in connection 
with the second notice of proposed rulemaking. The final regulations 
provide the eligibility requirements for the credit, and a special 10-
year credit recapture rule that applies if there is a significant 
transaction involving the material expansion of semiconductor 
manufacturing capacity in a foreign country of concern. The final 
regulations affect taxpayers that claim the advanced manufacturing 
investment credit.

DATES: 
    Effective date: These regulations are effective on December 23, 
2024.
    Applicability dates: For dates of applicability see Sec. Sec.  
1.48D-1(d), 1.48D-2(q), 1.48D-3(h), 1.48D-4(d), 1.48D-5(f) and 1.50-
2(e).

FOR FURTHER INFORMATION CONTACT: Concerning these final regulations, 
contact Lani Sinfield of the Office of Associate Chief Counsel 
(Passthroughs and Special Industries), (202) 317-4137 (not a toll-free 
number).

SUPPLEMENTARY INFORMATION:

Authority

    This document amends the Income Tax Regulations (26 CFR part 1) by 
adding regulations authorized to be issued by the Secretary of the 
Treasury or her delegate (Secretary) under sections 50(a) and 7805(a) 
of the Internal Revenue Code (Code) regarding the application of 
sections 48D and 50(a)(3) and (a)(6)(D) and (E) of the Code (final 
regulations).
    Section 50(a)(3)(C) provides an express delegation of authority to 
the Secretary to provide guidance relating to the recapture requirement 
in section 50(a)(3) for the advanced manufacturing investment credit, 
stating, ``The Secretary shall issue such regulations or other guidance 
as the Secretary determines necessary or appropriate to carry out the 
purposes of this paragraph, including regulations or other guidance 
which provide for requirements for recordkeeping or information 
reporting for purposes of administering the requirements of this 
paragraph.''
    In addition, section 50(a)(6)(D)(i) provides an express delegation 
of authority to the Secretary to determine, in coordination with the 
Secretary of Commerce and the Secretary of Defense, significant 
transactions, stating, ``[t]he term `applicable transaction' means, 
with respect to any applicable taxpayer, any significant transaction 
(as determined by the Secretary, in coordination with the Secretary of 
Commerce and the Secretary of Defense) involving the material expansion 
of semiconductor manufacturing capacity of such applicable taxpayer in 
the People's Republic of China or a foreign country of concern (as 
defined in section 9901(7) of the William M. (Mac) Thornberry National 
Defense Authorization Act for Fiscal Year 2021).''
    The final regulations are also issued under the express delegation 
of authority under section 7805(a), which provides that ``[t]he 
Secretary shall prescribe all needful rules and regulations for the 
enforcement of [the Code], including all rules and regulations as may 
be necessary by reason of any alteration of law in relation to internal 
revenue.''

Background

I. Overview

    Section 107(a) of the CHIPS Act of 2022 (CHIPS Act), enacted as 
Division A of Public Law 117-167, 136 Stat. 1366, 1393 (August 9, 
2022), added section 48D to the Code to establish the advanced 
manufacturing investment credit (section 48D credit) as an investment 
credit for purposes of section 46 of the Code, which is a current year 
general business credit under section 38 of the Code.
    Section 48D(a) provides that the section 48D credit is an amount 
equal to 25 percent of the qualified investment for any taxable year 
with respect to any advanced manufacturing facility of an eligible 
taxpayer. Section 48D(b)(1) provides that the ``qualified investment'' 
with respect to any advanced manufacturing facility for any taxable 
year 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. However, the section 48D credit only applies to 
property placed in service after December 31, 2022, and, for any 
property the construction of which begins prior to January 1, 2023, 
only to the extent of the basis thereof attributable to the 
construction, reconstruction, or erection after August 9, 2022 (the 
date of enactment of the CHIPS Act). See section 107(f)(1) of the CHIPS 
Act. In addition, the section 48D credit does not apply to property the 
construction of which begins after December 31, 2026. See section 
48D(e).
    Section 48D(b)(2) provides that, for purposes of section 48D(b), 
the term ``qualified property'' means tangible property with respect to 
which depreciation (or amortization in lieu of depreciation) is 
allowable that is integral to the operation of the advanced 
manufacturing facility if (I) constructed, reconstructed, or erected by 
the taxpayer, or (II) acquired by the taxpayer, if the original use of 
such property commences with the taxpayer. Qualified property includes 
any building or its structural components satisfying such requirements 
unless the building or portion of the building is used for offices, 
administrative services, or other functions unrelated to manufacturing.
    Section 48D(b)(3) provides that the term ``advanced manufacturing 
facility'' means a facility for which the primary purpose is the 
manufacturing of semiconductors or semiconductor manufacturing 
equipment.
    Section 48D(b)(4) provides that the qualified investment with 
respect to any advanced manufacturing facility for any taxable year 
shall not include the portion of the basis of any such property that is 
attributable to qualified rehabilitation expenditures (as defined in 
section 47(c)(2) of the Code).
    Section 48D(b)(5) states that rules similar to the rules of 
subsections (c)(4) and (d) of section 46 (as in effect on the day 
before the date of the enactment of the Revenue Reconciliation Act of 
1990) shall apply for purposes of section 48D(a).
    Section 48D(c) provides that, for purposes of the section 48D 
credit, an ``eligible taxpayer'' is any taxpayer that (1) is not a 
foreign entity of concern (as defined in section 9901(6) of the William 
M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 
2021, as amended by section 103

[[Page 84733]]

of the CHIPS Act), and (2) has not made an applicable transaction (as 
defined in section 50(a) of the Code) during the taxable year.
    Section 107(b) of the CHIPS Act added new section 50(a)(3), (6)(D) 
and (E) to the Code to provide special recapture rules for certain 
expansions in connection with advanced manufacturing facilities. Under 
section 50(a)(3)(A), if there is an applicable transaction by an 
applicable taxpayer before the close of the 10-year period beginning on 
the date such taxpayer placed in service property that is eligible for 
the section 48D credit, then the taxpayer's Federal income tax 
liability under chapter 1 of the Code (chapter 1) for the taxable year 
in which such transaction occurs must be increased by 100 percent of 
the aggregate decrease in the credits allowed under section 38 for all 
prior taxable years which would have resulted solely from reducing to 
zero any investment credit determined under section 46 that is 
attributable to the section 48D credit with respect to such property 
(applicable transaction recapture rule). Section 50(a)(3)(B) provides 
an exception to the applicable transaction recapture rule for an 
applicable taxpayer that demonstrates to the satisfaction of the 
Secretary that the applicable transaction has been ceased or abandoned 
within 45 days of a determination and notice by the Secretary. Section 
50(a)(3)(C) authorizes the Secretary to issue such regulations or other 
guidance as the Secretary determines necessary or appropriate to carry 
out the purposes of the applicable transaction recapture rule, 
including regulations or other guidance providing for recordkeeping 
requirements or information reporting for purposes of administering the 
requirements of section 50(a)(3).
    As added to the Code by section 107(b)(2) of the CHIPS Act, section 
50(a)(6)(D) provides that for purposes of section 50(a), the term 
``applicable transaction'' means, with respect to any applicable 
taxpayer, any significant transaction (as determined by the Secretary, 
in coordination with the Secretary of Commerce and the Secretary of 
Defense) involving the material expansion of semiconductor 
manufacturing capacity of such applicable taxpayer in a foreign country 
of concern (as defined in section 9901(6) of the William M. (Mac) 
Thornberry National Defense Authorization Act for Fiscal Year 2021, as 
amended by section 103 of the CHIPS Act) other than certain 
transactions that primarily involve the expansion of manufacturing 
capacity for legacy semiconductors (as defined in section 9902(a)(6) of 
the William M. (Mac) Thornberry National Defense Authorization Act for 
Fiscal Year 2021, as amended by section 103 of the CHIPS Act).
    Section 50(a)(6)(E) defines an ``applicable taxpayer'' for purposes 
of section 50(a) as any taxpayer who has been allowed a section 48D 
credit for any prior taxable year.

II. Proposed and Temporary Regulations

    On March 23, 2023, the Department of the Treasury (Treasury 
Department) and the IRS published proposed regulations (REG-120653-22) 
in the Federal Register (88 FR 17451) related to the section 48D credit 
under the authority granted by sections 48D(d), 50(a), and 7805(a) 
(March 2023 proposed regulations). The March 2023 proposed regulations 
primarily would apply long-established credit mechanics and procedures 
common to all investment tax credits (including the section 48D credit) 
previously set forth in regulations and subregulatory guidance. In 
addition, the March 2023 proposed regulations included proposed 
definitions and rules that would apply for determining who is an 
eligible taxpayer, what qualifies as qualified property or an advanced 
manufacturing facility, whether the beginning of construction 
requirement is met, and what qualifies as a significant transaction 
involving a material expansion of semiconductor manufacturing capacity 
in a foreign country of concern for purposes of the special 10-year 
recapture rule under section 50(a)(3). Consistent with the statutory 
directive in section 50(a)(6)(D)(i) to coordinate with the Department 
of Commerce and the Department of Defense regarding such significant 
transactions, the Treasury Department and the IRS, in coordination with 
the Department of Commerce and the Department of Defense, incorporated 
in the March 2023 proposed regulations definitional concepts set forth 
in proposed 15 CFR part 231 as contained in the proposed rule, 
Preventing the Improper Use of CHIPS Act Funding, published in the 
Federal Register (88 FR 17439) by the CHIPS Program Office, National 
Institute of Standards and Technology, Department of Commerce (Commerce 
Proposed Rule). The Commerce Proposed Rule would have provided 
guardrails to prevent the improper use of CHIPS Act funding overseen by 
the Department of Commerce. On September 25, 2023, the CHIPS Program 
Office, National Institute of Standards and Technology, Department of 
Commerce published the final rule, Preventing the Improper Use of CHIPS 
Act Funding, in the Federal Register (88 FR 65600) to add part 231, 
subchapter C, to 15 CFR chapter II (Commerce Final Rule).
    In addition, Sec.  1.48D-6 of the March 2023 proposed regulations 
set forth the general requirements that would apply for making an 
elective payment election under section 48D(d), and the general 
requirement that an eligible taxpayer, partnership, or S corporation 
would need to comply with the registration procedures in proposed Sec.  
1.48D-6(c)(2) as a condition of, and prior to, any amount being treated 
as a payment under section 48D(d)(1) or (d)(2)(A)(i)(I). However, the 
March 2023 proposed regulations under proposed Sec.  1.48D-6(c)(2) 
reserved on the procedures and additional information required for 
completing the pre-filing registration process.
    On June 21, 2023, the Treasury Department and the IRS published 
proposed regulations (REG-105595-23) in the Federal Register (88 FR 
40123) authorized by section 48D(d)(6) to update proposed Sec.  1.48D-6 
of the March 2023 proposed regulations (June 2023 proposed 
regulations). Also on June 21, 2023, the Treasury Department and the 
IRS published temporary regulations (TD 9975) in the Federal Register 
(88 FR 40086) authorized by section 48D(d)(6) under Sec.  1.48D-6T to 
set forth mandatory information and registration requirements for 
taxpayers planning to make an elective payment election under section 
48D(d) to treat the amount of the section 48D credit as a payment of 
Federal income tax, or in the case of a partnership or S corporation, 
to receive a payment in the amount of such credit. The temporary 
regulations are applicable to property placed in service on or after 
December 31, 2022, and during a taxable year ending on or after June 
21, 2023, and will expire on June 12, 2026. A public hearing on the 
June 2023 proposed regulations was held on August 24, 2023. On March 
11, 2024, the Treasury Department and the IRS published final 
regulations (TD 9989) in the Federal Register (89 FR 17596) authorized 
by section 48D(d)(6) under Sec.  1.48D-6 to remove the temporary 
regulations (TD 9975) and adopt the June 2023 proposed regulations with 
modifications in response to all comments received on the proposed 
rules and all testimony heard at the public hearings held on July 26, 
2023 (March 2023 proposed regulations) and August 24, 2023 (June 2023 
proposed regulations) (March 2024 final regulations).
    The Treasury Department and the IRS received more than 40 comments 
responding to the March 2023 proposed

[[Page 84734]]

regulations. A public hearing on the March 2023 proposed regulations 
was held on July 26, 2023. As described in the following Summary of 
Comments and Explanation of Revisions, this Treasury decision adopts 
Sec. Sec.  1.48D-1 through 1.48D-5 and 1.50-2 of the March 2023 
proposed regulations with certain modifications after full 
consideration of all comments received on those proposed rules and all 
testimony heard at the July 26, 2023, public hearing.

Summary of Comments and Explanation of Revisions

I. Overview

    The final regulations set forth in Sec. Sec.  1.48D-1 through 
1.48D-5 and 1.50-2 retain the basic approach and structure of the March 
2023 proposed regulations, with certain revisions in response to 
comments submitted by commenters in response to the March 2023 proposed 
regulations.
    The Treasury Department and the IRS have refined and clarified 
certain aspects of the proposed regulations in these final regulations. 
Specifically, the definitions of ``semiconductor manufacturing,'' 
``semiconductor manufacturing equipment,'' and ``significant 
transaction'' have been clarified. The final regulations do not set 
forth rules for Sec.  1.48D-6 of the March 2023 proposed regulations, 
because the June 2023 proposed regulations updated Sec.  1.48D-6 of the 
March 2023 proposed regulations and the June 2023 proposed regulations 
were finalized by the March 2024 final regulations. Consistent with the 
proposed regulations, the final regulations primarily apply long-
established credit mechanics and procedures common to all investment 
tax credits (including the section 48D credit) previously set forth in 
regulations and subregulatory guidance. In addition, consistent with 
the statutory directive in section 50(a)(6)(D)(i) to coordinate with 
the Department of Commerce and the Department of Defense regarding the 
scope of significant transactions that are applicable transactions, the 
Treasury Department and the IRS, in coordination with the Department of 
Commerce and the Department of Defense, have incorporated in the final 
regulations definitional concepts, as determined by the Secretary of 
Commerce in the Commerce Final Rule in 15 CFR part 231, necessary to 
align the final regulations related to applicable transactions that 
result in the recapture of the section 48D credit with the provisions 
of the Commerce Final Rule.

II. Comments on and Changes to Proposed Sec.  1.48D-1

    Commenters requested that the final regulations address whether the 
taxpayer in proposed Sec.  1.48D-1(c)(2) actually claims a 
rehabilitation credit. Proposed Sec.  1.48D-1(c)(2) includes an example 
(proposed example) in which a taxpayer incurred capital expenditures to 
reconstruct a building. The proposed example indicates that all of the 
expenditures are ``qualified investment'' for purposes of the section 
48D credit and a portion of those expenditures are also qualified 
rehabilitation expenditures (QREs) (as defined in section 47(c)(2) and 
Sec.  1.48-12(c)) for purposes of the rehabilitation credit. The 
proposed example concludes that the amount of the taxpayer's qualified 
investment does not include the portion of the basis of the property 
that is attributable to any QREs.
    Section 48D(b)(4) and proposed Sec.  1.48D-1(c)(1) provide that 
qualified investment with respect to any advanced manufacturing 
facility for any taxable year does not include the portion of the basis 
of the property that is attributable to QREs. The Treasury Department 
and the IRS have determined that it would be inconsistent with section 
48D(b)(4) to exclude from qualified basis the portion of the basis that 
is attributable to QREs only when a taxpayer actually claims a 
rehabilitation credit. Accordingly, the final regulations modify the 
proposed example to clarify that qualified investment does not include 
the basis of the property that is attributable to QREs even if the 
taxpayer does not determine a rehabilitation credit.
    Commenters requested that the final regulations clarify whether the 
section 48D credit has an impact on any other credits established by 
the Code. The Treasury Department and the IRS note that section 
48D(b)(4) provides a special rule for coordination with the 
rehabilitation credit but does not provide any special rules to 
coordinate section 48D with other credits established by the Code. 
Additionally, the Code includes numerous tax credits. Addressing the 
impact of the section 48D credit on every other credit established by 
the Code (if any) would require a careful examination of numerous 
provisions apart from those found in section 48D and the section 48D 
regulations. For these reasons, addressing whether the section 48D 
credit has an impact on other credits established by the Code is not 
necessary for purposes of the final regulations.

III. Comments on and Changes to Proposed Sec.  1.48D-2

A. Basis
    Commenters requested clarification on the proper method for 
determining the portion of basis attributable to the construction, 
reconstruction, or erection after the date of enactment (August 9, 
2022) for property the construction of which began prior to the 
effective date (January 1, 2023) of section 107 of the CHIPS Act. The 
commenters requested that the final regulations provide some 
flexibility to address the difficulties associated with tracking and 
allocating costs around a date occurring in the middle of the month 
(August 9, 2022). The commenters also requested that the final 
regulations allow for the use of any reasonable method and specifically 
provide that rules similar to the cost allocation rules in Sec. Sec.  
1.48-2(b)(2), 1.48-11(b)(5)(i), and 1.48-12(c)(1) are applicable. One 
commenter requested that the final regulations clarify that basis can 
be determined on the principles of section 461 of the Code. The 
commenter argued that this would clarify, for example, that in cases 
where a taxpayer has made a payment for construction services prior to 
August 10, 2022, such payment will be included in the basis of 
qualified property because the amount is incurred only when the service 
is performed.
    For the avoidance of doubt, no provision of Federal law, including 
the CHIPS Act or the Code, permits determining any amount of a section 
48D credit with respect to any basis in property attributable to 
construction, reconstruction, or erection that occurred before August 
10, 2022 (the first day after the August 9, 2022, date of enactment of 
the CHIPS Act). However, a rule to address the proper method for 
allocating basis attributable to the period beginning on the day after 
the date of enactment (August 10, 2022) and ending on the day 
immediately before the effective date of section 48D (December 31, 
2022) is consistent with the purpose and structure of the statute. 
Accordingly, the final regulations clarify that for property the 
construction of which began before January 1, 2023, the portion of 
basis of such property attributable to construction, reconstruction, or 
erection after August 9, 2022, the date of enactment of the CHIPS Act, 
(if any) must be allocated using any reasonable method, including by 
applying the principles of section 461. The final regulations further 
clarify that rules similar to the rules in Sec. Sec.  1.48-2(b)(2), 
1.48-11(b)(5)(i), and 1.48-12(c)(1) apply.

[[Page 84735]]

    Commenters requested that the final regulations provide methods for 
allocating basis for dual-use property or property comprised of 
eligible and non-eligible components by square footage, cost, or allow 
the taxpayer to utilize any reasonable method for allocating cost among 
properties and time periods. Two commenters requested that the final 
regulations provide a percentage-based safe harbor rule that allows 100 
percent of the basis to qualify if, for example, 80 or 90 percent of 
the basis is allocable to qualified basis. Commenters also requested 
that the Treasury Department and the IRS consider whether rules are 
needed to allocate basis in qualified property in the case of 
vertically integrated companies that manufacture, for example, ingots, 
wafers, and semiconductors. Section 48D does not address methods of 
allocating basis. Section 48D is an investment credit under section 46, 
and, thus, the investment credit rules for allocating the basis of 
qualified property apply. Further, the Code includes provisions that 
control for such purposes (see, for example, section 1012). For these 
reasons, the inclusion of special rules for allocating basis in 
qualified property as requested by the commenters is not necessary for 
purposes of the final regulations.
    One commenter requested that the final regulations revise the 
definition of ``basis'' in proposed Sec.  1.48D-2(c) to allow 
capitalized costs incurred after the placed in service date of 
qualified property to qualify for the section 48D credit. Another 
commenter requested that the final regulations state that the basis of 
an item of qualified property or properties placed in service during 
the taxable year is the basis on which the credit is claimed for each 
year and provide examples illustrating this rule in the context of 
multi-unit or multi-phase manufacturing projects. The Treasury 
Department and the IRS agree that a revision is needed and have removed 
from the final regulations the proposed requirement that basis is 
determined immediately before the qualified property is placed in 
service. The final regulations clarify that with respect to any 
qualified property, the term ``basis'' has the same meaning as provided 
in Sec.  1.46-3(c). Thus, if, for the first taxable year in which 
property is placed in service by the taxpayer, the property meets the 
definition of qualified property but the basis of the property does not 
reflect its full cost for the reason that the total amount to be paid 
or incurred by the taxpayer for the property is indeterminate, a credit 
will be allowed to the taxpayer for such first taxable year with 
respect to so much of the cost as is reflected in the basis of the 
property as of the close of such taxable year, and a credit will be 
allowed to the taxpayer for any subsequent taxable year with respect to 
any additional cost paid or incurred during such subsequent taxable 
year and reflected in the basis of the property as of the close of such 
subsequent taxable year. The basis of property determined can include 
capital expenditures, as defined in section 263 of the Code and 
Sec. Sec.  1.263(a)-1 through 1.263(f)-1, with respect to the property. 
Additionally, Sec.  1.48D-2(h) clarifies that the term ``placed in 
service'' has the same meaning as provided in Sec.  1.46-3(d). Because 
the revision made to the final regulations clarifies that the term 
``basis'' has the same meaning as provided in Sec.  1.46-3(c), it is 
not necessary to provide specific examples of this rule as applied to 
qualified property placed in service during a taxable year.
B. Foreign Entity of Concern and Owned By, Controlled By, or Subject to 
the Jurisdiction or Direction of
    Proposed Sec.  1.48D-2 defined the terms ``foreign entity of 
concern'' and ``owned by, controlled by, or subject to the jurisdiction 
or direction of'' to have the same meaning as those terms in the 
Commerce Proposed Rule. The Commerce Final Rule does not include a 
definition of ``owned by, controlled by, or subject to the jurisdiction 
or direction of,'' but includes a revised definition of ``foreign 
entity of concern.'' The Department of Commerce removed the definition 
of ``owned by, controlled by, or subject to the jurisdiction or 
direction of'' from the Commerce Final Rule to provide greater 
specificity and incorporated the definition of ``owned by, controlled 
by, or subject to the jurisdiction of'' into the definition of 
``foreign entity of concern'' to clarify that the scope of the terms 
are limited to defining foreign entities of concern. To address the 
concern that foreign entities of concern could circumvent the 
restrictions of the rules by establishing entities for which multiple 
foreign entities of concern each have ownership below the 25 percent 
threshold, the Commerce Final Rule clarifies that, where at least 25 
percent of the person's outstanding voting interest is held directly or 
indirectly by any combination of persons who would otherwise be foreign 
entities of concern themselves, that person is a foreign entity of 
concern.
    As stated in the Background section of this preamble, consistent 
with the statutory authority provided under sections 50(a)(3) and 
(a)(6)(D)(i) and 7805(a), the Treasury Department and the IRS, in 
coordination with the Department of Commerce and the Department of 
Defense, have incorporated in the final regulations definitional 
concepts as determined by the Secretary of Commerce, and contained in 
the Commerce Final Rule, necessary for the determination of applicable 
transactions under section 50(a)(3) and (a)(6)(D). Section 48D(c)(1) 
defines the term ``eligible taxpayer,'' in part, as any taxpayer that 
is not a foreign entity of concern (as defined in section 9901(6) of 
the William M. (Mac) Thornberry National Defense Authorization Act for 
Fiscal Year 2021 (amending 15 U.S.C. 4651)). Section 50(a)(6)(D)(i) 
provides rules for when an advanced manufacturing investment credit 
allowable under section 48D is subject to recapture and defines a 
foreign entity of concern in the same manner as in section 48D(c)(1). 
Because section 48D(c)(1) provides rules for when a taxpayer is 
eligible to claim the advanced manufacturing investment credit, and 
section 50(a)(6)(D)(i) provides rules for when a taxpayer is no longer 
eligible for the credit, the statute requires the definition of 
``foreign entity of concern'' in both sections to be synonymous. For 
these reasons, removing the term ``owned by, controlled by, or subject 
to the jurisdiction or direction of'' from the final regulations and 
defining the term ``foreign entity of concern'' in the final 
regulations as having the same meaning as that term as defined in the 
Commerce Final Rule is consistent with the language and purpose of the 
statute. The final regulations are revised accordingly.
C. Qualified Investment, Special Rules for Partnerships
    Commenters requested a modification to Sec.  1.46-3(f) to permit a 
partner's share of the basis of qualified property to be determined 
independent of the ratio in which the partners divide the general 
profits of the partnership as required under Sec.  1.46-3(f). One of 
the commenters noted that section 48D is silent as to how a taxpayer's 
basis in qualified property should be allocated in the context of 
passthrough entities. Section 48D is among the investment credits 
listed under section 46. See section 46(6). The investment credit under 
section 46 is a business credit under section 38(b)(1). Thus, property 
with respect to which a section 48D credit is determined is section 38 
property.
    Section 1.704-1(b)(4)(ii), which requires allocations with respect 
to the investment credit provided by section

[[Page 84736]]

38(b)(1) to be made in accordance with the partners' interests in the 
partnership, provides that allocations of cost or qualified investment 
made in accordance with Sec.  1.46-3(f) are deemed to be made in 
accordance with the partners' interests in the partnership. Pursuant to 
Sec.  1.46-3(f)(1), in the case of a partnership that owns section 38 
property, a partner in a partnership is treated as the taxpayer with 
respect to the partner's share of the basis of partnership section 38 
property. Section 1.46-3(f)(2)(i) provides that a partner's share of 
basis is determined in accordance with the ratio in which the partners 
share general profits. Pursuant to Sec.  1.46-3(f)(2)(ii), if all 
related items of income, gain, loss, and deduction with respect to any 
item of partnership section 38 property are specially allocated in the 
same manner as if such special allocation is recognized under section 
704(a) and (b) and Sec.  1.704-1(b), then each partner's share of the 
basis of such item of section 38 property is determined by reference to 
such special allocation effective for the date on which the property is 
placed in service, rather than in accordance with the ratio in which 
the partners share general profits. Thus, Sec.  1.46-3(f), as currently 
in effect already permits special allocations of a partner's share of 
the basis of an item of section 38 property independent of the ratio in 
which the partners divide the general profits of the partnership if all 
requirements under Sec.  1.46-3(f)(2)(ii) are met. Also, modifying the 
regulations under Sec.  1.46-3(f) to allow for allocations beyond what 
is already permitted under Sec.  1.46-3(f), including Sec.  1.46-
3(f)(2)(ii), would have broad implications beyond the application of 
section 48D, and for that reason, such modifications would not be 
appropriate to include in the final regulations. For the foregoing 
reasons, the final regulations do not incorporate the commenters' 
recommendations regarding Sec.  1.46-3(f).
D. Qualified Progress Expenditures Election
    One commenter requested that the final regulations clarify whether 
an election for qualified progress expenditure can be made for expenses 
paid or incurred after August 9, 2022, through December 31, 2022. The 
Treasury Department and the IRS have determined that no further 
clarification is necessary concerning the availability of a progress 
expenditures election. Section 48D(b)(5) applies rules similar to the 
progress expenditures rules of section 46(c)(4) and (d) as in effect on 
the day before the date of enactment of the Revenue Reconciliation Act 
of 1990. Section 107(f)(1) of the CHIPS Act provides that the section 
48D credit can be claimed for property placed in service after December 
31, 2022, and for any property the construction of which began prior to 
January 1, 2023, only to the extent of the basis thereof attributable 
to the construction, reconstruction or erection after the date of 
enactment (August 9, 2022). Consistent with the statute, Sec.  1.48D-
2(j)(3)(i) of the final regulations provides that the taxpayer may 
elect, as provided in Sec.  1.46-5, which provides the rules governing 
qualified progress expenditures, to increase the qualified investment 
with respect to an advanced manufacturing facility of an eligible 
taxpayer for the taxable year by any qualified progress expenditures 
made after August 9, 2022. Accordingly, an election for qualified 
progress expenditures can be made for expenses paid or incurred after 
August 9, 2022, and on or before December 31, 2022. In addition, the 
final regulations under Sec.  1.48D-2(j)(3)(ii) clarify that, if 
progress expenditure property is being constructed by or for a 
partnership or S corporation, the rules of Sec.  1.46-5(o)(1) and (p) 
do not prohibit a partnership or S corporation from making a qualified 
progress expenditure election under Sec.  1.46-5 if such partnership or 
S corporation intends to make an elective payment election under 
section 48D(d) and Sec.  1.48D-6 with respect to a section 48D credit 
determined with respect to such qualified property.
    One commenter requested that the final regulations or other 
guidance provide guidance on the definitions of ``self-constructed'' 
versus ``non-self-constructed property'' and ``integrated unit'' for 
purposes of determining the construction period under Sec.  1.46-5. 
Pursuant to Sec.  1.46-5(d), whether a property, including qualified 
property under section 48D(b)(2) and the section 48D regulations, is 
progress expenditure property is determined based on the facts known at 
the close of the first taxable year in which construction begins, or if 
later, at the close of the first taxable year to which a progress 
expenditures election is made. Whether property is ``self-constructed'' 
versus ``non-self-constructed property'' or an ``integrated unit'' 
pursuant to Sec.  1.46-5(k), (l) and (e)(3), respectively, is also a 
factual determination. Additional guidance on the definitions of 
``self-constructed'' versus ``non-self-constructed property'' and 
``integrated unit,'' would inject significant complexity into the final 
regulations and likely cause additional uncertainty regarding the scope 
of those terms. Such guidance would have implications for any 
investment tax credit, including, for example, the rehabilitation 
credit under section 47 and the energy credit under section 48, for 
which a taxpayer can made a qualified progress expenditures election. 
For these reasons, such guidance is not appropriate to be included in 
the final regulations. Accordingly, the final regulations do not 
address the modifications requested by the commenter.
    One commenter requested that the final regulations provide that the 
percentage of completion limitation for non-self-constructed property 
under Sec.  1.46-5(j)(6) does not apply or that it be amended to allow 
for a greater percentage (up to 66 percent) of completion for 
semiconductor tooling equipment. The commenter argued that some tooling 
equipment manufacturers require a payment of as much as 90 percent of 
the total contract price in the first year the order is placed. Section 
1.46-5(j)(6)(i) provides: (1) payments made in any taxable year may be 
considered qualified progress expenditures for non-self-constructed 
property only to the extent they are attributable to progress made in 
construction (percentage of completion limitation); (2) progress will 
generally be measured in terms of the manufacturer's incurred cost as a 
fraction of the anticipated cost (as adjusted from year to year); and 
(3) progress is presumed to occur not more rapidly than ratably over 
the normal construction period but the taxpayer may rebut the 
presumption by clear and convincing evidence of a greater percentage of 
completion. Section 1.46-5(j)(6)(i) provides sufficient flexibility for 
taxpayers that intend to claim a section 48D credit for qualified 
progress expenditures. The commenter requested a modification to the 
percentage of completion limitation for non-self-constructed property 
under Sec.  1.46-5(j)(6) for semiconductor tooling equipment only; 
however, such modification would require a careful examination of any 
implications for all other investment tax credits for which a taxpayer 
can make a qualified progress expenditures election, including, for 
example, the rehabilitation credit under section 47 and the energy 
credit under section 48. For these reasons, the final regulations do 
not adopt the commenter's recommendations.
E. Definitions of Semiconductor and Semiconductor Manufacturing
1. In General
    Commenters requested that the final regulations expand the 
definition of

[[Page 84737]]

``semiconductor'' and ``semiconductor manufacturing'' to encompass 
additional products, substances, and processes. The commenters 
requested that, among other materials and substances, wafers, diamond 
wafer substrates, ingots, boules, high-purity silicon, silicon carbide, 
polysilicon, semiconductive substances, III-V compounds, ceramics, 
lithographic materials, specialty adhesives and cleaners, metals and 
dielectrics, and quantum electronics be included in the definition of 
``semiconductor.'' Commenters also requested that the final regulations 
modify the definition of ``semiconductor manufacturing'' if the 
definition of ``semiconductor'' is expanded to include additional 
products and substances.
    Consistent with the statutory authority provided under sections 
50(a)(3) and (a)(6)(D)(i) and 7805(a), the Treasury Department and the 
IRS, in coordination with the Department of Commerce and the Department 
of Defense, have incorporated in the final regulations definitional 
concepts that are consistent with the Commerce Final Rule and necessary 
for the determination of both eligibility for the section 48D credit 
and applicable transactions under section 50(a)(3) and (a)(6)(D).
    Accordingly, the final regulations provide that a taxpayer may 
claim a section 48D credit for qualified property placed in service as 
part of an advanced manufacturing facility the primary purpose of which 
is semiconductor manufacturing. The final regulations define 
``semiconductor manufacturing'' as semiconductor wafer production, 
semiconductor fabrication, and semiconductor packaging.
    The remainder of this section III.E of this Summary of Comments and 
Explanation of Revisions discusses the definitions adopted in the final 
regulations of the terms ``semiconductors,'' ``semiconductor 
manufacturing,'' ``semiconductor wafer production,'' ``semiconductor 
fabrication,'' and ``semiconductor packaging.''
2. Semiconductors
    The term ``semiconductor'' is among those definitional concepts 
necessary for the determination of whether a transaction is a 
significant transaction involving the material expansion of 
semiconductor manufacturing capacity in a foreign county of concern 
(emphasis added). Because the term ``semiconductor'' is also a 
definitional concept necessary for the determination of when a taxpayer 
is eligible to claim the advanced manufacturing investment credit, the 
statute requires the definition of ``semiconductor'' for purposes of 
sections 48D and 50(a)(6)(D)(i) to be synonymous. Moreover, failing to 
define the term ``semiconductor'' for purposes of the section 48D 
regulations would contravene the statutory directive under section 
50(a)(6)(D)(i) to define what is a ``significant transaction'' for the 
expansion of semiconductor manufacturing capacity other than with 
regard to certain ``legacy semiconductors.'' In addition, section 
9901(9) of the William M. (Mac) Thornberry National Defense 
Authorization Act, as redesignated by section 103(a)(2) of the CHIPS 
Act, for Fiscal Year 2021 (15 U.S.C. 4651), provides that the term 
``semiconductor'' has the same meaning given that term by the Secretary 
of Commerce. For these reasons, the Treasury Department and the IRS 
decline to expand the definition of ``semiconductor'' to include 
additional products and substances beyond what is provided in the 
Commerce Final Rule, as suggested by the commenters.
    Consistent with the definition of ``semiconductor'' in the Commerce 
Final Rule (15 CFR 231.115), and pursuant to the statutory authority 
provided under sections 50(a)(3) and (a)(6)(D)(i) and 7805(a), the 
final regulations provide that a semiconductor is 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. Such devices and systems include, but are not 
limited to, analog and digital electronics, power electronics, and 
photonics, for memory, processing, sensing, actuation, and 
communications applications.
3. Definition of Semiconductor Manufacturing
    One commenter requested that the final regulations expand the 
definition of ``semiconductor manufacturing'' to cover a broader space 
(aerospace) semiconductor manufacturing process. As noted in section 
IV.E of this Summary of Comments and Explanation of Revisions, section 
48D is silent on the topic of semiconductor manufacturing in space or 
whether semiconductor manufacturing can occur in space. Whether 
semiconductor manufacturing can occur in space would require a careful 
examination of all relevant facts and circumstances, any applicable 
Code provisions and Federal income tax principles apart from those 
found in section 48D and the section 48D regulations. As such, changing 
the definition of semiconductor manufacturing to include an aerospace 
semiconductor manufacturing process, as requested by the commenter, is 
beyond the scope of section 48D and the section 48D regulations. 
Accordingly, the final regulations do not adopt rules to address 
semiconductor manufacturing in space.
4. Semiconductor Wafer Production
    As previously discussed, commenters requested that the final 
regulations modify the definition of ``semiconductor manufacturing'' 
(and synonymously, the term ``manufacturing of semiconductors'') if the 
definition of ``semiconductor'' is expanded to include additional 
products and substances. Although the final regulations do not expand 
the definition of ``semiconductor'' beyond what is provided in the 
Commerce Final Rule, the final regulations clarify the definition of 
``semiconductor manufacturing'' by specifying that it includes 
``semiconductor wafer production'' but not further upstream production 
processes, pursuant to the statutory authority provided under sections 
50(a)(3) and (a)(6)(D)(i) and 7805(a). The clarification that 
``semiconductor manufacturing'' includes ``semiconductor wafer 
production'' is consistent with the definition of ``semiconductor 
manufacturing'' in the Commerce Final Rule (15 CFR 231.116) issued 
pursuant to section 103(b) of the CHIPS Act (15 U.S.C. 4652), which 
provides that, for purposes of the Expansion Clawback (described 
later), the term ``semiconductor manufacturing'' has the same meaning 
given that term by the Secretary of Commerce, in consultation with the 
Secretary of Defense and the Director of National Intelligence.
    However, the production of additional products and substances 
requested by commenters to be included in ``semiconductor 
manufacturing'' would not be appropriate as those are materials that 
are consumed or substantially transformed during the semiconductor 
manufacturing processes, and not included in the definition of 
``semiconductor manufacturing'' in the Commerce Final Rule. For these 
reasons, the final regulations clarify that the definition of the term 
``manufacturing of semiconductors'' (and synonymously ``semiconductor 
manufacturing'') includes semiconductor wafer production but excludes 
the production of precursor materials such as polysilicon from the 
scope of the definition.

[[Page 84738]]

    The final regulations define the term ``semiconductor wafer 
production'' to include ``the processes of growing single-crystal 
ingots and boules, wafer slicing, etching and polishing, bonding, 
cleaning, epitaxial deposition, and metrology'' (emphasis added). The 
Commerce Final Rule defines the term ``semiconductor wafer production'' 
to include the processes of wafer slicing, polishing, cleaning, 
epitaxial deposition, and metrology. The final regulations differ from 
the Commerce Final Rule by including ``growing single-crystal ingots 
and boules,'' ``etching,'' and ``bonding'' in the definition of 
``semiconductor wafer production'' because the purposes of the relevant 
provisions in the Commerce Final Rule and those in the section 48D 
regulations differ.
    The CHIPS Act established the section 48D credit for the purpose of 
incentivizing the manufacturing of semiconductors and semiconductor 
manufacturing equipment within the United States and amended section 
50(a) to provide for recapture of the section 48D credit if an 
applicable taxpayer engages in an applicable transaction. Thus, the 
section 48D regulations include definitions and rules that apply for 
determining who is an eligible taxpayer, what qualifies as qualified 
property or an advanced manufacturing facility, and whether the 
beginning of construction requirement is met.
    However, the purposes of relevant definitions and rules in the 
section 48D regulations differ from the purpose of the Commerce Final 
Rule, which relates to implementing the CHIPS Act's ``Expansion 
Clawback.'' As a matter of United States national security interests, a 
funding recipient is required by statute to enter into an agreement 
with the Department of Commerce restricting engagement by the funding 
recipient or its affiliates in any significant transaction involving 
the material expansion of semiconductor manufacturing capacity in 
foreign countries of concern. Failure by a funding recipient (or its 
affiliate) to comply with the restriction on semiconductor 
manufacturing capacity expansion in foreign countries of concern may 
cause the Expansion Clawback to apply, resulting in recovery of the 
full amount of Federal financial assistance provided to the funding 
recipient.
    The differences between the meaning of ``semiconductor wafer 
production'' in the Commerce Final Rule and in the final regulations 
reflects the difference between the purposes of the two rules as 
intended by Congress. The Expansion Clawback prohibits funding 
recipients from knowingly engaging in a significant transaction, and 
the section 48D credit incentivizes taxpayers to engage in the 
manufacturing of semiconductors and semiconductor manufacturing 
equipment in the United States, provided the applicable taxpayer does 
not also engage in an applicable transaction. For these reasons, the 
Treasury Department and the IRS, after consultation with the Department 
of Commerce and the Department of Defense pursuant to the statutory 
authority provided under sections 50(a)(3) and (a)(6)(D)(i) and 
7805(a), have determined that a clarification is necessary to confirm 
that for purposes of the section 48D credit, ``semiconductor wafer 
production'' includes growing single-crystal ingots and boules, wafer 
slicing, etching and polishing, bonding, cleaning, epitaxial 
deposition, and metrology. The Treasury Department and the IRS note 
that the term ``semiconductor wafer production'' in the final 
regulations also includes growing single-crystal ingots and boules, 
wafer slicing, etching and polishing, bonding, cleaning, epitaxial 
deposition, and metrology as applied to the production of solar wafers. 
The Treasury Department and the IRS note this after coordination with 
the Department of Commerce and the Department of Defense due to 
specific supply chain and national security considerations regarding 
the production of solar wafers not present in the case of other related 
products.
5. Semiconductor Fabrication
    The final regulations provide that the term ``semiconductor 
fabrication'' includes ``the process of forming devices such as 
transistors, poly capacitors, non-metal resistors, and diodes, as well 
as interconnects between such devices, on a wafer of semiconductor 
material'' (emphasis added). The Commerce Final Rule defines the term 
``semiconductor fabrication'' to include the process of forming devices 
such as transistors, poly capacitors, non-metal resistors, and diodes 
on a wafer of semiconductor material. The final regulations differ from 
the Commerce final rule by including ``interconnects between such 
devices.''
    The difference between the definition of ``semiconductor 
fabrication'' in the Commerce Final Rule and the final regulations with 
respect to ``interconnects between such devices'' reflects the 
difference between the purpose of the section 48D regulations and the 
Expansion Clawback. As explained in section III.E.4 of this Summary of 
Comments and Explanation of Revisions, the Expansion Clawback prohibits 
funding recipients from knowingly engaging in a significant 
transaction, whereas the section 48D credit incentivizes taxpayers to 
engage in the manufacturing of semiconductors and semiconductor 
manufacturing equipment in the United States, provided the applicable 
taxpayer does not also engage in an applicable transaction. For these 
reasons, the Treasury Department and the IRS, in coordination with the 
Department of Commerce and the Department of Defense, and pursuant to 
the statutory authority provided under sections 50(a)(3) and 
(a)(6)(D)(i) and 7805(a), have determined that a clarification is 
necessary to confirm that for purposes of the section 48D credit, 
``semiconductor fabrication'' includes the process of forming 
interconnects between such devices.
6. Semiconductor Packaging
    Several commenters requested that the definition of ``semiconductor 
manufacturing'' be revised to include assembly and testing within all 
stages of packaging. Commenters also requested that the final 
regulations provide definitions of the terms ``assembly'' and 
``testing.'' As previously noted, consistent with the statutory 
authority provided under sections 50(a)(3) and (a)(6)(D)(i) and 
7805(a), the Treasury Department and the IRS, in coordination with the 
Department of Commerce and the Department of Defense, have incorporated 
in the final regulations definitional concepts as determined by the 
Secretary of Commerce, and contained in the Commerce Final Rule 
necessary for the determination of applicable transactions under 
section 50(a)(3) and (a)(6)(D). The preamble to the Commerce Proposed 
Rule clarifies that ``semiconductor manufacturing'' includes both 
front-end fabrication as well as back-end manufacturing including 
assembly, testing, and packaging of semiconductors. Accordingly, 
revising the definition of ``semiconductor manufacturing'' to include 
``assembly'' and ``testing'' and providing definitions of ``assembly'' 
and ``testing'' is consistent with the purpose of the section 48D 
credit to incentivize the manufacture of semiconductors within the 
United States. Accordingly, Sec.  1.48D-2(n) of the final regulations 
provides that semiconductor packaging includes assembly and testing. 
Section 1.48D-2(n)(4) and (5) of the final regulations provide 
definitions of ``assembly'' and ``testing,'' respectively.
    One commenter requested that the final regulations clarify that the 
term

[[Page 84739]]

``semiconductor packaging'' include the manufacturing of IC-substrates. 
As stated in the Background section of this preamble, consistent with 
the statutory authority provided under sections 50(a)(3) and 
(a)(6)(D)(i) and 7805, the Treasury Department and the IRS, in 
coordination with the Department of Commerce and the Department of 
Defense, have incorporated in the final regulations definitional 
concepts as determined by the Secretary of Commerce, and contained in 
the Commerce Final Rule necessary for the determination of applicable 
transactions under section 50(a)(3) and (a)(6)(D). Consistent with the 
Commerce Final Rule, the final regulations define the term 
``semiconductor packaging'' as the process of enclosing a semiconductor 
in a protective container (package) and providing external connectivity 
for the assembled integrated circuit. The manufacturing of a substrate 
used during the semiconductor packaging process is not part of 
``semiconductor packaging'' as defined under the final regulations. For 
the foregoing reason, the final regulations do not adopt the 
commenter's recommendation.
F. Definitions of Semiconductor Manufacturing Equipment, Subsystems, 
and Manufacturing Semiconductor Manufacturing Equipment
    Commenters requested that the final regulations modify the 
definition of ``semiconductor manufacturing equipment'' to include 
direct and indirect materials integral to the semiconductor 
manufacturing equipment, such as, electronic grade isopropyl alcohol, 
precision bearings, industrial gases including high purity and general 
purpose nitrogen, chemicals such as fluoropolymers peroxides and 
fluorogases, lens and mirrors, and components. Commenters requested 
that the final regulations define the term ``subsystem'' as highly 
engineered and specialty equipment that is either sold directly to, or 
primarily produced for, a semiconductor fabricator or a third-party 
equipment manufacturer.
    Among other requirements, section 48D(b)(2) and Sec.  1.48D-3(c) 
(referencing Sec.  1.48-1(c) and (d)) require that property be tangible 
depreciable property, for example, production machinery, to meet the 
definition of qualified property. Gases, chemicals, and materials, such 
as IC-substrates and diamond wafer substrates, and semiconductive 
substances, that are consumed, utilized, or substantially transformed 
in a similar manner during the manufacturing process does not meet the 
threshold requirement of section 48D(b)(2) and Sec.  1.48D-3(c) because 
they are not tangible depreciable property for purposes of the section 
48D credit.
    For the foregoing reason, the Treasury Department and the IRS 
decline to adopt the commenters' requests to modify the definition of 
``semiconductor manufacturing equipment'' to include such materials. 
The final regulations clarify that ``semiconductor manufacturing 
equipment'' means the highly engineered specialized equipment used in 
the manufacturing of semiconductors as defined in Sec.  1.48D-2(g) and 
the subsystems that enable, or are incorporated into, the manufacturing 
equipment. This definition will eliminate uncertainty in determining 
whether property is semiconductor manufacturing equipment, as opposed 
to consumable materials, chemicals, or gases, that do not meet the 
definition of semiconductor manufacturing equipment.
    The Treasury Department and the IRS decline to adopt the 
commenters' recommendations to define the term ``subsystem'' as highly 
engineered and specialty equipment that is either sold directly to, or 
is primarily produced for, a semiconductor fabricator or a third-party 
equipment manufacturer. Providing such a definition would inject 
significant complexity into the final regulations. Consistent with the 
definition of semiconductor manufacturing equipment in the proposed 
regulations, Sec.  1.48D-2(o) provides that the term ``semiconductor 
manufacturing equipment'' includes the subsystems that enable, or are 
incorporated into, the manufacturing equipment. Additionally, property 
that may be considered a subsystem must also meet the requirements of 
section 48D and the section 48D regulations.
    Commenters also requested that the list of examples of 
``semiconductor manufacturing equipment'' be expanded to include any 
property that is considered property integral to the operation of an 
advanced manufacturing facility under proposed Sec.  1.48D-3(f)(1). The 
Treasury Department and the IRS have determined that such a rule is 
inconsistent with the purpose and structure of the statute, which 
clearly contemplates that not all property integral to the operation of 
an advanced manufacturing facility be treated as semiconductor 
manufacturing equipment. Although certain property, such as a gas 
handling system, may be property integral to the operation of an 
advanced manufacturing facility under section 48D(b)(2)(A)(iv) and 
proposed Sec.  1.48D-3(f), that property does not, by application of 
the standard in section 48D(b)(2)(A)(iv) and proposed Sec.  1.48D-3(f), 
meet the definition of semiconductor manufacturing equipment under 
Sec.  1.48D-2(o) of the final regulations.
    Commenters requested that the final regulations clarify that the 
list of examples of semiconductor manufacturing equipment is non-
exclusive and provide an illustrative list of subsystems to include, 
items such as specialty glass lenses, photomasks, lenses and mirrors 
like those made of calcium fluoride or high-purity fused silica, lens 
assemblies for wafer defect inspection following wafer printing, light 
sources or other major components of photolithography systems, and 
advanced ceramic products. The Treasury Department and the IRS have 
determined that such clarifications are appropriate for defining 
``semiconductor manufacturing equipment.'' Accordingly, the final 
regulations clarify that the list of examples of semiconductor 
manufacturing equipment and subsystems is non-exclusive and includes 
additional examples of property that may qualify as semiconductor 
manufacturing equipment and subsystems. The Treasury Department and the 
IRS again note that property that may be considered a subsystem must 
also meet the requirements of section 48D and the section 48D 
regulations.
    Commenters further requested that the final regulations clarify 
that a component, part or subsystem may be considered semiconductor 
manufacturing equipment on a case-by-case basis, and provide factors 
that are persuasive, including industry definitions, CHIPS Act funding, 
complexity of part, or other United States Government Agency 
categorizations that define it as semiconductor equipment. As stated in 
the Background section of this preamble, consistent with the authority 
granted by sections 50(a)(3) and (a)(6)(D)(i) and 7805(a), the Treasury 
Department and the IRS, in coordination with the Department of Commerce 
and the Department of Defense, have incorporated in the final 
regulations definitional concepts as determined by the Secretary of 
Commerce, and contained in the Commerce Final Rule necessary for the 
determination of applicable transactions under section 50(a)(3) and 
(a)(6)(D). For this reason, the Treasury Department and the IRS have 
determined that incorporating definitions from other United States 
Government agencies that define semiconductor equipment for other 
purposes would not be appropriate. The Treasury Department and the IRS 
have further determined that including a case-by-case facts and 
circumstances

[[Page 84740]]

rule as suggested by the commenters would inject significant complexity 
into the final regulations and likely cause additional uncertainty 
regarding the scope of the term ``semiconductor manufacturing 
equipment'' due to its inherently factual nature. As a result, the 
final regulations do not incorporate the commenters' recommendations.
    The Treasury Department and the IRS note that proposed Sec.  1.48D-
2(n) would define ``manufacturing semiconductor manufacturing 
equipment'' as the physical production of semiconductor manufacturing 
equipment in a manufacturing facility. As further described in section 
V.A. of this Summary of Comments and Explanation of Revisions, the 
final regulations modify the proposed definition of ``advanced 
manufacturing facility'' by removing the requirement that such a 
facility manufacture ``finished'' semiconductor manufacturing 
equipment. Consistent with the modification, the final regulations 
define the term ``manufacturing of semiconductor manufacturing 
equipment'' to require that that such semiconductor manufacturing 
equipment be used by an advanced manufacturing facility engaged in the 
manufacturing of semiconductors as defined in Sec.  1.48D-2(g) of the 
final regulations.

IV. Comments on and Changes to Proposed Sec.  1.48D-3

A. Part of an Advanced Manufacturing Facility
    Commenters requested clarification that a taxpayer's ownership of 
an advanced manufacturing facility is not a prerequisite for claiming 
the section 48D credit when a taxpayer places in service qualified 
property that is co-located on an advanced manufacturing facility and 
otherwise meets the requirements of section 48D and the final 
regulations. One commenter requested that the final regulations provide 
that property that is physically located or co-located on an advanced 
manufacturing facility and integral to the operation of the advanced 
manufacturing facility be considered part of the advanced manufacturing 
facility. The Treasury Department and the IRS agree that neither 
section 48D(b)(1) and (2), nor any other provision under section 48D, 
require a taxpayer to own the advanced manufacturing facility as a 
prerequisite to determining a section 48D credit. Section 48D(b)(1) and 
(2) mandate that, among other requirements, property be placed in 
service as part of, and, integral to the operation of an advanced 
manufacturing facility to be ``qualified property'' for purposes of the 
section 48D credit. Therefore, the final regulations include a 
definition of ``part of an advanced manufacturing facility'' to clarify 
that property is part of the advanced manufacturing facility if the 
property is physically located or co-located either (1) at the advanced 
manufacturing facility, or (2) on a contiguous piece of land to the 
advanced manufacturing facility. The final regulations clarify that 
parcels or tracts of land are considered contiguous if they possess 
common boundaries and would be contiguous but for the interposition of 
a road, street, railroad, public utility, stream or similar property. 
Generally, property that is not physically located or co-located at the 
advanced manufacturing facility or on a piece of land contiguous to the 
advanced manufacturing facility is not part of an advanced 
manufacturing facility.
    The Treasury Department and the IRS are aware that certain 
properties, for example, a water or wastewater treatment plant, may not 
be physically located or co-located at an advanced manufacturing 
facility or on a contiguous piece of land to the advanced manufacturing 
facility, but could be integral to the operation of the advanced 
manufacturing facility. For this reason, a rule allowing such 
properties in certain situations to be considered part of an advanced 
manufacturing facility is appropriate for purposes of the section 48D 
credit. Accordingly, the final regulations provide that property that 
is not located or co-located at an advanced manufacturing facility or 
on a contiguous piece of land to the advanced manufacturing facility 
may be considered part of an advanced manufacturing facility if the 
property is (1) owned by the same taxpayer as the entire advanced 
manufacturing facility, (2) connected to the advanced manufacturing 
facility (for example, via pipeline), and (3) the sole purpose, 
function, and output of the property is dedicated to the operation of 
the advanced manufacturing facility. However, such property must also 
meet the requirements of section 48D and the section 48D regulations. 
The final regulations include two examples to illustrate the 
application of section 48D(b) and Sec.  1.48D-3(f).
B. Buildings and Offices
    Commenters requested that the final regulations expand the 
definition of ``qualified property'' to include an existing building 
that is purchased but not reconditioned or re-built by the taxpayer. It 
would be inconsistent with the statute to allow a building that is 
purchased but not reconstructed by the taxpayer to be ``qualified 
property'' for purposes of the section 48D credit. Section 
48D(b)(2)(A)(iii)(I) provides that the term ``qualified property'' 
means property that is, among meeting other requirements, 
``constructed, reconstructed, or erected by the taxpayer.'' Therefore, 
the final regulations retain the rule set forth in proposed Sec.  
1.48D-3(b)(1).
    Commenters requested that the final regulations remove ``offices'' 
from the exception to the definition of tangible depreciable property 
in Sec.  1.48D-3(c)(2) in order to allow certain office space within an 
advanced manufacturing facility to meet the definition of tangible 
depreciable property in Sec.  1.48D-3(c)(1). It would be inconsistent 
with the statute to omit ``offices'' from the exception to the 
definition of tangible depreciable property, but further clarification 
is necessary concerning the meaning of the term ``office''. Section 
48D(b)(2)(B)(ii) excludes from the definition of ``qualified property'' 
``a building or portion of a building used for offices, administrative 
services, or other functions unrelated to manufacturing.'' Accordingly, 
the final regulations clarify that the term ``tangible depreciable 
property'' does not include a building and its structural components 
used for offices. But, in response to the comments received, the final 
regulations also provide a list of certain buildings or portions of a 
building within an advanced manufacturing facility that are considered 
related to manufacturing and not considered offices. However, whether a 
particular building or portion of a building is used as an office, for 
administrative services, or is unrelated to manufacturing is a factual 
determination.
C. Certain Leasing Transactions and Original Use
    A commenter requested that the final regulations clarify that a 
lessor election under Sec.  1.48-4 to treat the lessee as having 
acquired investment credit property is permitted with respect to the 
section 48D credit. The commenter also requested that the final 
regulations address whether a lessor or lessee that purchases a 
previously leased advanced manufacturing facility and subsequently 
reconditions or rebuilds the facility is eligible to claim a section 
48D credit. The Treasury Department and the IRS agree with the 
commenter that a lessor election under Sec.  1.48-4 to treat the lessee 
as having acquired investment credit property is permitted by operation 
of the statute. Section 48D is

[[Page 84741]]

an investment credit under section 46. Section 50(d)(5) provides that, 
for purposes of computing the investment credit, rules similar to the 
rules of former section 48(d) (relating to certain leased property) (as 
in effect on the day before the date of the enactment of the Revenue 
Reconciliation Act of 1990 (Pub. L. 101-508, 104 Stat. 1388 (November 
5, 1990)) apply. Section 1.48-4 provides the regulatory requirements 
for the time and manner for making an election to treat the lessee as 
having purchased the property for purpose of the credit allowed and the 
regulatory requirements, including for original use, that must be met 
and are applicable for purposes of the election. The Treasury 
Department and the IRS decline to address specific examples of leasing 
transactions in the final regulations and note that the investment 
credit recapture provisions under section 50(a) and regulations, 
including Sec. Sec.  1.47-1 through 1.47-3 apply for purposes of the 
section 48D credit.
    Commenters also requested that the definition of ``original use'' 
in proposed Sec.  1.48D-3(e) be modified in the final regulations to 
include acquired property that is reconditioned or rebuilt by a 
different taxpayer. Section 48D(b)(2)(A)(iii)(I) and (II) provide that 
``qualified property'' includes property that is constructed, 
reconstructed, or erected by the taxpayer, or acquired by the taxpayer 
if the ``original use'' of such property begins with the taxpayer. 
Thus, the taxpayer must reconstruct or rebuild a property to meet the 
``original use'' requirement under section 48D(b)(2)(A)(iii). 
Accordingly, the Treasury Department and the IRS decline to adopt this 
recommendation.
D. Property Integral to the Operation of an Advanced Manufacturing 
Facility
    One commenter requested that the sentence in proposed Sec.  1.48D-
3(f)(1) that states, ``Materials, supplies, and other inventoriable 
items of property that are transformed into a finished semiconductor or 
into a finished unit of semiconductor manufacturing equipment are not 
considered property integral to the operation of manufacturing 
semiconductors or semiconductor manufacturing equipment'' be modified 
to provide that such materials are integral to the operation of an 
advanced manufacturing facility. The Treasury Department and the IRS 
decline to adopt this recommendation. As noted in section III.I. of 
this Summary of Comments and Explanation of Revisions, among other 
requirements, section 48D(b)(2) and Sec.  1.48D-3(c) (referencing Sec.  
1.48-1(c) and (d)) require that property be tangible depreciable 
property, for example, production machinery, to meet the definition of 
qualified property. Gases, chemicals, and materials, such as diamond 
wafer substrates, and other semiconductive substances, that are 
consumed, utilized, or substantially transformed during the 
manufacturing process, or any other inventoriable items of property do 
not meet the threshold requirement of section 48D(b)(2) and Sec.  
1.48D-3(c) to be ``qualified property'' because they are not tangible 
depreciable property for purposes of the section 48D credit. Thus, such 
property would not be property ``integral to the operation of an 
advanced manufacturing facility'' under the statute.
    Another commenter requested that the final regulations clarify that 
the term ``transformed'' in proposed Sec.  1.48D-3(f)(1) does not refer 
to the normal degradation of components of semiconductor manufacturing 
equipment. However, a clarification is appropriate for establishing 
whether property is integral to the operation of an advanced 
manufacturing facility. Accordingly, Sec.  1.48D-3(g)(1) of the final 
regulations clarifies that the term ``transformed'' does not include 
the normal degradation of components of semiconductor manufacturing 
equipment.
    The final regulations include a special rule for purposes of 
establishing whether property is integral to the operation of a 
vertically integrated manufacturing facility. As discussed in section 
III.E. of this Summary of Comments and Explanation of Revisions, the 
final regulations clarify that the term ``semiconductor manufacturing'' 
includes semiconductor packaging, semiconductor fabrication, and 
semiconductor wafer production but excludes manufacturing processes 
related to precursor materials such as polysilicon. Consistent with 
this modification, the final regulations provide that, if an advanced 
manufacturing facility that is engaged in the manufacturing of 
semiconductors within the meaning of Sec.  1.48D-2 also conducts 
vertically integrated activities (for example, producing raw materials 
and manufacturing ingots, wafers, and semiconductors), then property 
integral to the operation of such an advanced manufacturing facility 
includes only the property used in the manufacturing of semiconductors 
within the meaning of Sec.  1.48D-2.
    Commenters requested that examples of property that would normally 
be integral to operation of an advanced manufacturing facility in 
proposed Sec.  1.48D-3(f)(1) be modified to reflect any modifications 
to the definitions of ``semiconductor'' and ``semiconductor 
manufacturing equipment'' in the final regulations. Commenters also 
requested that the final regulations include additions to the list of 
specific property under Sec.  1.48D-3(f)(1) to provide certainty to 
taxpayers. The commenters requested that the list include, property 
such as electricity distribution equipment, industrial automation and 
control equipment, communications devices, lighting products, water 
management, conservation, water treatment equipment, materials, and 
technologies, and tooling equipment. The Treasury Department and the 
IRS have determined that adding to the list of specified property that 
would ``normally be integral to the operation of an advanced 
manufacturing facility'' consistent with the modification to the 
definitions of ``semiconductor manufacturing'' and ``semiconductor 
manufacturing equipment'' under Sec.  1.48D-2(n) and (o) of the final 
regulations is appropriate for determining whether property is 
``integral to the operation of an advanced manufacturing facility.'' 
Accordingly, Sec.  1.48D-3(g)(3) of the final regulations includes 
additional examples of such property.
    One commenter requested that proposed Sec.  1.48D-3(f)(2) be 
modified to treat research facilities that do not manufacture any type 
of semiconductor or semiconductor manufacturing equipment to qualify as 
integral to the operation of an advanced manufacturing facility. The 
commenter further stated that the restriction in Sec.  1.48D-3(f)(2) of 
the March 2023 proposed regulations exceeds the statutory exclusions in 
section 48D(b)(2)(B)(ii) for a building or portion of a building used 
for offices, administrative services, or other functions unrelated to 
manufacturing. The statute is silent concerning the treatment of 
research facilities, but does require, pursuant to section 
48D(b)(2)(A)(iv), that property be integral to the operation of an 
``advanced manufacturing facility'' to meet the definition of 
``qualified property.'' As previously noted in the Background section 
of this preamble, the March 2023 proposed regulations primarily applied 
long-established credit mechanics and procedures common to all 
investment tax credits previously set forth in regulations and 
subregulatory guidance. Those long-established mechanics and 
procedures, including those set forth in Sec.  1.48-1 generally require 
that a research facility be used ``in connection'' with the qualifying 
activity to be considered used

[[Page 84742]]

as integral part of the activity. Section 48D(b)(3) defines an 
``advanced manufacturing facility'' as a ``facility for which the 
primary purpose is the manufacturing of semiconductors or semiconductor 
manufacturing equipment.'' Under both the March 2023 proposed 
regulations and the final regulations, facilities built for pre-pilot 
production lines and the manufacture of prototypes would be qualified 
property integral to the operation of an advanced manufacturing 
facility. Based on the foregoing, a research facility that does not 
manufacture semiconductors or semiconductor manufacturing equipment is 
not used ``in connection'' with the manufacturing of semiconductors or 
semiconductor manufacturing equipment. For these reasons, the final 
regulations do not adopt the commenter's recommendation.
E. Semiconductor Manufacturing in Space
    One commenter requested that the final regulations clarify that 
section 48D directly contemplates semiconductor manufacturing work in 
space and explicitly confirm that qualifying advanced manufacturing 
activity can occur in space, and on a low-earth orbiter, in particular. 
More specifically, the commenter requested that the final regulations: 
(1) provide an exception to the definition of buildings and structural 
components unrelated to manufacturing for functions that are critical 
for human habitation in space; and (2) expand the examples of property 
integral to the operations of an advanced manufacturing facility to 
include space delivery vehicles, as all of the examples currently 
describe either the facility itself or related infrastructure for land-
based manufacturing (for example, docks, railroad tracks, and bridges).
    Section 48D does not expressly address semiconductor manufacturing 
in space, or whether a ``qualifying advanced manufacturing activity'' 
can occur in space, and on a low-earth orbiter, in particular. Section 
48D is among the investment credits under section 46. Section 
50(b)(1)(A) makes ineligible for the investment credit property that is 
used predominantly outside the United States. However, section 
50(b)(1)(B) provides an exception for property described in section 
168(g)(4). Section 168(g)(4)(L) includes an exception for any satellite 
(not described in section 168(g)(4)(H), which applies to communication 
satellites) or other spacecraft (or any interest therein) held by a 
United States person if such satellite or other spacecraft was launched 
from within the United States. Whether a low-earth orbiter or property 
placed in service on a low-earth orbiter is described in section 
168(g)(4)(L) would require a careful examination of all relevant facts 
and circumstances, any applicable Code sections and Federal income tax 
principles apart from those found in section 48D and the section 48D 
regulations. Whether ``buildings'' or structural components that are 
critical for human habitation in space are included among the exception 
for a building or portion of a building used for offices administrative 
services, or other functions unrelated to manufacturing pursuant to 
section 48D(b)(2)(B)(ii), also would require a careful examination of 
all relevant facts and circumstances, any applicable Code sections, and 
Federal income tax principles apart from those found in section 48D and 
the section 48D regulations. Similarly, whether property integral to 
the operation of an advanced manufacturing facility can include space 
delivery vehicles requires a careful examination of all relevant facts 
and circumstances. For these reasons, the issues addressed by the 
commenter are beyond the scope of the final regulations. Accordingly, 
the final regulations do not adopt rules to address semiconductor 
manufacturing in space.

V. Comments on and Changes to Proposed Sec.  1.48D-4

A. Definition of Advanced Manufacturing Facility
    Section 1.48D-4(b) of the March 2023 proposed regulations would 
have provided that the term ``advanced manufacturing facility'' means a 
facility of an eligible taxpayer for which the primary purpose is the 
manufacturing of finished semiconductors or the manufacturing of 
finished semiconductor manufacturing equipment. Commenters requested 
that the final regulations omit the term ``finished'' from the 
definition of ``advanced manufacturing facility,'' or, define the term 
``finished'' if it is retained in the final regulations. Commenters 
also requested that conforming changes be made to the definition of 
``advanced manufacturing facility'' if the definitions of 
``semiconductor,'' ``semiconductor manufacturing equipment,'' or 
``subsystems'' are modified by the final regulations.
    The Treasury Department and the IRS agree with the commenters that 
the term ``finished'' should be removed from the definition of 
``advanced manufacturing facility'' in the final regulations to reflect 
industry practice and the modifications to the definitions of 
``semiconductor manufacturing'' and ``semiconductor manufacturing 
equipment'' under Sec.  1.48D-2(n) and (o) of the final regulations. 
Accordingly, the definition of ``advanced manufacturing facility'' is 
revised in the final regulations by removing the term ``finished.'' 
Consistent with the revision to the definition of ``advanced 
manufacturing facility,'' the term ``finished'' is also removed from 
Sec.  1.48D-4(b) and (c)(1) of the final regulations, for purposes of 
determining whether the primary purpose of a facility is the 
manufacturing of semiconductors or semiconductor manufacturing 
equipment.
    Commenters requested that the definition of an advanced 
manufacturing facility be modified to ensure that industrial gas and 
other equipment qualifies when co-located on an advanced manufacturing 
facility, and, similarly, clarify what constitutes an advanced 
manufacturing facility when multiple taxpayers place in service 
qualified property at the same facility. Commenters also requested that 
the final regulations define the term ``facility'' as a reasonably 
identifiable space, an amenity, a piece of equipment, or an assembly 
line that can be distinguished from an entire campus or building where 
multiple activities are performed and would allow for bifurcation of 
manufacturing campuses or within buildings where certain facilities may 
be leveraging the section 48D credit while other facilities may be 
leveraging a different tax incentive. One commenter requested that the 
final regulations define an advanced manufacturing facility consistent 
with the definition of qualified property integral to the operation of 
an advanced manufacturing facility in proposed Sec.  1.48D-3(f). 
Another commenter requested that the final regulations provide that the 
definition of an advanced manufacturing facility include design 
facilities that are related to the semiconductor manufacturing process.
    The Treasury Department and the IRS decline to adopt these 
recommendations by further modifying the definition of an ``advanced 
manufacturing facility'' or defining ``facility'' in the final 
regulations. Section 48D(b)(3) and Sec.  1.48D-4(b) of the final 
regulations define an advanced manufacturing facility as a facility for 
which the primary purpose is the manufacturing of semiconductors or the 
manufacturing of semiconductor manufacturing equipment within the 
meaning of Sec.  1.48D-2. Section 1.48D-2 defines the

[[Page 84743]]

terms semiconductor, semiconductor manufacturing, semiconductor 
manufacturing equipment, manufacturing of semiconductors, and 
manufacturing of semiconductor manufacturing equipment. Taken together, 
the statutory and regulatory provisions define what constitutes an 
advanced manufacturing facility for purposes of the section 48D credit. 
For these reasons, the final regulations do not include a separate 
definition of ``facility'' as requested by the commenters. The 
treatment of co-located property is addressed in section IV.A of this 
Summary of Comments and Explanation of Revisions.
B. Primary Purpose
    Commenters requested that the final regulations include a minimum 
threshold that would satisfy the ``primary purpose'' requirement. In 
proposed Sec.  1.48D-4(c)(3)(i) (Example 1), a taxpayer manufactures 
semiconductor manufacturing equipment that represents approximately 75 
percent of the potential output of the taxpayer's facility by cost to 
produce such equipment. Section 1.48D-4(c)(3)(i) (Example 1) shows that 
the taxpayer satisfied the primary purpose test in proposed Sec.  
1.48D-4(c). Proposed Sec.  1.48D-4(c)(3)(ii) (Example 2) reaches the 
same conclusion when the taxpayer manufactures certain microscopes for 
a semiconductor manufacturing facility and such equipment represents 
approximately 75 percent of the potential output (by cost) of the 
taxpayer's facility. Commenters requested that the final regulations 
state the minimum threshold that would satisfy the primary purpose test 
as more than 50 percent. One commenter requested that the final 
regulations specify the types of cost that should be considered in the 
output test and if research costs in connection with manufacturing 
semiconductor or semiconductor equipment should be considered in the 
numerator of output test. The commenter further requested that the 
regulations should clarify that the output capacity in the quantitative 
test should be measured at full life cycle instead of the year placed 
in service when the credit is determined. The commenter also requested 
that the threshold requirement rule be provided in the regulatory text. 
Another commenter requested that the final regulations include an 
example of a facility that does not meet the ``primary purpose'' 
requirement, especially for facilities that do not meet the 75 percent 
threshold.
    The Treasury Department and the IRS have determined that the final 
regulations should include a minimum threshold that would satisfy the 
``primary purpose'' requirement. Accordingly, Sec.  1.48D-4(c)(1) of 
the final regulations provides that a minimum threshold of more than 50 
percent by cost of production, revenue received in an arm's length 
transaction, or units produced satisfies the ``primary purpose'' 
requirement. Section 1.48D-4(c)(3) of the final regulations include 
examples illustrating the application of this rule, including examples 
involving semiconductor wafer production and a vertically integrated 
manufacturer. However, property placed in service in a taxable year 
must still meet the definition of qualified property under section 
48D(b)(2) and Sec.  1.48D-3 for its basis to be included as part of the 
qualified investment in the advanced manufacturing facility eligible 
for the section 48D credit. Specifying the types of cost that should be 
considered in the output test and the time period for the measurement 
would require a careful examination of all relevant facts and 
circumstances, any applicable Code sections and Federal income tax 
principles apart from those found in section 48D and the section 48D 
regulations. For these reasons, specifying the types of costs that 
should be considered and the time period for measurement is not 
appropriate for purposes of the final regulations.
    One commenter requested that the words ``grows'' and ``grow 
wafers'' in proposed Sec.  1.48D-4(c)(2) be removed in the final 
regulations if the definition of ``semiconductor'' is revised in the 
final regulations to include polysilicon, boules, wafers, and similar 
materials with electronic properties manufactured specifically for the 
purpose of semiconductor manufacturing. Another commenter requested 
that the final regulations clarify that ``primary purpose'' can include 
intermediate manufacturing steps or production of components for 
finished semiconductors. One commenter requested that the final 
regulations provide that, in the case of a vertically integrated 
company that manufactures semiconductors, property used in the crystal 
and boule growth be treated as property integral to the operation of an 
advanced manufacturing facility.
    The Treasury Department and the IRS agree, in part, with commenters 
and the final regulations adopt, in part, the commenter's request for a 
modification to proposed Sec.  1.48D-4(c)(2) by removing ``grows'' and 
``grows wafers'' from the final regulations, and providing that primary 
purpose can include certain intermediate manufacturing steps to conform 
with the definition of ``semiconductor manufacturing'' in Sec.  1.48D-
2(n) of the final regulations. As previously described in section 
III.E. of this Summary of Comments and Explanation of Revisions, 
semiconductor wafer production includes the processes of growing 
single-crystal ingots and boules, as well as wafer slicing, bonding, 
etching and polishing, cleaning, epitaxial deposition, and metrology. 
Including property used in steps prior to growing single-crystal ingots 
and boules in the case of a vertically integrated semiconductor 
manufacturer is not consistent with the purpose and structure of the 
statute because the primary purpose of such property is not the 
manufacturing of semiconductors (as defined in Sec.  1.48D-2(g) of the 
final regulations) or the manufacturing of semiconductor manufacturing 
equipment (as defined in Sec.  1.48D-2(h) of the final regulations). 
Accordingly, the final regulations do not include such a rule for such 
vertically integrated businesses.
    The final regulations provide examples to illustrate whether a 
facility has a primary purpose of manufacturing of semiconductors or 
manufacturing of semiconductor manufacturing equipment. The examples 
address whether the facility meets the primary purpose test in the 
taxable year the property is placed in service. Because the section 48D 
is an investment tax credit, and pursuant to Sec.  1.46-3(d)(4), the 
investment credit is allowed in the taxable year the property is placed 
in service. In addition, the investment tax credit recapture rules 
under section 50(a) apply to the section 48D credit. If the property 
for which the section 48D credit is claimed ceases to be investment 
credit property (as defined in section 50(a)(6)(A)) with respect to the 
taxpayer before the close of the 5-year recapture period, then all or a 
portion of the section 48D credit is recaptured. If a taxpayer fails to 
meet the primary purpose test during any of the years during the 5-year 
recapture period, then the facility is no longer an advanced 
manufacturing facility, as defined in section 48D(b)(3) and the final 
regulations. The property the taxpayer placed in service to claim the 
section 48D credit is no longer qualified property under section 
48D(b)(2)(A)(iv), because such property is no longer integral to the 
operation of an advanced manufacturing facility. Thus, the property has 
ceased to be investment credit property with respect to the taxpayer 
and, pursuant to section 50(a)(1)(A) and (B), all or a portion of

[[Page 84744]]

the section 48D credit claimed is recaptured.

VI. Comments on and Changes to Proposed Sec.  1.48D-5

A. Definition of Single Advanced Manufacturing Facility Project
    Commenters requested that the final regulations expand the list of 
items of property that may be treated as a single item for purposes of 
the beginning of construction rules to include ``tooling equipment'' 
and ``semiconductor manufacturing equipment.'' The list in proposed 
Sec.  1.48D-5(a)(3) is non-exclusive. However, the Treasury Department 
and the IRS have determined that a clarification is appropriate to 
clarify that ``tooling equipment'' and ``semiconductor manufacturing 
equipment'' can be treated as a single item for purposes of the 
beginning of construction. Accordingly, Sec.  1.48D-5(a)(3)(i) of the 
final regulations is revised to include ``tooling equipment'' and 
``semiconductor manufacturing equipment.''
    Commenters requested that the final regulations establish a safe 
harbor for satisfying the single advanced manufacturing facility 
project determination if a taxpayer meets at least four of the factors 
listed under proposed Sec.  1.48D-5(a)(3)(i). As noted in the 
Background section of this preamble, the final regulations primarily 
apply credit mechanics and procedures common to all investment credits. 
It is therefore appropriate for purposes of section 48D to provide a 
single project test similar to the test provided in other recent 
guidance applicable to investment credits. Accordingly, Sec.  1.48D-
5(a)(3)(i) of the final regulations provides that multiple properties 
or facilities will be treated as a single project if, at any point 
during construction of the multiple properties or facilities, they are 
owned by a single taxpayer (subject to the related taxpayer rule 
discussed later in this section of this Summary of Comments and 
Explanation of Revisions), and any two or more of the factors listed in 
Sec.  1.48D-5(a)(3)(i) are met. Under Sec.  1.48D-5(a)(3)(ii) of the 
final regulations, related taxpayers would be treated as one taxpayer 
in determining whether multiple facilities or properties are treated as 
a single project. Related taxpayers would be defined as members of a 
group of trades or businesses that are under common control (as defined 
in Sec.  1.52-1(b)).
    Commenters also requested that the final regulations modify 
proposed Sec.  1.48D-5(a)(3)(i)(F) by changing ``single master 
construction contract'' to a ``single master construction plan,'' and 
add a new factor based on whether the properties or facilities achieve 
efficiencies and economies of scale through shared semiconductor 
manufacturing resources. However, planning and designing are generally 
regarded as preliminary activities that would not satisfy the Physical 
Work Test, and treating multiple items of qualified property as a 
single item based on a ``construction plan'' as opposed to a 
``construction contract'' would not inform whether construction has 
begun for purposes of section 48D. Including a factor based on whether 
the properties or facilities achieve efficiencies and economies of 
scale through shared semiconductor manufacturing resources would inject 
significant complexity into the final regulations and likely cause 
additional uncertainty regarding the scope of the term ``single 
advanced manufacturing facility project'' due to its inherently factual 
nature. Accordingly, the final regulations do not incorporate the 
commenters' recommendations.
    One commenter requested that the final regulations clarify the 
disaggregation of a single advanced manufacturing facility project 
under proposed Sec.  1.48D-5(a)(3)(iv). The commenter requested that 
the final regulations clarify that the relevant facts and circumstances 
to satisfy the continuity requirement for disaggregated separate items 
of property or facilities should be the facts and circumstances from 
the time that the continuity safe harbor period ends until the property 
is placed in service. The Treasury Department and the IRS decline to 
adopt the recommendation because it would be inconsistent with the 
continuity requirement. Those disaggregated separate items of property 
or facilities were not placed in service prior to the continuity safe 
harbor deadline and therefore, the taxpayer is not deemed to satisfy 
the continuity requirement with respect to those items from the 
beginning of construction date through the end of the continuity safe 
harbor period. Accordingly, the final regulations do not incorporate 
the commenter's recommendation.
    The commenter also requested that the final regulations address the 
time period for which the remaining disaggregated separate items of 
property or facilities may satisfy the continuity requirement under a 
facts and circumstances determination, pursuant to proposed Sec.  
1.48D-5(a)(3)(iv). The commenter recommended that the period start when 
physical work of a significant nature begins with respect to the 
disaggregated separate item of property rather than when construction 
began based on the single advanced manufacturing facility project. The 
commenter recommended that, alternatively, a continuous construction or 
continuous effort for any one item of property within the single 
advanced manufacturing facility project be attributed to all properties 
within the project to satisfy the continuity requirement. The Treasury 
Department and the IRS have determined that the relevant facts and 
circumstances determination in proposed Sec.  1.48D-5(a)(3)(iv) is 
appropriate for determining whether a disaggregated separate item of 
property satisfies the continuity requirement. Accordingly, the final 
regulations do not incorporate the commenter's recommendation.
B. Beginning of Construction, In General
    A commenter requested that the final regulation clarify whether a 
taxpayer applies the same test for all construction in progress at one 
contiguous location to determine whether construction began before 
December 31, 2026. Proposed Sec.  1.48D-5(b)(1) provides that a 
taxpayer may establish that construction of an item of property 
(defined as a single advanced manufacturing facility project under 
proposed Sec.  1.48D-5(a)(3), or an item of qualified property under 
proposed Sec.  1.48D-3(b)) of a taxpayer begins under either the 
Physical Work Test or the Five Percent Safe Harbor. Thus, whether a 
taxpayer applies the same test for all construction in progress at one 
contiguous location depends on the unit of property being measured. For 
this reason, the Treasury Department and the IRS have determined that a 
clarification is not necessary.
C. Physical Work Test
    Commenters requested that the final regulations include examples of 
on-site and off-site physical work of a significant nature specific to 
the semiconductor industry. One commenter recommended, at a minimum, 
including on-site activities such as excavation for the foundation of a 
facility, pouring concrete into a foundation of a facility, and 
installing underground utilities, and including off-site activities 
such as the acquisition of key systems, manufacture of components, 
mounting equipment, and constructing support structures such as steel 
trusses. The Treasury Department and the IRS have determined that 
including certain examples of on-site and off-site work to provide 
additional certainty to taxpayers is appropriate for determining 
whether physical work of a significant nature has occurred.

[[Page 84745]]

Accordingly, Sec.  1.48D-5(c)(2) of the final regulations includes a 
non-exclusive list of examples of on-site and off-site activities, 
consistent with IRS guidance pertaining to beginning of construction.
D. Five Percent Safe Harbor
    One commenter requested that a payment made by the taxpayer for 
property that is manufactured, constructed, or produced for the 
taxpayer by another person under a binding written contract but is not 
yet provided to the taxpayer and is not yet incurred by the other 
person is considered paid or incurred with respect to the taxpayer for 
purposes of the Five Percent Safe Harbor. As noted, the section 48D 
regulations primarily apply long-established credit mechanics and 
procedures common to all investment credits, including application of 
the principles of section 461. Therefore, the final regulations retain 
the rule set forth in proposed Sec.  1.48D-5(d)(2).
E. Continuity Requirement
    Commenters requested that the final regulations provide examples of 
the facts and circumstances that would support the conclusion that the 
taxpayer satisfied the continuity requirement. The Treasury Department 
and the IRS have determined that including an example of facts and 
circumstances that would support a particular factor being met under 
the continuity facts and circumstances test is appropriate for 
clarifying the continuity requirement in this context. Accordingly, the 
final regulations clarify that a taxpayer has met the factor of paying 
or incurring additional amounts included in the total cost of the 
property for a taxable year in which it pays or incurs (within the 
meaning of Sec.  1.461-1(a)(1) and (2)) five percent or more of the 
total cost of the property each calendar year after the calendar year 
during which construction of the property began for purposes of section 
48D and the section 48D regulations.
    One commenter requested that the final regulations include 
``industry downturns'' in the non-exclusive list of construction 
disruptions under proposed Sec.  1.48D-5(e)(4)(iii). The commenter 
explained that the semiconductor industry is highly cyclical in nature 
and semiconductor companies typically reduce capital expenditures and 
delay on-going construction of new semiconductor facilities during 
industry downturns. The commenter recommended defining ``industry 
downturn'' as a 20 percent reduction to publicly traded stock value 
during the preceding 12-month period. The commenter also requested that 
the final regulations include a provision that Treasury may exercise 
its authority to identify per se construction disruptions in future 
guidance. The Treasury Department and the IRS decline to adopt these 
recommendations, but will consider whether future guidance, specific to 
any market and construction disruptions, is necessary, as needed.
    A commenter requested that the final regulations modify the 
continuity safe harbor in proposed Sec.  1.48D-5(e)(6) by creating a 
bright-line rule that all property placed in service before December 
31, 2036, will be deemed to satisfy the continuity safe harbor. The 
commenter argued that the structure of a continuity safe harbor that 
measures from the beginning of construction, in the context of 
semiconductor manufacturing, creates an incentive to intentionally 
delay the beginning of construction date to as late in 2026 as possible 
to more closely align the time that construction begins to the 
beginning of the tolling of the 10-year safe harbor period. Section 
48D(e) provides that a section 48D credit may not be claimed for 
property the construction of which begins after December 31, 2026. The 
March 2023 proposed regulations provide that a taxpayer can establish 
that construction of property has begun by meeting either the Physical 
Work Test or the Five Percent Safe Harbor. Under either test, a 
taxpayer must meet the Continuity Requirement by demonstrating 
continuous construction or continuous efforts based on the relevant 
facts and circumstances. In lieu of demonstrating continuous 
construction or continuous efforts, however, the taxpayer is deemed to 
satisfy the continuity requirement, under the continuity safe harbor, 
by placing the property in service within ten calendar years after the 
date that the Physical Work Test or the Five Percent Safe Harbor is 
first satisfied. Taxpayers are not obligated to satisfy the continuity 
safe harbor to meet the continuity requirement. For these reasons, the 
Treasury Department and the IRS decline to adopt the commenter's 
recommendation in the final regulations.
    A commenter requested that the final regulations include a monetary 
safe harbor in which a taxpayer is deemed to satisfy the continuous 
construction test or continuous efforts test in the case an advanced 
manufacturing facility project if the taxpayer pays or incurs a certain 
dollar amount of the total cost of the property during each taxable 
year before the property is placed in service. Paying or incurring 
costs towards completion of a project is one of many factors that may 
indicate the continuity requirement is met. As such, the Treasury 
Department and the IRS decline to include an additional safe harbor in 
the final regulations that is solely dependent on the dollar amount of 
monetary spend in a given taxable year. However, as previously 
described, the final regulations clarify that a taxpayer has met the 
factor of paying or incurring additional amounts included in the total 
cost of the property for a taxable year in which it pays or incurs 
(within the meaning of Sec.  1.461-1(a)(1) and (2)) five percent or 
more of the total cost of the property each calendar year after the 
calendar year during which construction of the property began.

VII. Comments on and Changes to Proposed Sec.  1.50-2

A. Applicable Transaction
    One commenter requested clarification of whether the term 
``applicable transaction'' includes the expansion of manufacturing 
semiconductor manufacturing equipment in a foreign country of concern. 
Section 50(a)(6)(D) provides that ``applicable transaction'' means a 
``significant transaction'' involving the material expansion of 
``semiconductor manufacturing capacity'' in a foreign country of 
concern. Section 50(a)(6)(D) does not refer to manufacturing 
semiconductor manufacturing equipment. For that reason, the term 
``applicable transaction'' does not include the expansion of 
manufacturing semiconductor manufacturing equipment in a foreign 
country of concern. Section 50(a)(6)(E), however, defines the term 
``applicable taxpayer'' as any taxpayer who has been allowed a section 
48D credit for any prior taxable year. Thus, a taxpayer that was 
allowed a section 48D credit for manufacturing semiconductor 
manufacturing equipment as defined in Sec.  1.48D-2(g) of the final 
regulations is an ``applicable taxpayer'' for purposes of section 
50(a)(3) and (a)(6)(D) and would be subject to recapture under those 
provisions if the taxpayer engaged in an ``applicable transaction'' 
involving the material expansion of semiconductor manufacturing in a 
foreign country of concern.
    Commenters suggested that the final regulations provide that a 
transaction does not trigger recapture under section 50(a)(3) if such 
transaction does not trigger a clawback under an entity's required 
agreement with the Department of Commerce. Consistent with section 
50(a)(6)(D), if a taxpayer enters into a required agreement with the 
Secretary

[[Page 84746]]

of Commerce, the final regulations define the term ``significant 
transaction'' to have the same meaning as provided in the required 
agreement for purposes of section 48D and the section 48D regulations.
B. Definition of Applicable Taxpayer
    Several commenters requested that the final regulations treat only 
partners that actually claim a section 48D credit as an ``applicable 
taxpayer,'' as opposed to all partners in the partnership as required 
under proposed Sec.  1.50-2(b)(2)(i)(C). Two of the commenters argued 
that activities undertaken outside the partnership by one partner 
should not trigger recapture of the section 48D credit claimed by 
another partner in the partnership. The Treasury Department and the IRS 
have determined that certain modifications are appropriate for defining 
``applicable taxpayer'' in the context of qualified property owned by a 
partnership or S corporation. Accordingly, the final regulations retain 
the general definition of ``applicable taxpayer'' from proposed Sec.  
1.50-2(b)(2)(i)(A) and include special rules for partnerships and S 
corporations.
    The final regulations clarify that in the case of property placed 
in service by a partnership, the term ``applicable taxpayer'' means any 
direct or indirect partner in a partnership: (1) who was allowed a 
section 48D credit for such property for any taxable year prior to when 
such partnership entered into an applicable transaction and includes 
such partnership; (2) with respect to the partner's share of any 
section 48D credit allowed for such property prior to when such partner 
entered into an applicable transaction; or (3) with respect to the 
partner's share of any tax-exempt income from a partnership that made 
an election under section 48D(d)(2) for any taxable year prior to when 
such partner entered into an applicable transaction. Consistent with 
proposed Sec.  1.50-2(b)(2)(i)(B), the final regulations provide that 
the term ``applicable taxpayer'' means a partnership that made an 
election under section 48D(d)(2) for any taxable year prior to the 
taxable year in which the partnership entered into an applicable 
transaction. The final regulations include similar rules for S 
corporations and shareholders. The final regulations also include 
additional examples to clarify the application of the rules regarding 
the term ``applicable taxpayer.''
C. Significant Transactions in General and Certain Required Agreements 
Under Section 103(b) of the CHIPS Act
    Section 50(a)(6)(D) requires that the meaning of the term 
``significant transaction'' be determined by the Secretary in 
coordination with the Secretary of Commerce and the Secretary of 
Defense. Accordingly, the March 2023 proposed regulations defined the 
term ``significant transaction'' to align and harmonize the scope of 
applicable transactions under section 50(a)(3) with the scope of 
prohibited material expansion transactions within the meaning of 
proposed 15 CFR 231.121 (relating to the Prohibition on Certain 
Expansion Transactions) and included the definition of ``significant 
transaction'' in proposed 15 CFR 231.101 as contained in the Commerce 
Proposed Rule. However, unlike the Commerce Proposed Rule, the Commerce 
Final Rule does not include a definition of ``significant 
transaction.'' Rather, pursuant to section 103(b) of the CHIPS Act, 
what constitutes a ``significant transaction'' is to be defined in the 
required agreement entered into between a funding recipient and the 
Secretary of Commerce. Accordingly, the Treasury Department and the IRS 
(in coordination with the Secretary of Commerce and the Secretary of 
Defense) have determined that, consistent with section 50(a)(6)(D), the 
term ``significant transaction'' means either a ``significant 
transaction'' as that term is generally defined in Sec.  1.50-
2(b)(10)(i) of the final regulations, or, with respect to a taxpayer 
that has entered into a required agreement with the Secretary of 
Commerce, as the term ``significant transaction'' is defined in Sec.  
1.50-2(b)(10)(ii) of the final regulations, in the required agreement 
with the Department of Commerce. Consistent with the definition of 
``significant transaction'' in Sec.  1.50-2(b)(10)(ii) of the final 
regulations, the defined terms in the required agreement with the 
Department of Commerce control for purposes of determining the meaning 
of the term ``significant transaction.''
    One commenter requested that the section 50(a)(3) and (a)(6)(D) 
recapture provisions and the Department of Commerce's award clawback 
rules should align the set of restrictions on transactions in foreign 
countries of concern to avoid disrupting ordinary business activities 
at existing legacy facilities, especially given the length of time of 
the advanced manufacturing investment credit recapture period. The 
Treasury Department and the IRS note that the final regulations 
harmonize the restrictions to the extent provided under the statute.
D. Definition of Significant Transaction
    Several commenters requested modifications to the definition of 
``significant transaction'' in the March 2023 proposed regulations. 
Some commenters requested the final regulations increase the $100,000 
threshold for determining whether a transaction is a ``significant 
transaction.'' Commenters also requested that the final regulations 
explicitly state that transactions with a principal purpose of funding 
ordinary course operations (for example, payroll, rent and utilities, 
marketing and advertising, and similar items) are not considered 
significant.
    In response to comments, the Treasury Department and the IRS are 
removing the monetary threshold for ``significant transaction'', and, 
instead, the revised definition focuses on the type of transaction that 
could result in material expansion. This approach is consistent with 
the intent of the recapture rule in section 50(a)(3). Accordingly, the 
definition of ``significant transaction'' has been modified to include 
(1) an investment, whether proposed, pending, or completed, including 
any capital expenditure, loan, or gift; (2) the formation of a 
subsidiary, whether classified as a corporation or partnership for 
Federal tax purposes; (3) a merger, acquisition, or takeover, including 
(a) the acquisition of a new or additional ownership interest in an 
entity, (b) the acquisition of a material portion of the assets of an 
entity, or (c) a consolidation; (4) the formation of a joint venture; 
or (5) a long-term lease or concession arrangement under which a lessee 
(or equivalent) makes substantially all business decisions concerning 
the operation of a leased entity (or equivalent), as if it were the 
owner. This definition, coupled with the revision to the definition of 
material expansion, would clarify that transactions with a principal 
purpose of funding ordinary course operations are not significant 
transactions.
    One commenter requested that the final regulations eliminate the 85 
percent rule under proposed Sec.  1.50-2(b)(10)(iii) from the 
definition of ``significant transaction'' or replace it with a simpler 
metric based on the ratio of units an entity manufactures in a foreign 
country of concern to the units shipped into a foreign county of 
concern. Another commenter requested that the Treasury Department and 
the IRS coordinate with the Department of Commerce to finalize a single 
uniform

[[Page 84747]]

standard to identify what is a ``final product'' for purposes of 
proposed Sec.  1.50-2(b)(10)(iii). The proposed definition of 
``significant transaction'' was intended to align and harmonize with 
the scope of certain prohibited expansion transactions under the 
Commerce Proposed Rule, pursuant to the Secretary's authority under 
section 50(a)(6)(D)(i) to determine whether transactions are 
significant transactions. Accordingly, to maintain this alignment, the 
final regulations retain the 85 percent threshold in its consideration 
of whether certain production of legacy semiconductors ``predominately 
serves the market'' in a foreign country of concern. Because the 
meaning of the term ``predominately serves the market'' is intended to 
be consistent with the Commerce Final Rule, the Treasury Department and 
the IRS decline to interpret ``serves the market'' to refer to the 
location to which the semiconductors are first shipped.
    Two commenters requested that the prohibition on technology 
licensing and joint research be removed from the definition of 
significant transaction, noting that the CHIPS Act does not refer to 
``technology licensing.'' Several commenters suggested that the 
definition of ``technology licensing'' in proposed Sec.  1.50-2(b)(11) 
is overly broad and could include general business operations, 
nondisclosure agreements, the discussion of products or technology, 
patents, trade secrets, know-how, intraparty transfer agreements, or 
arrangements operating under current export control authorization. The 
commenters requested that the final regulations narrow the definition 
to focus on the actual licensing of the technology or products that are 
subject to restrictions rather than just the discussion of products or 
technology. One commenter suggested that taxpayers and their affiliate 
will be required to review and possibly terminate pre-existing 
agreements based on the proposed definition.
    Removing the prohibition on joint research or technology licensing 
agreements with a foreign entity of concern would allow a taxpayer to 
circumvent section 50(a)(3) and (a)(6)(D) through the use of joint 
research or technology licensing transactions. However, the Treasury 
Department and the IRS agree with the commenter's suggestions 
concerning the scope of the term ``technology licensing'' in the March 
2023 proposed regulations given that the definition of ``technology 
licensing'' in the Commerce Final Rule was modified, consistent with 
these comments. Accordingly, the final regulations provide that the 
terms ``joint research'' and ``technology licensing'' have the same 
meaning as provided in 15 CFR 231.105 and 231.120, respectively.
    One commenter stated that the affiliated group rule under proposed 
Sec.  1.50-2(b)(10)(v) (establishing a 50 percent ownership test) is 
inconsistent with the reference in 15 U.S.C. 4652(a)(6)(C)(iii) to 
section 1504(a) of the Code. The Treasury Department and the IRS agree 
that the affiliated group rule is inconsistent with the reference in 15 
U.S.C. 4652(a)(6)(C)(iii) to section 1504(a) and for that reason, the 
affiliate group rule has been removed from the final regulations.
E. Existing Facility
    Commenters requested that the definition of an ``existing 
facility'' in proposed Sec.  1.50-2(b)(5) be revised in the final 
regulations to clarify whether the term includes a facility undergoing 
production ramp-up and thus, on the date on which qualified property 
was placed in service, was not operating at full production level for 
which it was designed. One commenter requested that the final 
regulations clarify that upgrades and productivity improvements made to 
a facility during the ordinary course of business operations is not 
considered a significant renovation and the date for measuring 
semiconductor manufacturing capacity is the placed in service date as 
intended by the statute. The Treasury Department and the IRS have 
determined that only facilities built, equipped, and operating prior to 
a taxpayer placing in service qualified property as defined in section 
48D(b)(2) and Sec.  1.48D-3 are considered to be existing facilities. A 
facility that undergoes significant renovations as defined in Sec.  
1.50-2(b)(9) of the final regulations would no longer qualify as an 
existing facility. The final regulations do not require the existing 
facility to be operating at the semiconductor manufacturing capacity 
for which it was designed, as required by the March 2023 proposed 
regulations. As noted in section VII.G of this Summary of Comments and 
Explanation of Revisions, the final regulations modify the definition 
of a ``significant renovation'' to mean building new cleanroom space or 
adding a production line or other physical space to an existing 
facility, such that upgrades and productivity improvements made to a 
facility during the ordinary course of business operations would not be 
considered a significant renovation.
F. Material Expansion
    Commenters requested that the definition of ``material expansion'' 
in proposed Sec.  1.50-2(b)(7) be modified in the final regulations to 
allow for an increase of semiconductor manufacturing capacity greater 
than 5 percent. One commenter requested that the 5 percent increase in 
capacity be measured on an average basis over the course of a year. 
Commenters also requested that the final regulations provide a finite 
list specifying business activities, products and processes that 
constitute a material expansion of semiconductor manufacturing. The 
Treasury Department and the IRS have determined that raising the five 
percent threshold for allowable material expansions or measuring the 
five percent increase capacity on average over the course of a year 
would undermine the objective of the recapture rule under section 
50(a)(3). The Treasury Department and the IRS have further determined 
that specifying business activities, products and process that 
constitute a material expansion of semiconductor manufacturing is 
consistent with the statute. Accordingly, the final regulations retain 
the five percent threshold and clarify that the increase in capacity is 
due to the addition of a cleanroom, production line or other physical 
space, or series of such additions during the applicable period. The 
final regulations clarify that the term ``material expansion'' includes 
any construction of a new facility for semiconductor manufacturing.
G. Significant Renovations and Semiconductor Manufacturing Capacity
    Several commenters requested that the scope of the definition of 
``significant renovation'' in proposed Sec.  1.50-2(b)(9) be modified 
to encompass only new cleanroom construction, production space, 
increase in the square footage of an existing facility by a specified 
percentage, or actual output of the facility. The commenters argued 
that the March 2023 proposed regulations unnecessarily narrowed the 
scope of the exemption for legacy semiconductors as enacted, noting 
that the CHIPS Act does not include the term ``significant 
renovation.'' Some commenters also requested that the ten percent 
ceiling for increasing semiconductor manufacturing capacity be 
increased to fifteen percent. The commenters further requested that the 
final regulations clarify that an operating facility that has not yet 
reached its full capacity will be considered an ``existing facility.'' 
The Treasury Department and the IRS have

[[Page 84748]]

considered the commenters' suggestions and have determined that the 
``significant renovation'' and ten percent threshold provisions are 
necessary to prevent a taxpayer from circumventing the recapture 
provisions of section 50(a)(3)(A) by engaging in a ``significant 
renovation'' of an ``existing facility.'' However, the Treasury 
Department and the IRS agree with the commenters that clarification is 
needed concerning what is the scope of a ``significant renovation.'' 
Accordingly, the final regulations retain the rules for a ``significant 
renovation'' of an existing facility but clarify that a ``significant 
renovation'' means building new cleanroom space or adding a production 
line or other physical space to an existing facility that, in the 
aggregate during the applicable period, increases semiconductor 
manufacturing capacity by 10 percent or more.
    One commenter requested that the final regulations clarify that, 
with respect to a specific facility, a taxpayer's semiconductor 
manufacturing capacity is measured by taking into account both (i) the 
taxpayer's own semiconductor manufacturing capacity in that facility, 
and (ii) any semiconductor manufacturing capacity of another party to 
the extent the other party's operations are carried on for the benefit 
of the taxpayer. The commenter noted that semiconductor fabrication 
companies commonly outsource assembly and test work to third parties 
referred to as outsourced semiconductor assembly and test providers, or 
``OSATs.'' The commenter further noted that semiconductor manufacturer 
may lease a portion of a facility in a foreign country of concern to an 
OSAT that performs assembly and test work for the benefit of the 
taxpayer within the same facility. One commenter, included as an 
attachment to its comments on the March 2023 proposed regulations, a 
letter that the commenter sent to the Department of Commerce concerning 
the Commerce Proposed Rule. The commenter requested that the Commerce 
Final Rule provide that semiconductor manufacturing capacity be 
measured in wafer starts per year, as opposed to wafer starts per 
month.
    Consistent with the Commerce Final Rule in 15 CFR 231.117, the 
final regulations provide that semiconductor manufacturing capacity is 
appropriately measured in wafer starts per month not including OSAT 
production. Section 1.50-2(b)(8) of the final regulations include a 
rule for determining ``semiconductor manufacturing capacity'' in the 
case of semiconductor wafer production. The final regulations clarify 
that wafer production is measured in starts per month and in the case 
of a semiconductor wafer production facility that includes the 
processes of growing single-crystal ingots and boules, wafer slicing, 
etching and polishing, cleaning, epitaxial deposition, and metrology, 
manufacturing capacity is measured in wafer starts per month.
H. Technology or Product That Raises National Security Concerns
    One commenter requested that the final regulations exclude from the 
definition of semiconductors critical to national security, any 
semiconductors that reduce carbon emissions because they enhance rather 
than reduce U.S. national security (specifically SiC power 
semiconductors). The Treasury Department and the IRS appreciate that 
the performance advantages offered by compound semiconductors over 
silicon semiconductors, such as wider bandgap, lower operating 
voltages, and higher electron mobility, are vital to many military 
applications. Moreover, the governments of some foreign countries of 
concern have identified compound semiconductors as a strategic emerging 
industry. They have set ambitious goals for acquisition and development 
of compound semiconductor technology and strive to become global 
leaders in the industry. However, while exports of certain 
semiconductors are not subject to national security or regional 
stability export controls, joint research, or technology licensing 
involving these products with foreign entities of concern can 
nevertheless pose a significant risk to national security. Taxpayers 
that claim a section 48D credit should not further that risk. For these 
reasons, the Treasury Department and the IRS decline to adopt the 
commenter's request.
I. Exception From the Definition of Applicable Transaction for the 
Manufacturing of Legacy Semiconductors
    Several commenters requested that the final regulations 
specifically include assembly test manufacturing (ATM) that uses non-3D 
packaging in the definition of legacy semiconductor. The commenters 
argued that given that ATM is generally a back-end operation, with 
billions of pre-existing investments, it is appropriate for these 
operations to be viewed under the definition of legacy unless they 
specifically perform 3D integration. The Treasury Department and the 
IRS agree with the commenters' suggestion. Accordingly, the final 
regulations, consistent with 15 CFR 231.107, clarify that only 
semiconductors utilizing advanced 3D integration packaging such as by 
directly attaching one or more die or wafer, through silicon vias (TSV) 
or through mold vias (TMV), or other advanced methods are not 
considered to be legacy semiconductors.
    Commenters requested that the final regulations conform the example 
of memory semiconductor under proposed Sec.  1.50-2(c)(2)(ii) to 
current export controls. Section 50(a)(6)(D)(ii) provides that the 
exception for legacy semiconductors applies as defined in section 
9902(a)(6) of the William M. (Mac) Thornberry National Defense 
Authorization Act for Fiscal Year 2021, as amended by section 103 of 
the CHIPS Act. The example of a memory semiconductor in proposed Sec.  
1.50-2(c)(2)(ii) is consisted with the statutory definition of a legacy 
semiconductor. Accordingly, the Treasury Department and the IRS decline 
to revise the example of a memory semiconductor in the final 
regulations.
    Commenters requested that what is considered a leading or 
``legacy'' semiconductor should be adjusted over the course of a 10-
year period and should be connected to authorization permitted under 
export control licensing. Proposed Sec.  1.50-2(c)(2)(iii) includes 
among the definition of a ``legacy semiconductor'' a semiconductor 
identified by the Secretary of Commerce in a public notice issued under 
15 U.S.C. 4652(a)(6)(A)(ii). The Secretary of Commerce is required, 
pursuant to 15 U.S.C. 4652(a)(6)(A)(ii), to update the definition of 
``legacy semiconductor'' on a regular basis and at least every two 
years. Thus, the definition of what is considered a leading or legacy 
semiconductor will be adjusted over the course of a 10-year period, as 
the Secretary of Commerce deems appropriate as reflected in Sec.  1.50-
2(c)(2) of the final regulation.
    One commenter requested that the final regulations provide that the 
exclusion of any technology from the definition of ``legacy 
semiconductor'' in the future pursuant to 15 U.S.C. 4652(a)(6)(A)(ii) 
be applied only prospectively and not to any transactions previously 
entered into. Section 50(a)(6)(D)(ii) provides that the exception for 
legacy semiconductors applies as defined in section 9902(a)(6) of the 
William M. (Mac) Thornberry National Defense Authorization Act for 
Fiscal Year 2021, as amended by section 103 of the CHIPS Act. Section 
103(b) of the CHIPS Act added 15 U.S.C. 4652(a)(6)(A)(ii) and requires 
the Secretary of Commerce, after public notice and an opportunity for 
comment and if applicable and necessary, to issue

[[Page 84749]]

a public notice identifying any additional semiconductor technology 
included in the meaning of the term ``legacy semiconductor'' on a 
regular basis, and at least every two years. The commenter's 
recommendation to apply only prospectively any technology excluded from 
the definition of ``legacy semiconductor'' by the Secretary of Commerce 
pursuant to 15 U.S.C. 4652(a)(6)(A)(ii) is beyond the application of 
sections 48D and 50 and the section 48D regulations. For that reason, 
the Treasury Department and the IRS decline to adopt the commenter's 
recommendation. One commenter requested that the final regulations 
modify the definition of legacy semiconductors that is of 28 nanometer 
generation or older under proposed Sec.  1.50-2(c)(2)(i) by deleting 
the reference to gate length and including technologies using the 
planar transistor architecture that should be considered the same as 28 
nanometer generation technology. The Treasury Department and the IRS 
decline to adopt the commenter's recommendation. The proposed 
definition of legacy semiconductor with respect to 28 nanometer 
generation technology is consistent with the CHIPS Act and accurately 
captures the definition of legacy semiconductors. The proposed 
definition also prevents a company from using or creating a derivation 
of their existing 28 nanometer technology for use in a foreign country 
of concern that is inconsistent with the kind of material expansion of 
semiconductor manufacturing the CHIPS Act seeks to constrain.
    Several commenters requested that the final regulations narrow the 
exception under proposed Sec.  1.50-2(c)(3)(iii) to ``advanced'' 3D 
packaging techniques, so that TSV and TMV are excluded from the 
definition of legacy semiconductor. In coordination with the Department 
of Commerce and the Department of Defense, the Treasury Department and 
the IRS have incorporated this recommendation in the final regulations. 
The Commerce Final Rule clarifies the meaning of the term ``legacy 
semiconductor'' with respect to a semiconductor wafer facility, a 
semiconductor fabrication facility, and a semiconductor packaging 
facility. Again, in coordination with the Department of Commerce and 
the Department of Defense, the Treasury Department and the IRS have 
incorporated this clarification in the final regulations.
    The March 2023 proposed regulations provided a definition of 
``legacy semiconductor'' that was identical to the definition in 
Commerce Proposed Rule. Consistent with section 50(a)(6)(D)(ii) of the 
Code and section 9902(a)(6) of the William M. (Mac) Thornberry National 
Defense Authorization Act for Fiscal Year 2021, as amended by section 
103 of the CHIPS Act, the final regulations define the term ``legacy 
semiconductor'' as having the same meaning as that term is defined in 
the Commerce Final Rule, 15 CFR 231.107.
J. Standards for Determining the Satisfaction of the Commissioner
    Commenters requested that the final regulations include standards 
for establishing what is considered to be to ``the satisfaction of the 
Secretary'' or ``the satisfaction of the Commissioner'' for purposes of 
section 50(a)(3)(B) and proposed Sec.  1.50-2(a)(2), respectively. 
Commenters suggested that the final regulations address how a taxpayer 
may demonstrate cessation or abandonment of a project, and further 
suggested that those actions could include proof of cancelled 
contracts, the withdrawal or cancellation of work permits, a board 
resolution that expressly cancels the applicable transaction, or the 
issuance of a public statement that expressly cancels the applicable 
transaction. Commenters also suggested that final regulations include a 
non-exhaustive list of documents that can be used to establish 
cessation or abandonment of a project. The Treasury Department and the 
IRS have determined that the rules suggested by the commenters, as well 
as similar provisions, would likely cause additional uncertainty 
regarding the scope of the term ``to the satisfaction of the 
Commissioner'' due to its inherently factual nature. As a result, the 
final regulations do not incorporate the commenters recommendations.
K. Records Retention
    The Treasury Department and the IRS requested comments on the 
ability of applicable taxpayers to comply with potential record keeping 
requirements in addition to those required by current law and on what 
specific procedures should be considered to ensure that the IRS has 
sufficient information to determine whether an applicable taxpayer 
engages in an applicable transaction within the meaning of section 
50(a)(3) and proposed Sec.  1.50-2. Several commenters suggested that 
any record retention should be limited to records obtained in the 
ordinary course of business. Another commenter suggested the IRS could 
include a form or attachment to annual tax returns with basic questions 
for the IRS to ascertain whether an applicable taxpayer may have 
engaged in an applicable transaction during the taxable year. Section 
50(a)(3)(C) provides that the Secretary shall issue regulations or 
other guidance as the Secretary determines necessary or appropriate to 
carry out the purposes of section 50(a)(3), including regulations or 
other guidance which provides for requirements for recordkeeping or 
information reporting for purposes of administering the requirements of 
section 50(a)(3). The Treasury Department and the IRS have determined 
that records retained in a taxpayer's ordinary course of business, and 
as required under current applicable periods of limitations under 
section 6501 of the Code on assessment and collection of tax under 
chapter 1 with respect to the applicable taxpayer's return filed for 
the taxable year that includes the close of the 10-year period 
beginning on the date such taxpayer placed in service investment credit 
property that is eligible for the section 48D credit, are sufficient. 
Accordingly, the final regulations do not incorporate any additional 
record keeping requirements.
    Some commenters requested that the final regulations provide for 
more of an alignment of the section 48D credit requirements and the 
Department of Commerce grant regulatory requirements including 
standardizing the same 10-year recapture or clawback period and 
streamline reporting and recordkeeping requirements. The commenters 
also requested that responsibility for administering the various 
overlapping rules and taxpayer notification requirements be delegated 
to a single agency or an interagency body. Section 50(a)(3) provides 
for recapture of the section 48D credit if there is an applicable 
transaction by an applicable taxpayer before the close of the ten-year 
period beginning on the date such property placed in service. Pursuant 
to 15 U.S.C. 4652(a)(6)(C)(i), the Commerce Final Rule, 15 CFR 231.202, 
provides that the 10-year period for the Expansion Clawback begins on 
the date of the award of Federal financial assistance under 15 U.S.C. 
4652. The preamble to the Commerce Final Rule clarifies that the 
applicable term for the technology clawback (15 CFR 231.203) is defined 
in the relevant award documents. Pursuant to the relevant statutes, the 
recapture period for a section 48D credit begins on the date the 
qualified property is placed in service, and the Expansion Clawback and 
technology clawback periods begin on the date of the award of financial 
assistance and as defined in the award documents, respectively. For 
this

[[Page 84750]]

reason, aligning the recapture period with the clawback period would be 
inconsistent with section 50(a)(3)(A).
    Section 50(a)(6)(D)(i) requires that the Secretary (in coordination 
with the Secretary of Commerce and the Secretary of Defense) define the 
term ``significant transaction'' for purposes of section 50. Consistent 
with the statutory directive in section 50(a)(6)(D)(i), Sec.  1.50-
2(b)(10) of the final regulations defines the term ``significant 
transaction'' as determined by the Treasury Department and the IRS in 
coordination with the Department of Commerce and the Department of 
Defense. Treasury regulations that otherwise would align or streamline 
the reporting and recordkeeping requirements or delegate the 
administrative functions to a single agency or interagency body are 
beyond the scope of the statute.
L. Private Letter Rulings
    Commenters requested that the IRS grant private letter rulings or 
other determinations on the beginning of construction, effective date, 
costs, and or other matters relevant to section 48D. Consistent with 
guidance published in the Internal Revenue Bulletin, the IRS ordinarily 
will not issue private letter rulings to a taxpayer regarding the 
beginning of construction requirement under section 48D with respect to 
property placed in service after these final regulations are published 
in the Federal Register. In addition, the IRS may decline to issue a 
letter ruling or a determination letter when appropriate in the 
interest of sound tax administration, including due to resource 
constraints, or on other grounds whenever warranted by the facts or 
circumstances of a particular case.

Applicability Date

    The final regulations set forth in Sec. Sec.  1.48D-1 through 
1.48D-5, and 1.50-2 apply to property that is placed in service after 
December 31, 2022, and during a taxable year ending on or after October 
23, 2024.

Special Analyses

I. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
generally requires that a Federal agency obtain the approval of the 
Office of Management and Budget (OMB) before collecting information 
from the public, whether such collection of information is mandatory, 
voluntary, or required to obtain or retain a benefit. A Federal agency 
may not conduct or sponsor, and a person is not required to respond to, 
a collection of information unless the collection of information 
displays a valid control number.
    This regulation mentions elections that are made in accordance with 
section 48D(d)(1) and (d)(2) of the Code and Sec.  1.46-5 of the 
Treasury Regulations. These elections are made with Form 3468, 
Investment Credit, which are already approved by the OMB under 1545-
0074 for individual/sole proprietor filers, 1545-0123 for business 
filers, and 1545-0155 for trust and estate filers. This regulation is 
not changing those election requirements; and is not telling taxpayers 
to make these elections but explaining their treatment for the credit 
if they have made these elections.
    This regulation also describes recapture of the advanced 
manufacturing investment credit in the case of certain expansions, as 
detailed in Sec.  1.50-2(a). The reporting of the recapture event will 
still be required to be reported using Form 4255, Recapture of 
Investment Credit. This form is approved under OMB control numbers 
1545-0074 for individuals/sole proprietors, 1545-0123 for business 
entities, and 1545-0166 for trust and estate filers. The final 
regulation is not changing or creating new collection requirements not 
already approved by OMB on Form 4255.
    This regulation includes recordkeeping requirements outlined in 
Sec.  1.50-2 for recording transactions, investments, facilities 
information, and agreements with the Department of Commerce. The IRS 
expects that these records are usual and customary business records; 
however, the taxpayers will need to keep these records as long as they 
are admissible by the statute, typically for 10 years. Therefore, the 
IRS is considering these to be general tax records under Sec.  1.6001-
1. These records are required for the IRS to validate that the 
taxpayers have met the regulatory requirements; and are required as 
proof that the taxpayer has not engaged in an applicable transaction or 
that the taxpayer has ceased or abandoned the applicable transaction 
within 45 days of a determination and notice by the Commissioner, 
pursuant to section 50(a)(3). For PRA purposes, general tax records are 
already approved by OMB under 1545-0074 for individual/sole proprietor 
filers, 1545-0123 for business filers, and 1545-0092 for trust and 
estate filers.

II. Regulatory Flexibility Act

    The Treasury Department and the IRS determined the rule will not 
have a significant economic impact on a substantial number of small 
entities. Although the rules affect small entities, data are not 
readily available about the number of taxpayers affected. Section 48D 
affects the semiconductor manufacturing industry, and specifically, 
individuals and entities that make qualified investments in facilities 
engaged in the manufacturing of semiconductors and semiconductor 
manufacturing equipment. The economic impact of these regulations is 
not likely to be significant, because the regulations substantially 
incorporate statutory changes by the CHIPS Act in establishing section 
48D and amending section 50(a). The regulations will also make it 
easier for taxpayers to comply with section 48D and the changes to 
section 50(a). Pursuant to the RFA (5 U.S.C. chapter 6), the Secretary 
hereby certifies that these regulations will not have a significant 
economic impact on a substantial number of small entities.
    Pursuant to section 7805(f), the notice of proposed rulemaking has 
been submitted to the Chief Counsel for the Office of Advocacy of the 
Small Business Administration for comment on its impact on small 
business. The Chief Counsel for the Office of Advocacy of the SBA did 
not provide any comments on the March 2023 proposed regulations.

III. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million (updated annually for inflation). This rule 
does not include any Federal mandate that may result in expenditures by 
State, local, or Tribal governments, or by the private sector in excess 
of that threshold.

IV. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. This rule does not have federalism 
implications and does not impose substantial direct compliance costs on 
State and local governments or preempt State law within the meaning of 
the Executive order.

[[Page 84751]]

V. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

VI. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs has designated this 
rule as a major rule as defined by 5 U.S.C. 804(2).

Statement of Availability of IRS Documents

    Guidance cited in this preamble is published in the Internal 
Revenue Bulletin and is available from the Superintendent of Documents, 
U.S. Government Publishing Office, Washington, DC 20402, or by visiting 
the IRS website at https://www.irs.gov.

Drafting Information

    The principal author of these final regulations is Lani Sinfield, 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries), IRS. However, other personnel from the Treasury Department 
and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, the 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry, in numerical order, for Sec.  1.50-2 to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.50-2 also issued under 26 U.S.C. 50(a)(3)(C), and 
50(a)(6).
* * * * *

0
Par. 2. Section 1.48D-0 is revised to read as follows:


Sec.  1.48D-0   Table of contents.

    This section lists the table of contents for Sec. Sec.  1.48D-1 
through 1.48D-6.

Sec.  1.48D-1 Advanced manufacturing investment credit determined.

    (a) Overview.
    (b) Determination of credit.
    (c) Coordination with section 47.
    (1) In general.
    (2) Example.
    (d) Applicability date.

Sec.  1.48D-2 Definitions.

    (a) In general.
    (b) Applicable transaction.
    (c) Basis.
    (1) In general.
    (2) Transition rule.
    (d) Beginning of construction.
    (e) Eligible taxpayer.
    (f) Foreign entities.
    (1) Foreign entity.
    (2) Foreign entity of concern.
    (g) Manufacturing of semiconductors.
    (h) Manufacturing of semiconductor manufacturing equipment.
    (i) Placed in service.
    (j) Qualified investment.
    (1) In general.
    (2) Special rules for certain passthrough entities.
    (i) Partnership.
    (ii) S corporation.
    (iii) Estate or trust.
    (3) Qualified progress expenditures election.
    (i) In general.
    (ii) Special rules for certain passthrough entities.
    (4) Examples.
    (i) Example 1.
    (ii) Example 2.
    (k) Section 48D credit.
    (l) Section 48D regulations.
    (m) Semiconductor.
    (n) Semiconductor manufacturing.
    (1) Semiconductor wafer production.
    (2) Semiconductor fabrication.
    (3) Semiconductor packaging.
    (4) Assembly.
    (5) Testing.
    (6) Advanced packaging.
    (o) Semiconductor manufacturing equipment.
    (p) Statutory references.
    (1) Chapter 1.
    (2) Code.
    (3) Subtitle A.
    (q) Applicability date.

Sec.  1.48D-3 Qualified property.

    (a) In general.
    (b) Qualified property.
    (c) Tangible depreciable property.
    (1) In general.
    (2) Exception.
    (3) Buildings or portions of a building not excluded by section 
48D(b)(2)(B)(ii).
    (d) Constructed, reconstructed, or erected by the taxpayer.
    (e) Original use.
    (1) In general.
    (2) Treatment of inventory.
    (f) Part of an advanced manufacturing facility.
    (1) In general.
    (2) Property that is not located or co-located at an advanced 
manufacturing facility or on a contiguous piece of land to the 
advanced manufacturing facility.
    (g) Integral to the operation of an advanced manufacturing 
facility.
    (1) In general.
    (2) Vertically integrated manufacturers.
    (3) Specific examples of integral property.
    (4) Research or storage facilities.
    (5) Examples.
    (i) Example 1.
    (ii) Example 2.
    (h) Applicability date.

Sec.  1.48D-4 Advanced manufacturing facility of an eligible 
taxpayer.

    (a) In general.
    (b) Advanced manufacturing facility.
    (c) Primary purpose.
    (1) In general.
    (2) No primary purpose.
    (3) Examples.
    (i) Example 1: Primary purpose; in general
    (ii) Example 2: Primary purpose; semiconductor wafer production.
    (iii) Example 3: Primary purpose; vertically integrated 
manufacturer.
    (iv) Example 4: No primary purpose; vertically integrated 
manufacturer.
    (d) Applicability date.

Sec.  1.48D-5 Beginning of construction.

    (a) Termination of credit.
    (1) In general.
    (2) Property.
    (3) Single advanced manufacturing facility project.
    (i) In general.
    (ii) Related taxpayers.
    (A) Definition.
    (B) Related taxpayer rule.
    (iii) Example.
    (iv) Timing of single advanced manufacturing facility project 
determination.
    (v) Disaggregation.
    (vi) Example.
    (b) Beginning of construction.
    (1) In general.
    (2) Continuity requirement.
    (c) Physical work test.
    (1) In general.
    (2) Physical work of significant nature.
    (i) In general.
    (ii) Exceptions.
    (d) Five percent safe harbor.
    (1) In general.
    (2) Costs.
    (3) Cost overruns.
    (i) Single advanced manufacturing facility project.
    (ii) Example.
    (iii) Single property.
    (iv) Example.
    (e) Continuity requirement.
    (1) In general.
    (2) Continuous construction.
    (3) Continuous efforts.
    (4) Excusable disruptions to continuous construction and 
continuous efforts tests.
    (i) In general.
    (ii) Effect of excusable disruptions on continuity safe harbor.
    (iii) Non-exclusive list of construction disruptions.
    (5) Timing of excusable disruption determination.
    (6) Continuity safe harbor.
    (i) In general.
    (ii) Example.
    (f) Applicability date.

Sec.  1.48D-6 Elective payment election.

    (a) Elective payment election.
    (1) In general.
    (2) Partnerships and S corporations.
    (3) Irrevocable.
    (b) Pre-filing registration required.

[[Page 84752]]

    (1) In general.
    (2) Manner of registration.
    (3) Members of a consolidated group.
    (4) Timing of pre-filing registration.
    (5) Each qualified investment in an advanced manufacturing 
facility must have its own registration number.
    (6) Information required to complete the pre-filing registration 
process.
    (7) Registration number.
    (i) In general.
    (ii) Registration number is only valid for one year.
    (iii) Renewing registration numbers.
    (iv) Amendment of previously submitted registration information 
if a change occurs before the registration number is used.
    (v) Registration number is required to be reported on the return 
for the taxable year of the elective payment election.
    (c) Time and manner of election.
    (1) In general.
    (2) Limitations.
    (d) Special rules for partnerships and S corporations.
    (1) In general.
    (2) Election.
    (i) Time and manner of election.
    (ii) Effect of election.
    (iii) Coordination with sections 705 and 1366.
    (iv) Partner's distributive share.
    (A) In general.
    (B) Interim rule.
    (C) Partnership requirements.
    (v) S corporation shareholder's pro-rata share.
    (vi) Timing of tax exempt income.
    (3) Disregarded entity ownership.
    (4) Electing partnerships in tiered structures.
    (i) In general.
    (ii) Electing partnerships in tiered structures; interim rule.
    (5) Character of tax exempt income.
    (6) Determination of amount of the section 48D credit.
    (i) In general.
    (ii) Application of section 49 at-risk rules to determination of 
section 48D credit for partnerships and S corporations.
    (iii) Changes in at-risk amounts under section 49 at partner or 
shareholder level.
    (7) Partnerships subject to subchapter C of chapter 63 of the 
Code.
    (8) Example.
    (e) Denial of double benefit.
    (1) In general.
    (2) Application of the denial of double benefit rule.
    (3) Use of the section 48D credit for other purposes.
    (4) Examples.
    (i) Example 1.
    (ii) Example 2.
    (iii) Example 3.
    (iv) Example 4.
    (f) Excessive payment.
    (1) In general.
    (2) Reasonable cause.
    (3) Excessive payment defined.
    (4) Example.
    (g) Basis reduction and recapture.
    (1) In general.
    (2) Basis adjustment.
    (i) In general.
    (ii) Basis adjustment by partnership or S corporation.
    (iii) Basis adjustment of partners and S corporation 
shareholders.
    (3) Recapture reporting.
    (h) Applicability dates.
    (1) In general.
    (2) Prior taxable years.

0
Par. 3. Sections 1.48D-1 through 1.48D-5 are added to read as follows:
Sec.
* * * * *
1.48D-1 Advanced manufacturing investment credit determined.
1.48D-2 Definitions.
1.48D-3 Qualified property.
1.48D-4 Advanced manufacturing facility of an eligible taxpayer.
1.48D-5 Beginning of construction.
* * * * *


Sec.  1.48D-1   Advanced manufacturing investment credit determined.

    (a) Overview. For purposes of section 46 of the Code, the amount of 
the advanced manufacturing investment credit under section 48D of the 
Code determined for any taxable year is the amount determined under 
section 48D and this section and Sec. Sec.  1.48D-2 through 1.48D-6 and 
1.50-2 (the section 48D regulations) (subject to any applicable 
provisions of the Code that may limit the amount determined under 
section 48D), for such taxable year with respect to any advanced 
manufacturing facility of an eligible taxpayer. Paragraph (b) of this 
section provides the general rules for determining the amount of a 
taxpayer's section 48D credit for a taxable year. Paragraph (c) of this 
section provides rules coordinating the section 48D credit with the 
rules of section 47 of the Code (relating to the rehabilitation 
credit). Section 1.48D-2 provides definitions that apply for purposes 
of section 48D and the section 48D regulations. Section 1.48D-3 
provides rules relating to the definition of qualified property for 
purposes of the section 48D credit. Section 1.48D-4 provides rules 
relating to the definition of an advanced manufacturing facility of an 
eligible taxpayer for purposes of the section 48D credit. Section 
1.48D-5 provides rules regarding the beginning of construction of 
property for purposes of the section 48D credit. Section 1.48D-6 
provides rules related to the elective payment election of the section 
48D credit. See Sec.  1.50-2 for additional rules under section 
50(a)(3) and (6) of the Code relating to applicable transactions that 
result in the recapture of section 48D credits.
    (b) Determination of credit. Subject to any applicable sections of 
the Code that may limit the credit determined under section 48D, the 
section 48D credit for any taxable year of an eligible taxpayer with 
respect to any advanced manufacturing facility is an amount equal to 25 
percent of the taxpayer's qualified investment for the taxable year 
with respect to that advanced manufacturing facility. A section 48D 
credit is available only with respect to qualified property that a 
taxpayer places in service after December 31, 2022, and, for any 
qualified property the construction of which began prior to January 1, 
2023, only to the extent of the basis of that property attributable to 
the construction, reconstruction, or erection of that property 
occurring after August 9, 2022. Under section 48D(e), no section 48D 
credit is allowed to a taxpayer for placing qualified property in 
service in any taxable year if the beginning of construction of that 
qualified property as determined under Sec.  1.48D-5 begins after 
December 31, 2026 (the date specified in section 48D(e)).
    (c) Coordination with section 47--(1) In general. The qualified 
investment with respect to any advanced manufacturing facility of an 
eligible taxpayer for any taxable year does not include that portion of 
the basis of any property that is attributable to qualified 
rehabilitation expenditures, as defined in section 47(c)(2) and Sec.  
1.48-12(c), with respect to a qualified rehabilitated building, as 
defined in section 47(c)(1) and Sec.  1.48-12(b).
    (2) Example: Coordination with section 47. X Corp, a calendar-year 
C corporation, owns Building A, a certified historic structure. X 
Corp's adjusted basis in Building A is $100,000. Between August 1, 
2024, and October 31, 2024, X Corp incurs $1 million to reconstruct, 
within the meaning of section 48D(b)(2)(A)(iii)(I) and Sec.  1.48-
12(b)(2)(iv), Building A. X Corp places the reconstructed Building A, a 
qualified rehabilitated building, in service on November 15, 2024. Of 
the $1 million of capitalized expenditures incurred to reconstruct 
Building A (all of which would meet the definition of qualified 
investment), $250,000 also meets the definition of qualified 
rehabilitation expenditures (QREs). As such, X Corp's qualified 
investment in Building A is $750,000 ($1 million-$250,000). X Corp's 
qualified investment in Building A remains $750,000 even if X Corp does 
not determine a rehabilitation credit with respect to the $250,000 of 
QREs.
    (d) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or after October 23, 2024.

[[Page 84753]]

Sec.  1.48D-2   Definitions.

    (a) In general. The definitions in paragraphs (b) through (o) of 
this section apply for purposes of sections 48D and 50 of the Code and 
Sec.  1.48D-1, this section and Sec. Sec.  1.48D-3 through 1.48D-6 and 
1.50-2 (the section 48D regulations).
    (b) Applicable transaction. The term applicable transaction has the 
meaning provided in section 50(a)(6) and Sec.  1.50-2.
    (c) Basis--(1) In general. With respect to any qualified property, 
the term basis has the same meaning as provided in Sec.  1.46-3(c). 
Thus, the basis of the qualified property generally is determined in 
accordance with the general rules of subtitle A for determining the 
basis of property (see subtitle A, subchapter O, part II of the Code). 
As such, the basis of qualified property would generally be the cost of 
that qualified property (see section 1012 of the Code) unreduced by any 
adjustments to basis and would include all items properly included by 
the taxpayer in the depreciable basis of the qualified property.
    (2) Transition rule. For property the construction of which began 
prior to January 1, 2023, and is placed in service after December 31, 
2022, the portion of the basis of such property attributable to 
construction, reconstruction, or erection after August 9, 2022, must be 
allocated using any reasonable method, including by applying the 
principles of section 461 of the Code. Rules similar to the rules in 
Sec. Sec.  1.48-2(b)(2), 1.48-11(b)(5)(i), and 1.48-12(c)(1) are 
applicable.
    (d) Beginning of construction. The term beginning of construction 
has the meaning provided in Sec.  1.48D-5.
    (e) Eligible taxpayer. The term eligible taxpayer means any 
taxpayer that--
    (1) Is not a foreign entity of concern; and
    (2) Has not made an applicable transaction during the taxable year.
    (f) Foreign entities--(1) Foreign entity. The term foreign entity 
has the same meaning as provided in 15 CFR 231.103.
    (2) Foreign entity of concern. The term foreign entity of concern 
has the same meaning as provided in 15 CFR 231.104.
    (g) Manufacturing of semiconductors. The term manufacturing of 
semiconductors and the term semiconductor manufacturing are synonymous.
    (h) Manufacturing of semiconductor manufacturing equipment. The 
term manufacturing of semiconductor manufacturing equipment means the 
physical production (in a manufacturing facility) of semiconductor 
manufacturing equipment, which is used by an advanced manufacturing 
facility engaged in the manufacturing of semiconductors as defined in 
paragraph (g) of this section.
    (i) Placed in service. The term placed in service has the same 
meaning as provided in Sec.  1.46-3(d).
    (j) Qualified investment--(1) In general. Except as provided in 
paragraph (j)(2) and (3) of this section, the term qualified investment 
with respect to an advanced manufacturing facility means, for any 
taxable year, the basis of any qualified property that is part of an 
advanced manufacturing facility and placed in service by the taxpayer 
during the taxable year.
    (2) Special rules for certain passthrough entities. In the case of 
any qualified property that is part of an advanced manufacturing 
facility of an eligible taxpayer and placed in service by an entity 
described in paragraphs (j)(2)(i) through (iii) of this section during 
a taxable year, the rules of this paragraph (j)(2) apply to determine 
the qualified investment for the taxable year with respect to the 
advanced manufacturing facility.
    (i) Partnership. In the case of a partnership that places in 
service qualified property that is part of an advanced manufacturing 
facility of an eligible taxpayer, each partner in the partnership must 
take into account separately the partner's share of the basis of the 
qualified property placed in service by the partnership during the 
taxable year as provided in Sec.  1.46-3(f).
    (ii) S corporation. The basis of qualified property that is part of 
an advanced manufacturing facility of an eligible taxpayer and placed 
in service during the taxable year by an S corporation (as defined in 
section 1361(a) of the Code) must be apportioned pro rata among the S 
corporation's shareholders on the last day of the S corporation's 
taxable year as provided in section 1366.
    (iii) Estate or trust. The basis of qualified property that is part 
of an advanced manufacturing facility of an eligible taxpayer and 
placed in service during the taxable year by an estate or trust must be 
apportioned among the estate or trust and its beneficiaries on the 
basis of the income of the estate or trust allocable to each for that 
taxable year.
    (3) Qualified progress expenditures election--(i) In general. A 
taxpayer may elect, as provided in Sec.  1.46-5, to increase the 
qualified investment with respect to any advanced manufacturing 
facility of an eligible taxpayer for the taxable year, by any qualified 
progress expenditures made after August 9, 2022.
    (ii) Special rules for certain passthrough entities. 
Notwithstanding the provisions of Sec.  1.46-5, relating to elections 
of progress expenditure property being constructed by or for a 
partnership or S corporation, the rules of Sec.  1.46-5(o)(1) and (p) 
do not apply to prohibit a partnership or S corporation from making a 
progress expenditure election under Sec.  1.46-5 with respect to 
qualified property if the partnership or S corporation intends to make 
an elective payment election under section 48D(d) and Sec.  1.48D-6 
with respect to a section 48D credit determined with respect to such 
qualified property.
    (4) Examples. The provisions of this paragraph (j) are illustrated 
by the following examples.

    (i) Example 1: Advanced manufacturing investment credit: 
qualified investment in general. On November 1, 2024, X, a calendar-
year C corporation, places in service qualified property with a 
basis of $200,000, and on December 1, 2024, X places in service 
qualified property with a basis of $300,000. X's qualified 
investment for the taxable year is $500,000 ($200,000 + $300,000).
    (ii) Example 2: Advanced manufacturing investment credit: 
qualified investment for partnerships. A, B, C, and D, all calendar-
year C corporations, are partners in the ABCD partnership. Partners 
A, B, C, and D share partnership profits equally. On November 1, 
2024, the ABCD partnership placed in service qualified property with 
a basis of $1 million. Each partner's share of the basis of the 
qualified property, as determined in Sec.  1.46-3(f)(2), is $250,000 
($1m x 0.25) and each partner's qualified investment is $250,000.

    (k) Section 48D credit. The term section 48D credit means the 
advanced manufacturing investment credit determined under section 48D 
and the section 48D regulations.
    (l) Section 48D regulations. The term section 48D regulations means 
Sec. Sec.  1.48D-1 through 1.48D-6 and 1.50-2.
    (m) Semiconductor. The term semiconductor means, consistent with 15 
CFR 231.115, 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. Such devices and 
systems include, but are not limited to, analog and digital 
electronics, power electronics, and photonics, for memory, processing, 
sensing, actuation, and communications applications.
    (n) Semiconductor manufacturing. The term semiconductor 
manufacturing and the term manufacturing of semiconductors are 
synonymous and mean, consistent with 15 CFR 231.116, semiconductor 
wafer production, semiconductor fabrication, or semiconductor 
packaging. The following terms have the following

[[Page 84754]]

meanings in connection with semiconductor wafer production, 
semiconductor fabrication, and semiconductor packaging for purposes of 
section 48D and the section 48D regulations:
    (1) Semiconductor wafer production includes the processes of 
growing single-crystal ingots and boules, wafer slicing, etching and 
polishing, bonding, cleaning, epitaxial deposition, and metrology.
    (2) Semiconductor fabrication includes the process of forming 
devices such as transistors, poly capacitors, non-metal resistors, and 
diodes, as well as interconnects between such devices, on a wafer of 
semiconductor material.
    (3) Semiconductor packaging means the process of enclosing a 
semiconductor in a protective container (package) and providing 
external power and signal connectivity for the assembled integrated 
circuit and includes the process of assembly and testing of 
semiconductors and advanced packaging of semiconductors.
    (4) Assembly includes, but is not limited to, wafer-dicing, die-
bonding, wire bonding, solder bumping, and encapsulation.
    (5) Testing includes, but is not limited to, probing, screening, 
and burn-in work.
    (6) Advanced packaging means a subset of packaging technologies 
that uses novel techniques and materials to increase the performance, 
power, modularity, and/or durability of an integrated circuit. Advanced 
packaging technologies include flip-chip, 2D, 2.5D, and 3D stacking, 
fan-out and fan-in, and embedded die/system-in-package (SiP).
    (o) Semiconductor manufacturing equipment. The term semiconductor 
manufacturing equipment means the highly engineered and specialized 
equipment used in the manufacturing of semiconductors as defined in 
paragraph (g) of this section and the subsystems that enable or are 
incorporated into the manufacturing equipment. Specific examples of 
semiconductor manufacturing equipment and subsystems that enable 
semiconductor manufacturing equipment include but are not limited to:
    (1) Deposition equipment, including, Chemical Vapor Deposition 
(CVD), Physical Vapor Deposition (PVD), Electrodeposition, and Atomic 
Layer Deposition (ALD);
    (2) Etching equipment (wet etch, dry etch);
    (3) Equipment for epitaxial growth of transistor features;
    (4) Chemical-mechanical polishing equipment to planarize layers 
through the semiconductor fabrication process;
    (5) Lithography equipment (steppers and scanners of various light 
wavelengths, such as deep UV, extreme ultraviolet (EUV), photoresist 
coating, and developer tracks);
    (6) Equipment for producing ingots and boules, wafer growth 
equipment, wafer slicing equipment, wafer dicing equipment, and wire 
bonders;
    (7) Inspection and measuring equipment, including scanning electron 
microscopes, atomic force microscopes, optical inspection systems, 
wafer probes and optical scatterometer, EDS (Energy Dispersive 
Spectroscopy);
    (8) Certain metrology and inspection systems to measure critical 
dimensions of the integrated circuit features throughout the 
fabrication process, detection and measurement of defects on the wafers 
during the fabrication process;
    (9) Ion implantation and diffusion/oxidation furnaces;
    (10) Specialty glass components including EUV mirrors and optical 
pathways, lenses and mirrors used in inspection equipment and other 
fabrication processes, and lens assemblies for wafer defect inspection;
    (11) Electrostatic chucks;
    (12) High performance pumps;
    (13) High purity quartz devices;
    (14) Ultra-high vacuum chamber components; and
    (15) Photomasks and light sources used in photolithography.
    (p) Statutory references--(1) Chapter 1. The term chapter 1 means 
chapter 1 of the Code.
    (2) Code. The term Code means the Internal Revenue Code.
    (3) Subtitle A. The term subtitle A means subtitle A of the Code.
    (q) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or after October 23, 2024.


Sec.  1.48D-3   Qualified property.

    (a) In general. This section provides definitions and rules 
relating to qualified property for purposes of section 48D of the Code 
and the section 48D regulations.
    (b) Qualified property. The term qualified property means tangible 
depreciable property that is part of, and integral to, the operation of 
an advanced manufacturing facility and that is either--
    (1) Constructed, reconstructed, or erected by the taxpayer; or
    (2) Acquired by the taxpayer if the original use of such property 
commences with the taxpayer.
    (c) Tangible depreciable property--(1) In general. The term 
tangible depreciable property means tangible personal property (as 
defined in Sec.  1.48-1(c)), other tangible property (as defined in 
Sec.  1.48-1(d)), and building and structural components (as defined in 
Sec.  1.48-1(e), except as provided in paragraphs (c)(2) and (3) of 
this section) with respect to which depreciation (or amortization in 
lieu of depreciation) is allowable. The law of a State or local 
jurisdiction is not controlling for purposes of determining whether 
property is tangible property for purposes of section 48D or the 
section 48D regulations.
    (2) Exception. Pursuant to section 48D(b)(2)(B)(ii), except as 
provided in paragraph (c)(3) of this section, the term tangible 
depreciable property does not include a building and its structural 
components, or a portion thereof, used for--
    (i) Offices;
    (ii) Administrative services such as human resources or personnel 
services, payroll services, legal and accounting services, and 
procurement services;
    (iii) Sales or distribution functions;
    (iv) Security services (not including cybersecurity operations); or
    (v) Any other functions unrelated to manufacturing of 
semiconductors or semiconductor manufacturing equipment.
    (3) Buildings or portions of a building not excluded by section 
48D(b)(2)(B)(ii). Buildings or portions of a building not treated as 
offices and that are considered related to manufacturing of 
semiconductors or semiconductor manufacturing equipment include 
buildings or portions of a building used for:
    (i) Gowning to enter to and from a cleanroom environment;
    (ii) Monitoring operations and remote access of equipment;
    (iii) Functions performed by unit process engineers including 
developing, monitoring, updating and overseeing individual process 
recipes running on every tool in the facility to manufacture, measure 
and test wafers including access to relevant data, data analysis, 
modifications and updates to the process recipes on the tools;
    (iv) Functions performed by equipment engineers including 
overseeing tools to ensure proper operation by accessing data about the 
tool health and performance remotely adjusting the tool at 
workstations, and issuing work orders to the equipment and maintenance 
technicians from the workstations;
    (v) Functions performed by test engineers including monitoring the 
electrical test data being collected from

[[Page 84755]]

the wafers at certain points in their processing;
    (vi) Functions performed by yield and defect engineers including 
reviewing inspection data collected from wafers;
    (vii) Functions performed by metrology engineers including 
reviewing physical measurement data collected from the wafers;
    (viii) Functions performed by integration engineers that are 
responsible for the technology node and the end-to-end wafer process;
    (ix) Functions performed by facilities engineers including 
monitoring and controlling facilities systems; and
    (x) Functions related to central utilities buildings, material 
handling and ultrapure water generation facilities, and computing (data 
center).
    (d) Constructed, reconstructed, or erected by the taxpayer. 
Property is considered constructed, reconstructed, or erected by the 
taxpayer if the work is done for the benefit of the taxpayer in 
accordance with the taxpayer's specifications.
    (e) Original use--(1) In general. Except as provided in paragraph 
(e)(2) of this section, the term original use means with respect to any 
property the first use to which the property is put by any taxpayer in 
connection with a trade or business or for the production of income. 
Additional capital expenditures paid or incurred by a taxpayer to 
recondition or rebuild property acquired or owned by the taxpayer 
satisfy the original use requirement to the extent of the expenditures 
paid or incurred by a taxpayer. However, a taxpayer's cost to acquire 
property reconditioned or rebuilt by another taxpayer does not satisfy 
the original use requirement. Whether property is reconditioned or 
rebuilt property will be determined based on the facts and 
circumstances.
    (2) Treatment of inventory. For purposes of paragraph (e)(1) of 
this section, if a taxpayer initially acquires new property and holds 
the property primarily for sale to customers in the ordinary course of 
the taxpayer's trade or business and subsequently withdraws the 
property from inventory and uses the property primarily in the 
taxpayer's trade or business or primarily for the taxpayer's production 
of income, the taxpayer is considered the original user of the 
property. If a person initially acquires new property and holds the 
property primarily for sale to customers in the ordinary course of the 
person's business and a taxpayer subsequently acquires the property 
from the person for use primarily in the taxpayer's trade or business 
or primarily for the taxpayer's production of income, the taxpayer is 
considered the original user of the property. For purposes of this 
paragraph (e), the original use of the property by the taxpayer 
commences on the date on which the taxpayer first uses the property 
primarily in the taxpayer's trade or business or primarily for the 
taxpayer's production of income.
    (f) Part of an advanced manufacturing facility--(1) In general. To 
qualify for the section 48D credit, property must be part of the 
advanced manufacturing facility, as provided in this paragraph (f). 
Property is part of an advanced manufacturing facility if the property 
is physically located or co-located either at the advanced 
manufacturing facility, or on a contiguous piece of land to the 
advanced manufacturing facility. Parcels or tracts of land will be 
considered contiguous if they possess common boundaries, and would be 
contiguous but for the interposition of a road, street, railroad, 
public utility, stream or similar property.
    (2) Property that is not located or co-located at an advanced 
manufacturing facility or on a contiguous piece of land to the advanced 
manufacturing facility. Property that is not located or co-located at 
an advanced manufacturing facility or on a contiguous piece of land to 
the advanced manufacturing facility may be considered part of the 
advanced manufacturing facility if the property is owned by the same 
taxpayer as the entire advanced manufacturing facility, connected to 
the advanced manufacturing facility (e.g., via pipeline) and the sole 
purpose, function, and output of the property is dedicated to the 
operation of the advanced manufacturing facility.
    (g) Integral to the operation of an advanced manufacturing 
facility--(1) In general. To qualify for the section 48D credit, 
property must be integral to the operation of manufacturing of 
semiconductors or manufacturing of semiconductor manufacturing 
equipment, both as provided in Sec.  1.48D-2. Property is integral to 
the operation of manufacturing of semiconductors or manufacturing of 
semiconductor manufacturing equipment if such property is used directly 
in the manufacturing operation, is essential to the completeness of the 
manufacturing operation, and is not transformed in any material way as 
a result of the manufacturing operation. Materials, supplies, and other 
inventoriable items of property that are transformed during the 
manufacturing of semiconductors or into a unit of semiconductor 
manufacturing equipment are not considered property integral to the 
operation of an advanced manufacturing facility. For this purpose, the 
term transform does not include the normal degradation of components of 
semiconductor manufacturing equipment. In addition, property such as 
pavements, parking areas, inherently permanent advertising displays, or 
inherently permanent outdoor lighting facilities, although used in the 
operation of a business, ordinarily are not integral to the operation 
of an advanced manufacturing facility. Thus, for example, all property 
used by the taxpayer to acquire or transport materials or supplies to 
the point where the actual manufacturing activity commences (such as 
docks, railroad tracks, and bridges), or all property (other than 
materials or supplies) used by the taxpayer during the manufacturing of 
semiconductors or during the manufacturing of semiconductor 
manufacturing equipment within the meaning of Sec.  1.48D-2, would be 
considered property integral to the operation of an advanced 
manufacturing facility of an eligible taxpayer. Property is considered 
integral to the operation of an advanced manufacturing facility of an 
eligible taxpayer if so used either by the owner of the property or by 
a lessee of the property.
    (2) Vertically integrated manufacturers. If an advanced 
manufacturing facility that is engaged in the manufacturing of 
semiconductors within the meaning of Sec.  1.48D-2 also conducts 
vertically integrated activities (for example, producing raw materials 
and manufacturing, ingots, wafers, and semiconductors), then property 
integral to the operation of such an advanced manufacturing facility 
includes only the property used in the manufacturing of semiconductors 
within the meaning of Sec.  1.48D-2.
    (3) Specific examples of integral property. Specific examples of 
property that normally would be integral to the operation of the 
advanced manufacturing facility of an eligible taxpayer are:
    (i) Equipment and tools used in the processes of Chemical Vapor 
Deposition (CVD), and Physical Vapor Deposition (PVD), Atomic Layer 
deposition (ALD), oxidation, annealing, and epitaxy. Such equipment 
includes Deposition and thin-film growth equipment, etching equipment, 
and lithography equipment (including Extreme Ultraviolet Lithography 
(EUV));
    (ii) Wet process tools, analytical tools, E-Beam operation tools 
(to repair masks), mask manufacturing equipment, chemical mechanical 
polishing equipment, reticle handlers, and stockers;
    (iii) Inspection and metrology equipment, including scanning 
electron

[[Page 84756]]

microscopes, atomic force microscopes, ion milling tools, optical 
inspection systems, wafer probes and optical scatterometer;
    (iv) Clean room facilities, including locker and gowning rooms, 
specialized lighting systems, automated material systems for wafer 
handling, specialized recirculating air handlers, to maintain the 
cleanroom free from particles, control temperature and humidity levels, 
and specialized ceilings comprised of HEPA filters;
    (v) Cleanroom equipment (including jogs, hand tools, calibration 
equipment, and temperature pollution monitoring tools) and specialty 
cleaning equipment;
    (vi) Electrical power facilities, cooling facilities, chemical 
supply systems, and wastewater and wastewater treatment systems, 
including water management, water conservation, and water treatment 
equipment, materials and technologies;
    (vii) Electricity distribution equipment including connectors, 
capacitors, meters and sockets, switchgear, surge arresters and 
transformers;
    (viii) 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;
    (ix) Utility level equipment including chillers, systems to handle 
nitrogen, argon, and other gases, compressor systems, and pipes;
    (x) Industrial automation and control equipment (including, but not 
limited to, programmable logic controllers, process controllers, 
distributed control systems, human machine interface and motor controls 
and accessories);
    (xi) Industrial automation communications devices, networks, and 
software for industrial automation control products and systems 
including automated material handling systems (AMHS) and advance wafer 
routing software systems and databases;
    (xii) Tooling equipment;
    (xiii) Back-end manufacturing equipment related to assembly, 
testing, and packaging;
    (xiv) Photolithography tools;
    (xv) Photomasks, reticles, pellicle, steppers, scanners, and 
photoresist related equipment;
    (xvi) Emulation tools;
    (xvii) Rapid thermal processing tools (annealing tubs and vacuum 
ovens), melting laser annealing (MLA) equipment, wafer bonding 
equipment, physical removal processing tools (flycutter DieSaw and 
backgrind), and edge seal dispense;
    (xviii) Site infrastructure including but limited to energy, water, 
natural gas, backup power generators, transformers, stormwater 
management and fire protection;
    (xix) Equipment and installation (wipe-film evaporators);
    (xx) Chemical and gas delivery systems (piping, storage, and waste 
systems including hazardous waste);
    (xxi) Bulk chemical purification systems (Liquid N2, Ar, H2, etc.);
    (xxii) HVAC air conditioning and air handling systems, critical 
cooling water systems and heating systems;
    (xxiii) Wafer stockers with temperature and air quality control;
    (xxiv) Temperature control systems;
    (xxv) Security and monitoring system and devices;
    (xxvi) Failure analysis labs and equipment;
    (xxvii) Quality assurance equipment including incoming goods, in-
process inspection, and finished-good inspection;
    (xxviii) Transportation, trolleys and carts that are used to 
transport wafers or overhead conveyer systems to move the carts;
    (xxxix) Lighting products;
    (xxx) Industrial gas generation and/or handling systems, such as 
air separation units, including any associated backup and storage 
equipment;
    (xxxi) Input shaping tooling;
    (xxxii) Crystal formation and coating equipment;
    (xxxiii) Mechanical equipment; and
    (xxxiv) Polishing equipment.
    (4) Research or storage facilities. If property, including a 
building and its structural components, constitutes a research or 
storage facility and is used in connection with the manufacturing of 
semiconductors or manufacturing of semiconductor manufacturing 
equipment, the property may qualify as integral to the operation of the 
advanced manufacturing facility under section 48D(b)(2)(A)(iv). 
Specific examples of research facilities include research facilities 
that manufacture semiconductors in connection with research, such as 
pre-pilot production lines and prototypes, including semiconductor 
packaging. Specific examples of storage facilities are mineral or 
chemical storage equipment, gas storage tanks, including high pressure 
cylinders or specially designed tanks and drums, wastewater storage, 
and inventory and finished goods warehouses. A research facility that 
does not manufacture any type of semiconductor, as provided in Sec.  
1.48D-2(m), or semiconductor manufacturing equipment, as provided in 
Sec.  1.48D-2(o), does not qualify.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (g):

    (i) Example 1. X Corp, a calendar-year C corporation, is a 
manufacturer of air separation units that are designed to supply on 
demand nitrogen to an advanced manufacturing facility. In January 
2025, X Corp places in service an air separation unit that is co-
located at an advanced manufacturing facility on a contiguous piece 
of land to the advanced manufacturing facility. The air separation 
unit produces nitrogen on demand, and the nitrogen is used directly 
in the manufacturing of semiconductors. The air separation unit is 
part of the advanced manufacturing facility within the meaning of 
paragraph (f) of this section because the air separation unit is 
located on a contiguous piece of land to the advanced manufacturing 
facility. The air separation unit is property integral to the 
operation of an advanced manufacturing facility under this paragraph 
(g) because it is used directly in, and is essential to, the 
completeness of the semiconductor manufacturing operation, and is 
not transformed in any material way as a result of the semiconductor 
manufacturing operation.
    (ii) Example 2. Y Corp, a calendar-year C corporation, is a 
manufacturer of specialty chemicals that are used in the 
manufacturing of semiconductors. In 2025, Y Corp places in service 
equipment at its facility that manufactures the specialty chemicals. 
The equipment is located five miles from the advanced manufacturing 
facility, but is not part of the advanced manufacturing facility 
within the meaning of paragraph (f) of this section because it is 
not located or co-located at the advanced manufacturing facility, or 
on a contiguous piece of land to the advanced manufacturing 
facility, and it is not connected to the advanced manufacturing 
facility. Also in 2025, Y Corp places in service chemical storage 
tanks that are part of the advanced manufacturing facility within 
the meaning of paragraph (f) of this section because the property is 
located on a contiguous piece of land to the advanced manufacturing 
facility. The chemical storage tanks are property integral to the 
operation of the advanced manufacturing facility pursuant to 
paragraph (g) of this section.

    (h) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or after October 23, 2024.


Sec.  1.48D-4   Advanced manufacturing facility of an eligible 
taxpayer.

    (a) In general. This section provides definitions and rules 
relating to advanced manufacturing facilities of eligible taxpayers for 
purposes of section 48D of the Code and the section 48D regulations.
    (b) Advanced manufacturing facility. For purposes of section 
48D(b)(3) and this section, the term advanced manufacturing facility 
means a facility of an eligible taxpayer for which the

[[Page 84757]]

primary purpose, as determined under paragraph (c)(1) of this section, 
is the manufacturing of semiconductors or the manufacturing of 
semiconductor manufacturing equipment within the meaning of Sec.  
1.48D-2.
    (c) Primary purpose--(1) In general. The determination of the 
primary purpose of a facility will be made based on all the facts and 
circumstances surrounding the construction, reconstruction, or erection 
of the advanced manufacturing facility of an eligible taxpayer. Facts 
that may indicate a facility has a primary purpose of manufacturing of 
semiconductors or manufacturing of semiconductor manufacturing 
equipment include plans or other documents for the facility that 
demonstrate that the facility is designed for the manufacturing of 
semiconductors or manufacturing of semiconductor manufacturing 
equipment within the meaning of Sec.  1.48D-2. Facts may also include 
the possession of permits or licenses needed for the manufacturing of 
semiconductors or manufacturing of semiconductor manufacturing 
equipment; and executed contracts to a customer to supply such 
semiconductors or executed contracts to an advanced manufacturing 
facility as defined in paragraph (b) of this section to supply such 
semiconductor manufacturing equipment in place either before or within 
6 months after the facility is placed in service. A facility has the 
primary purpose of manufacturing of semiconductors or manufacturing of 
semiconductor manufacturing equipment if more than 50 percent of its 
potential output, as measured by cost to produce, revenue received in 
an arm's length transaction, or units produced, constitutes 
manufacturing of semiconductors or manufacturing of semiconductor 
manufacturing equipment within the meaning of Sec.  1.48D-2. However, 
property placed in service in a taxable year must still meet the 
definition of qualified property under section 48D(b)(2) and Sec.  
1.48D-3 for its basis to be included as part of the qualified 
investment in the advanced manufacturing facility eligible for the 
section 48D credit. For example, property that is not integral to the 
operation of an advanced manufacturing facility as provided in Sec.  
1.48D-3(g) may not be included as a qualified investment in an advanced 
manufacturing facility.
    (2) No primary purpose. A facility for which the primary purpose is 
the manufacturing, producing, growing, or extracting of materials or 
chemicals that are supplied to an advanced manufacturing facility is 
not a facility for which the primary purpose is the manufacturing of 
semiconductors or manufacturing of semiconductor manufacturing 
equipment. Thus, for example, facilities that exclusively produce 
semiconductor-grade polysilicon, or produce gases, or that manufacture 
components or parts, to supply to an advanced manufacturing facility 
engaged in the manufacturing of semiconductors or manufacturing of 
semiconductor manufacturing equipment are not facilities for which the 
primary purpose is the manufacturing of semiconductors or the 
manufacturing of semiconductor manufacturing equipment.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (c):

    (i) Example 1: Primary purpose; in general. In January 2025, X 
Corp, a calendar-year C corporation, begins construction of a 
facility that will manufacture semiconductor manufacturing equipment 
that could be used in a facility that will engage in semiconductor 
fabrication (semiconductor fabrication facility). A portion of the 
equipment produced, however, could be used for manufacturing 
operations of a facility that is not engaged in semiconductor 
manufacturing. X Corp enters into a contract with Y Corp, which is 
building a semiconductor fabrication facility to be placed in 
service in July 2026, to supply Y Corp with equipment that is 
integral to semiconductor fabrication. Such equipment represents 
more than 50 percent of the potential output of X Corp's facility 
(by cost to produce such equipment) of X Corp's facility for the 
first year of operations. X Corp's facility will be considered as 
having a primary purpose of manufacturing of semiconductor 
manufacturing equipment for the first year of its operations.
    (ii) Example 2: Primary purpose; semiconductor wafer production. 
X Corp, a calendar-year C corporation, is engaged in the production 
of solar wafers (that is, X Corp is engaged in semiconductor wafer 
production). In January 2025, X Corp receives the necessary permits 
to begin construction of a facility designed for semiconductor wafer 
production within the meaning of Sec.  1.48D-2. X Corp enters into a 
contract to supply such wafers to an unrelated person. Such contract 
represents more than 50 percent of X Corp's potential output (by 
revenue received) for the tax year that the facility is placed in 
service. Because the contract to sell wafers represents more than 50 
percent of X Corp's potential output (by revenue received), X Corp's 
facility will be considered as having a primary purpose of 
semiconductor wafer production within the meaning of paragraph 
(c)(1) of this section.
    (iii) Example 3: Primary purpose; vertically integrated 
manufacturer. Z Corp, a C corporation, is a vertically integrated 
manufacturer. In January 2025, Z Corp begins construction of a 
facility that will produce raw materials and other consumables for 
use in the manufacturing of semiconductors and such facility will 
also engage in semiconductor wafer production and semiconductor 
fabrication. Z Corp enters into separate sales contracts to sell 
units produced from the semiconductor fabrication with a variety of 
unrelated companies that are engaged in semiconductor packaging. Z 
Corp also enters into a sales contract with A Corp to sell raw 
materials that it produces at the facility to A Corp. Z Corp's 
production of units from its semiconductor fabrication sold to 
companies engaged in semiconductor packaging represents more than 50 
percent of the potential output (by cost) of Z Corp's facility for 
the first year of operations; therefore, Z Corp's facility will be 
considered as having a primary purpose of manufacturing of 
semiconductors.
    (iv) Example 4: No primary purpose; vertically integrated 
manufacturer. Assume the same facts as in paragraph (c)(3)(iii) of 
this section (Example 3), except that Z Corp's production of such 
raw materials represents more than 50 percent of the potential 
output of Z Corp's facility for the first year of operations. Z 
Corp's facility will not be considered as having a primary purpose 
of manufacturing of semiconductors.

    (d) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or October 23, 2024.


Sec.  1.48D-5   Beginning of construction.

    (a) Termination of credit--(1) In general. The credit allowed under 
section 48D of the Code and the section 48D regulations does not apply 
to property that is part of an advanced manufacturing facility of an 
eligible taxpayer if the beginning of construction of the property, as 
defined in paragraph (a)(2) of this section, begins after December 31, 
2026 (the date specified in section 48D(e)).
    (2) Property. For purposes of determining beginning of construction 
of property under this section, the unit of property is--
    (i) A single advanced manufacturing facility project as described 
in paragraph (a)(3) of this section; or
    (ii) An item of qualified property (as defined in Sec.  1.48D-
3(b)).
    (3) Single advanced manufacturing facility project--(i) In general. 
Solely for purposes of determining whether construction of a qualified 
property has begun for purposes of section 48D and the section 48D 
regulations, multiple items of qualified property or advanced 
manufacturing facilities that are operated as part of a single advanced 
manufacturing facility project (along with any items of property, such 
as clean rooms, chemical delivery systems, chemical storage facilities, 
temperature control systems, robotic handling systems, semiconductor 
manufacturing equipment, and tooling equipment (such as for deposition 
and etching) that

[[Page 84758]]

are integral to the operation of the single advanced manufacturing 
facility project) will be treated as a single item of qualified 
property. Multiple qualified properties or advanced manufacturing 
facilities will be treated as operated as part of a single advanced 
manufacturing facility project, if at any point during construction of 
the multiple qualified properties or advanced manufacturing facilities, 
they are owned by a single taxpayer (subject to the related taxpayer 
rule provided in paragraph (a)(3)(ii) of this section) and any two or 
more of the following factors are present--
    (A) The properties or facilities are owned by a single legal 
entity;
    (B) The properties or facilities are constructed on contiguous 
pieces of land;
    (C) The properties or facilities are described in a common supply 
contract or other type of relevant contract;
    (D) The properties or facilities share a common electricity and/or 
water supply;
    (E) The properties or facilities are described in one or more 
common environmental or other regulatory permits;
    (F) The properties or facilities were constructed pursuant to a 
single master construction contract; or
    (G) The construction of the properties or facilities was financed 
pursuant to the same loan agreement or other financing arrangement.
    (ii) Related taxpayers--(A) Definition. For purposes of this 
section, the term related taxpayers means members of a group of trades 
or businesses that are under common control (as defined in Sec.  1.52-
1(b)).
    (B) Related taxpayer rule. For purposes of this section, related 
taxpayers are treated as one taxpayer in determining whether multiple 
qualified properties or advanced manufacturing facilities will be 
treated as operated as part of a single advanced manufacturing facility 
project.
    (iii) Example. A single taxpayer is developing Project C, a project 
that will consist of 3 advanced manufacturing facilities constructed on 
the same campus. Project C will share a common electricity supply, and 
semiconductors manufactured by Project C will be sold to Buyer through 
a single supply contract. In 2023, for 1 of the 3 advanced 
manufacturing facilities, the taxpayer installs deposition equipment. 
Thereafter, the taxpayer completes the construction of all 3 advanced 
manufacturing facilities pursuant to a continuous program of 
construction. For purposes of the section 48D credit, Project C is a 
single advanced manufacturing facility project that will be treated as 
a single property, and the taxpayer performed physical work of a 
significant nature that constitutes the beginning of construction of 
Project C in 2023.
    (iv) Timing of single advanced manufacturing facility project 
determination. Whether multiple properties or advanced manufacturing 
facilities are operated as part of a single advanced manufacturing 
facility project and are treated as a single item of property for 
purposes of the beginning of construction requirement of section 48D 
and the section 48D regulations is determined in the taxable year 
during which the last of the multiple properties or facilities is 
placed in service.
    (v) Disaggregation. Multiple properties or advanced manufacturing 
facilities that are operated as part of a single advanced manufacturing 
facility project and treated as a single item of qualified property 
under this paragraph (a)(3) for purposes of determining whether 
construction of a qualified property or advanced manufacturing facility 
has begun may be disaggregated and treated as separate items of 
qualified property for purposes of determining whether a separate 
advanced manufacturing facility or item of qualified property satisfies 
the continuity safe harbor (as defined in paragraph (e) of this 
section). Those disaggregated separate advanced manufacturing 
facilities or items of qualified property that are placed in service 
prior to the continuity safe harbor deadline will be eligible for the 
continuity safe harbor. The remaining disaggregated separate items of 
property or facilities may satisfy the continuity requirement under a 
facts and circumstances determination.
    (vi) Example. A single taxpayer is developing Project D, a project 
that will consist of 4 separate properties. Project D will use the same 
water supply and each property within Project D will be constructed 
pursuant to a single master construction contract. Under the single 
project rule provided in this paragraph (a)(3), Project D is a single 
project that will be treated as a single property. In 2024, for 3 of 
the 4 separate properties, the taxpayer installs property integral to 
the operation of the advanced manufacturing facility. Accordingly, the 
taxpayer has performed physical work of a significant nature that 
constitutes the beginning of construction of Project D for purposes of 
section 48D(e). Thereafter, on the last day of the 10-year continuity 
safe harbor period, the taxpayer places in service only 3 of the 4 
separate properties within Project D. The taxpayer disaggregates 
Project D under paragraph (a)(3)(v) of this section and accordingly, 
only 3 of the 4 separate properties satisfy the continuity safe harbor. 
For the remaining 1 separate property, the taxpayer may demonstrate 
that it satisfies the continuity requirement provided in paragraph (e) 
of this section based on the facts and circumstances, to enable the 
taxpayer to claim the section 48D credit.
    (b) Beginning of construction--(1) In general. For purposes of 
section 48D, the section 48D regulations, and section 107(f)(1) of the 
CHIPS Act of 2022, Public Law 117-167, div. A, 136 Stat. 1366, 1399 
(August 9, 2022), a taxpayer may establish that construction of an item 
of property (as defined in paragraph (a)(2) of this section) of the 
taxpayer begins under either:
    (i) The physical work test of paragraph (c) of this section; or
    (ii) The five percent safe harbor of paragraph (d) of this section.
    (2) Continuity requirement. See paragraph (e) of this section for 
the continuity requirement applicable for purposes of the physical work 
test and the five percent safe harbor, which must be demonstrated 
either by maintaining continuous construction (as defined in paragraph 
(e)(2) of this section) or continuous efforts (as defined in paragraph 
(e)(3) of this section).
    (c) Physical work test--(1) In general. Under the physical work 
test, construction of an item of property begins when physical work of 
a significant nature begins, provided thereafter that the taxpayer 
maintains continuous construction or continuous efforts. This test 
focuses on nature of the work performed, not the amount of the costs. 
Assuming the work performed is of a significant nature, there is no 
fixed minimum amount of work, monetary or percentage threshold required 
to satisfy the physical work test.
    (2) Physical work of significant nature--(i) In general. Work 
performed by the taxpayer and work performed for the taxpayer by other 
persons under a binding written contract that is entered into prior to 
the manufacture, construction, or production of the property for use by 
the taxpayer in the taxpayer's trade or business of manufacturing 
semiconductors or semiconductor manufacturing equipment is taken into 
account in determining whether physical work of a significant nature 
has begun. Both on-site and off-site work (performed either by the 
taxpayer or by another person under a binding written contract) may be 
taken into account for purposes of demonstrating that physical work of 
a significant nature has begun. A written contract is binding only if 
it is enforceable under local law against the

[[Page 84759]]

taxpayer or a predecessor and does not limit damages to a specified 
amount (for example, by use of a liquidated damages provision). For 
this purpose, a contractual provision that limits damages to an amount 
equal to at least five percent of the total contract price will not be 
treated as limiting damages to a specified amount. For additional 
guidance regarding the definition of a binding written contract, see 
Sec.  1.168(k)-1(b)(4)(ii)(A) through (D). Specific examples of on-site 
physical work of a significant nature include the excavation for the 
foundation and the pouring of the concrete pads of the foundation. 
Specific examples of off-site physical work of a significant nature 
include the manufacture of semiconductor manufacturing equipment but 
only if the manufacturer's work is done pursuant to a binding written 
contract and the semiconductor manufacturing equipment is not held in 
the manufacturer's inventory.
    (ii) Exceptions. Physical work of significant nature does not 
include preliminary activities, including but not limited to planning 
or designing, securing financing, exploring, researching, obtaining 
permits, licensing, conducting surveys, environmental and engineering 
studies, or clearing a site, even if the cost of those preliminary 
activities is properly included in the depreciable basis of the 
property. Physical work of a significant nature also does not include 
work (performed either by the taxpayer or by another person under a 
binding written contract) to produce property that is either in 
existing inventory or is normally held in inventory by a vendor.
    (d) Five percent safe harbor--(1) In general. Construction of a 
property will be considered as having begun if:
    (i) A taxpayer pays or incurs (within the meaning of Sec.  1.461-
1(a)(1) and (2)) five percent or more of the total cost of the 
property; and
    (ii) Thereafter, the taxpayer maintains continuous construction or 
continuous efforts.
    (2) Costs. All costs properly included in the basis of the property 
are taken into account to determine whether the five percent safe 
harbor has been met. For property that is manufactured, constructed, or 
produced for the taxpayer by another person under a binding written 
contract with the taxpayer, costs incurred with respect to the property 
by the other person before the property is provided to the taxpayer are 
deemed incurred by the taxpayer when the costs are incurred by the 
other person under the principles of section 461 of the Code.
    (3) Cost overruns--(i) Single advanced manufacturing facility 
project. If the total cost of a property that is a single advanced 
manufacturing facility project comprised of multiple properties (as 
described in paragraph (a)(3) of this section) exceeds its anticipated 
total cost such that the amount the taxpayer actually paid or incurred 
with respect to the single advanced manufacturing facility project to 
establish the beginning of its construction under paragraph (b)(1)(ii) 
of this section is less than five percent of the total cost at the time 
it is placed in service, the five percent safe harbor is not fully 
satisfied. However, the five percent safe harbor will be satisfied with 
respect to some, but not all, of the separate properties or facilities 
(as described in paragraph (a)(3) of this section) comprising the 
single advanced manufacturing facility project, as long as the total 
aggregate cost of those properties is not more than twenty times 
greater than the amount the taxpayer paid or incurred.
    (ii) Example. In 2023, taxpayer incurs $300,000 in costs to 
construct Project A, comprised of six advanced manufacturing facilities 
that will be operated as a single project. Taxpayer anticipates that 
each advanced manufacturing facility will cost $1,000,000 for a total 
cost for Project A of $6,000,000. Thereafter, the taxpayer makes 
continuous efforts to advance towards completion of Project A. The 
taxpayer timely places Project A in service in 2025. In 2025, the 
actual total cost of Project A amounts to $7,500,000, with each 
advanced manufacturing facility costing $1,250,000. Although the 
taxpayer did not pay or incur five percent of the actual total cost of 
Project A in 2023, the taxpayer will be treated as satisfying the Five 
Percent Safe Harbor in 2023 with respect to four of the advanced 
manufacturing facilities, as their actual total cost of $5,000,000 is 
not more than twenty times greater than the $300,000 in costs incurred 
by the taxpayer. The taxpayer will not be treated as satisfying the 
five percent safe harbor in 2023 with respect to two of the properties. 
Thus, the taxpayer may claim the section 48D credit based on 
$5,000,000, the cost of four of the properties.
    (iii) Single property. If the total cost of a single property, 
which is not part of a single advanced manufacturing facility project 
comprised of multiple properties or facilities (as described in 
paragraph (a)(3) of this section) and cannot be separated into multiple 
properties or facilities, exceeds its anticipated total cost so that 
the amount a taxpayer actually paid or incurred with respect to the 
single property as of an earlier year is less than five percent of the 
total cost of the single property at the time it is placed in service, 
then the taxpayer will not satisfy the five percent safe harbor with 
respect to any portion of the single property in such earlier year.
    (iv) Example. In 2023, a taxpayer incurs $250,000 in costs to 
construct Project B, a single property. The taxpayer anticipates that 
the total cost of Project B will be $5,000,000. Thereafter, the 
taxpayer makes continuous efforts to advance towards completion of 
Project B. The taxpayer places Project B in service in a later year. At 
that time, its actual total cost amounts to $6,000,000. Because Project 
B is a single property that is not a single project comprised of 
multiple properties, the taxpayer will not satisfy the five percent 
safe harbor as of 2023. However, if the construction of Project B 
satisfies the requirements of the physical work test by also beginning 
physical work of a significant nature in 2024, the taxpayer may be able 
to demonstrate that construction began in 2024.
    (e) Continuity requirement--(1) In general. For purposes of the 
physical work test and five percent safe harbor, taxpayers must satisfy 
the continuity requirement by demonstrating either continuous 
construction or continuous efforts regardless of whether the physical 
work test or the five percent safe harbor was used to establish the 
beginning of construction. Whether a taxpayer meets the continuity 
requirement under either test is determined by the relevant facts and 
circumstances. The Commissioner will closely scrutinize a property and 
may determine that the beginning of construction is not satisfied with 
respect to a property if a taxpayer does not meet the continuity 
requirement.
    (2) Continuous construction. The term continuous construction means 
a continuous program of construction that involves continuing physical 
work of a significant nature. Whether a taxpayer maintains a continuous 
program of construction to satisfy the continuity requirement will be 
determined based on all the relevant facts and circumstances.
    (3) Continuous efforts. The term continuous efforts means 
continuous efforts to advance towards completion of a property to 
satisfy the continuity requirement. Whether a taxpayer makes continuous 
efforts to advance towards completion of a property will be determined 
by the relevant facts and circumstances. Facts and circumstances 
indicating continuous efforts to advance towards completion of a 
property may include:

[[Page 84760]]

    (i) Paying or incurring additional amounts included in the total 
cost of the property. A taxpayer is considered to meet this factor for 
a taxable year in which it pays or incurs (within the meaning of Sec.  
1.461-1(a)(1) and (2)) five percent or more of the total cost of the 
property each calendar year after the calendar year during which 
construction of the property began for purposes of section 48D and the 
section 48D regulations;
    (ii) Entering into binding written contracts for the manufacture, 
construction, or production of the property or for future work to 
construct the property;
    (iii) Obtaining necessary permits; and
    (iv) Performing physical work of a significant nature.
    (4) Excusable disruptions to continuous construction and continuous 
efforts tests--(i) In general. Certain disruptions in a taxpayer's 
continuous construction or continuous efforts to advance towards 
completion of a property that are beyond the taxpayer's control will 
not be considered as indicating that a taxpayer has failed to satisfy 
the continuity requirement.
    (ii) Effect of excusable disruptions on continuity safe harbor. The 
excusable disruptions provided in this paragraph (e)(4) will not extend 
the continuity safe harbor deadline that is provided in paragraph 
(e)(6) of this section.
    (iii) Non-exclusive list of construction disruptions. This 
paragraph (e)(4)(iii) provides a non-exclusive list of construction 
disruptions that will not be considered as indicating that a taxpayer 
has failed to satisfy the continuity requirement:
    (A) Delays due to severe weather conditions.
    (B) Delays due to natural disasters.
    (C) Delays in obtaining permits or licenses from Federal, Indian 
Tribal, State, territorial, or local governments. Such delays include 
delays in obtaining air emissions, water discharge, or hazardous waste 
management permits or chemical handling licenses from the Environmental 
Protection Agency (EPA) or another environmental protection authority. 
Such delays also include delays as a result of the review process under 
State, Tribal, local, or Federal environmental laws, for example, a 
review under the National Environmental Policy Act, as well as delays 
in obtaining construction permits.
    (D) Delays at the written request of a Federal, State, local, or 
Indian Tribal government regarding matters of public health, public 
safety, security, or similar concerns, including hazardous chemical 
transport.
    (E) Delays related to electrical or water supply, such as those 
relating to the completion of construction on a distribution line or 
water supply line that may be associated with a project's electrical 
and water needs, whether constructed by the eligible taxpayer that is 
the owner of the advanced manufacturing facility, a governmental 
entity, or another person.
    (F) Delays in the manufacture of custom components or equipment.
    (G) Delays due to the inability to obtain specialized equipment of 
limited availability.
    (H) Delays due to supply shortages.
    (I) Delays due to the presence of endangered species.
    (J) Financing delays.
    (K) Delays due to specialized labor shortages or labor stoppages.
    (5) Timing of excusable disruption determination. In the case of a 
single advanced manufacturing facility project comprised of a single 
property, whether an excusable disruption has occurred for purposes of 
the beginning of construction requirement of section 48D and the 
section 48D regulations must be determined in the taxable year during 
which the property is placed in service. In the case of a single 
advanced manufacturing facility project comprised of multiple 
properties or facilities, whether an excusable disruption has occurred 
for purposes of the beginning of construction requirement of section 
48D and the section 48D regulations must be determined in the taxable 
year during which the last of multiple properties or facilities is 
placed in service.
    (6) Continuity safe harbor--(i) In general. A taxpayer will be 
deemed to satisfy the continuity requirement provided the property is 
placed in service no more than 10 calendar years after the calendar 
year during which construction of the property began for purposes of 
section 48D and the section 48D regulations.
    (ii) Example. If construction begins on a property on January 15, 
2023, and the property is placed in service by December 31, 2033, the 
property will be considered to satisfy the continuity safe harbor. If 
the property is not placed in service before January 1, 2034, whether 
the continuity requirement was satisfied will be determined based on 
all the relevant facts and circumstances.
    (f) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or after October 23, 2024.

0
Par. 4. Section 1.50-0 is added to read as follows:


Sec.  1.50-0   Table of contents.

    This section lists the table of contents for Sec. Sec.  1.50-1 and 
1.50-2.
Sec.  1.50-1 Lessee's income inclusion following election of lessor 
of investment credit property to treat lessee as acquirer.
    (a) In general.
    (b) Coordination with basis adjustment rules.
    (1) Basis adjustment.
    (2) Amount of credit included ratably in gross income.
    (i) In general.
    (ii) Special rule for the energy credit.
    (3) Special rule for partnerships and S corporations.
    (i) In general.
    (ii) Definition of ultimate credit claimant.
    (c) Coordination with the recapture rules.
    (1) In general.
    (2) Income inclusion exceeds unrecaptured credit.
    (3) Special rule for the energy credit.
    (4) Timing of income inclusion or reduction following recapture.
    (d) Election to accelerate income inclusion outside of the 
recapture period.
    (1) In general.
    (2) Exceptions.
    (3) Manner and time for making election.
    (e) Examples.
    (1) Example 1.
    (2) Example 2.
    (3) Example 3.
    (4) Example 4.
    (5) Example 5.
    (6) Example 6.
    (f) Applicability date.
Sec.  1.50-2 Recapture of the advanced manufacturing investment 
credit in the case of certain expansions.
    (a) Recapture in connection with certain expansions.
    (1) In general.
    (2) Exception.
    (3) Carrybacks and carryover adjusted.
    (b) Definitions.
    (1) Applicable period.
    (2) Applicable taxpayer.
    (i) In general.
    (ii) Special rules for partnerships and S corporations and their 
partners and shareholders.
    (iii) Examples.
    (A) Example 1: Applicable taxpayer: In general.
    (B) Example 2: Applicable taxpayer: In general.
    (C) Example 3: Applicable taxpayer: Special rules for 
partnerships and S corporations and their partners and shareholders.
    (D) Example 4: Applicable taxpayer: Special rules for 
partnerships and S corporations and their partners and shareholders.
    (E) Example 5: Applicable taxpayer: Special rules for 
partnerships and S corporations and their partners and shareholders.
    (F) Example 6: Applicable taxpayer: Special rules for 
partnerships and S corporations and their partners and shareholders.
    (iv) Affiliated groups.
    (3) Applicable transaction.

[[Page 84761]]

    (4) Applicable transaction recapture amount.
    (5) Existing facility.
    (6) Foreign country of concern.
    (7) Material expansion.
    (8) Semiconductor manufacturing capacity.
    (9) Significant renovations.
    (10) Significant transaction.
    (i) In general.
    (ii) Required agreement.
    (11) Technology licensing.
    (12) Technology or product that raises national security 
concerns.
    (c) Exception from the definition of applicable transaction for 
the manufacturing of legacy semiconductors.
    (1) In general.
    (2) Legacy semiconductor.
    (d) Example: Applicable transaction credit claimed.
    (e) Applicability date.

0
Par. 5. Section 1.50-2 is added to read as follows:


Sec.  1.50-2   Recapture of the advanced manufacturing investment 
credit in the case of certain expansions.

    (a) Recapture in connection with certain expansions--(1) In 
general. Except as provided in section 50(a)(3)(B) of the Code and 
paragraph (a)(2) of this section, if an applicable taxpayer engages in 
an applicable transaction before the close of the applicable period, 
then the tax under chapter 1 for the taxable year in which such 
transaction occurs is increased by 100 percent of the applicable 
transaction recapture amount. Any taxpayer, including an applicable 
taxpayer, that engages in an applicable transaction during a taxable 
year does not meet the definition of an eligible taxpayer under section 
48D(c) and the section 48D regulations and is ineligible for the 
section 48D credit for that taxable year. See paragraph (b) of this 
section for definitions of terms used in section 50(a)(3) and this 
section.
    (2) Exception. Section 50(a)(3)(A) and paragraph (a)(1) of this 
section do not apply if the applicable taxpayer demonstrates to the 
satisfaction of the Commissioner that the applicable transaction has 
been ceased or abandoned within 45 days of a determination and notice 
by the Commissioner. A taxpayer that ceases or abandons a particular 
applicable transaction for a taxable year may still be treated as 
engaging in a different applicable transaction for a taxable year. A 
taxpayer may not circumvent the application of section 50(a)(3) and 
this section by engaging in a series of applicable transactions, 
multiple applicable transactions, or other similar arrangements.
    (3) Carrybacks and carryover adjusted. In the case of any cessation 
described in section 50(a)(1) or (2), or any applicable transaction to 
which section 50(a)(3) and paragraph (a)(1) of this section apply, any 
carryback or carryover under section 39 of the Code is appropriately 
adjusted by reason of such cessation or applicable transaction.
    (b) Definitions. The following definitions apply for purposes of 
section 50(a)(3) and this section.
    (1) Applicable period. The term applicable period means the 10-year 
period beginning on the date that an applicable taxpayer placed in 
service property that is eligible for the section 48D credit.
    (2) Applicable taxpayer--(i) In general. Except as provided in 
paragraph (b)(2)(ii) of this section, the term applicable taxpayer 
means any taxpayer who was allowed a section 48D credit or made an 
election under section 48D(d)(1) with respect to such credit, for any 
taxable year prior to the taxable year in which such taxpayer entered 
into an applicable transaction.
    (ii) Special rules for partnerships and S corporations and their 
partners and shareholders. In the case of qualified property placed in 
service by a partnership or an S corporation for which a section 48D 
credit was determined, the term applicable taxpayer also means--
    (A) The partnership and the partners of such partnership (directly 
or indirectly through one or more tiered partnerships) who were allowed 
a section 48D credit for such property, or S corporation and the 
shareholder(s) of such S corporation who were allowed a section 48D 
credit for such property, for any taxable year prior to the taxable 
year in which such partnership or S corporation entered into an 
applicable transaction;
    (B) Any partner in a partnership (directly or indirectly through 
one or more tiered partnerships) or any shareholder in an S corporation 
with respect to the partner's or S corporation shareholder's share of 
any section 48D credit allowed for such property for any taxable year 
prior to when such partner or S corporation shareholder entered into an 
applicable transaction;
    (C) Any partnership or S corporation that made an election under 
section 48D(d)(2) with respect to a credit determined under section 
48D(a)(1) for any taxable year prior to the taxable year in which such 
partnership or S corporation entered into an applicable transaction; 
and
    (D) Any partner in a partnership (directly or indirectly through 
one or more tiered partnerships) or shareholder in an S corporation 
with respect to the partner's or S corporation shareholder's share of 
any tax-exempt income from the partnership or S corporation that made 
an election under section 48D(d)(2) for any taxable year prior to when 
such partner or shareholder entered into an applicable transaction.
    (iii) Examples. The following examples illustrate the rules of this 
paragraph (b)(2).

    (A) Example 1: Applicable taxpayer: In general. On July 1, 2026, 
X Corp, a calendar-year C corporation, entered into an applicable 
transaction. In 2025, X Corp had placed in service qualified 
property that is part of an advanced manufacturing facility and was 
allowed a section 48D credit for its 2025 taxable year. X Corp is an 
applicable taxpayer when it entered into the applicable transaction.
    (B) Example 2: Applicable taxpayer: In general. The facts are 
the same as in paragraph (b)(2)(iii)(A) of this section (Example 1), 
except that X timely filed its 2025 tax return properly making an 
election under section 48D(d)(1) with respect to the section 48D 
credit. X Corp is an applicable taxpayer when it entered into the 
applicable transaction.
    (C) Example 3: Applicable taxpayer: Special rules for 
partnerships and S corporations and their partners and shareholders. 
A, B, C, and D, all calendar-year C corporations, are partners in 
the ABCD partnership. Partners A, B, C, and D share partnership 
profits equally. On May 1, 2027, the ABCD partnership engages in an 
applicable transaction. On November 1, 2025, the ABCD partnership 
had placed in service qualified property with a basis of $1 million. 
Each partner's share of the basis of the qualified property, as 
determined in Sec.  1.46-3(f)(2), is $250,000 ($1m x 0.25) and each 
partner's qualified investment is $250,000. A, B, C, and D each 
filed its 2025 tax return claiming a section 48D credit. The ABCD 
partnership and A, B, C, and D each are an applicable taxpayer when 
ABCD partnership enters into the applicable transaction.
    (D) Example 4: Applicable taxpayer: Special rules for 
partnerships and S corporations and their partners and shareholders. 
The facts are the same as in paragraph (b)(2)(iii)(C) of this 
section (Example 3), except that on May 1, 2027, A, and not ABCD 
partnership, engages in an applicable transaction. A is an 
applicable taxpayer with respect to A's share of the section 48D 
credit when A enters into the applicable transaction. Neither the 
ABCD partnership nor partners B, C, nor D are an applicable taxpayer 
with respect to the applicable transaction entered into by A.
    (E) Example 5: Applicable taxpayer: Special rules for 
partnerships and S corporations and their partners and shareholders. 
The facts are the same as in paragraph (b)(2)(iii)(C) of this 
section (Example 3), except that A, B, C and D do not claim a 
section 48D credit on their timely filed 2025 tax returns. Instead, 
the ABCD partnership makes an election pursuant to section 48D(d)(2) 
with respect to the section 48D credit determined under section 
48D(a)(1). The ABCD partnership is an applicable taxpayer with 
respect to the elective payment to the ABCD partnership pursuant to 
section 48D(d)(2)(A)(i)(I).

[[Page 84762]]

    (F) Example 6: Applicable taxpayer: Special rules for 
partnerships and S corporations and their partners and shareholders. 
The facts are the same as in paragraph (b)(2)(iii)(E) of this 
section (Example 5), except that the ABCD partnership did not engage 
in an applicable transaction. On May 1, 2027, A engages in an 
applicable transaction. A is an applicable taxpayer with respect to 
its share of tax-exempt income allocated to A pursuant to section 
48D(d)(2)(A)(i)(II) and (IV). Neither the ABCD partnership nor 
partners B, C, or D are an applicable taxpayer with respect to the 
applicable transaction entered into by A.

    (iv) Affiliated groups. For purposes of this paragraph (b)(2), all 
members of an affiliated group under section 1504(a) of the Code, 
determined without regard to section 1504(b)(3), are treated as one 
taxpayer.
    (3) Applicable transaction. Except as provided in section 
50(a)(6)(D)(ii) and paragraph (c)(1) of this section, the term 
applicable transaction means, with respect to any applicable taxpayer, 
any significant transaction involving the material expansion of 
semiconductor manufacturing capacity of such applicable taxpayer in any 
foreign country of concern.
    (4) Applicable transaction recapture amount. The term applicable 
transaction recapture amount means, with respect to an applicable 
taxpayer, the aggregate decrease in the credits allowed under section 
38 of the Code for all prior taxable years that would have resulted 
solely from reducing to zero any credit determined under section 46 of 
the Code that is attributable to the advanced manufacturing investment 
credit under section 48D(a), with respect to property that has been 
placed in service during the applicable period.
    (5) Existing facility. The term existing facility means any 
facility built, equipped, and operating prior to a taxpayer placing in 
service qualified property as defined in section 48D(b)(2) and Sec.  
1.48D-3. Existing facilities are defined by their semiconductor 
manufacturing capacity at the time the qualified property is placed in 
service; facilities that undergo significant renovations, as defined in 
paragraph (b)(9) of this section, will no longer qualify as existing 
facilities within the meaning of this paragraph (b)(5).
    (6) Foreign country of concern. The term foreign country of concern 
has the same meaning as provided in 15 CFR 231.102.
    (7) Material expansion. The term material expansion means--
    (i) With respect to an existing facility, the increase of the 
semiconductor manufacturing capacity of that facility by more than five 
percent during the applicable period due to the addition of a 
cleanroom, production line or other physical space, or a series of such 
additions; or
    (ii) Any construction of a new facility for semiconductor 
manufacturing.
    (8) Semiconductor manufacturing capacity. The term semiconductor 
manufacturing capacity means, consistent with 15 CFR 231.117, the 
productive capacity of a semiconductor facility. In the case of a 
semiconductor wafer production facility that includes the processes of 
growing single-crystal ingots and boules, wafer slicing, wafer bonding, 
etching and polishing, cleaning, epitaxial deposition, and metrology, 
semiconductor manufacturing capacity is measured in wafer starts per 
month. In the case of a semiconductor fabrication facility, 
semiconductor manufacturing capacity is measured in wafer starts per 
year. In the case of a packaging facility, semiconductor manufacturing 
capacity is measured in packages per year.
    (9) Significant renovations. The term significant renovations means 
building new cleanroom space or adding a production line or other 
physical space to an existing facility that, in the aggregate during 
the applicable period, increases semiconductor manufacturing capacity 
by 10 percent or more of the capacity.
    (10) Significant transaction--(i) In general. As determined in 
coordination with the Secretary of Commerce and the Secretary of 
Defense and except as provided in paragraph (b)(10)(ii) of this 
section, the term significant transaction means any of the following:
    (A) An investment, whether proposed, pending, or completed, 
including any capital expenditure, loan, or gift;
    (B) The formation of a subsidiary, whether classified as a 
corporation or partnership for Federal tax purposes;
    (C) A merger, acquisition, or takeover, including--
    (1) The acquisition of a new or additional ownership interest in an 
entity;
    (2) The acquisition of a material portion of the assets of an 
entity; or
    (3) A consolidation;
    (D) The formation of a joint venture; or
    (E) A long-term lease or concession arrangement under which a 
lessee (or equivalent) makes substantially all business decisions 
concerning the operation of a leased entity (or equivalent), as if it 
were the owner.
    (F) A transaction that involves the expansion of manufacturing 
capacity for legacy semiconductors (other than with respect to an 
existing facility or equipment of an applicable taxpayer for 
manufacturing legacy semiconductors) if less than 85 percent of the 
output of the semiconductor manufacturing facility (for example, 
wafers, semiconductor devices, or packages) by value, is incorporated 
into final products (that is, not an intermediate product that is used 
as factory inputs for producing other goods) that are used or consumed 
in the market of a foreign country of concern; or
    (G) A transaction during the applicable period in which an 
applicable taxpayer knowingly (within the meaning of 15 CFR 231.106) 
engages in any joint research, as defined in 15 CFR 231.105, or 
technology licensing effort with a foreign entity of concern that 
relates to a technology or product that raises national security 
concerns.
    (ii) Required agreement. If a taxpayer enters into a required 
agreement with the Secretary of Commerce pursuant to 15 U.S.C. 
4652(a)(6)(C) and 15 CFR 231.112, then the term significant transaction 
for purposes of section 48D and the section 48D regulations has the 
meaning provided in the required agreement. Defined terms in the 
required agreement control only for purposes of determining the meaning 
of the term significant transaction. Thus, the effect of a significant 
transaction is determined under section 50(a)(3) and (6) during the 
applicable term defined under paragraph (b)(1) of this section.
    (11) Technology licensing. The term technology licensing has the 
same meaning as provided in 15 CFR 231.120.
    (12) Technology or product that raises national security concerns. 
The term technology or product that raises national security concerns 
has the same meaning as provided in 15 CFR 231.121.
    (c) Exception from the definition of applicable transaction for the 
manufacturing of legacy semiconductors--(1) In general. The term 
applicable transaction, as defined in section 50(a)(6)(D) and paragraph 
(b)(3) of this section, does not include a transaction that primarily 
involves the expansion of manufacturing capacity for legacy 
semiconductors, but only to the extent not described in paragraph 
(b)(10)(i)(F) of this section.
    (2) Legacy semiconductor. The term legacy semiconductor has the 
same meaning as provided in 15 CFR 231.107.
    (d) Example: Applicable transaction credit claimed. On January 15, 
2025, X Corp, a C corporation that is a calendar-year taxpayer, placed 
in service Property A, qualified property with a basis of $1 million. X 
Corp's qualified investment, as determined in Sec.  1.46-3(c), for the 
taxable year is $1 million. X Corp's advanced manufacturing investment 
credit for the taxable year is $250,000 ($1 million x 0.25) and,

[[Page 84763]]

assume that X Corp's income tax liability is $400,000. X Corp does not 
determine any other credits in 2025. X claims an advanced manufacturing 
investment credit of $250,000 for its 2025 taxable year. On December 
15, 2026, X Corp engages in an applicable transaction, as defined in 
section 50(a)(6)(D) and paragraph (b)(3) of this section and did not 
cease or abandon the transaction within 45 days of a determination and 
notice by the Commissioner. X Corp has not determined or claimed any 
general business credits since its 2025 taxable year. The aggregate 
decrease in credits allowed under section 38 for all prior years 
resulting from reducing to zero any credit determined under section 46 
that is attributable to the advanced manufacturing investment credit is 
$250,000 ($250,000 (credit allowed)-$0 (credit that would have been 
allowed)). X Corp's tax under chapter 1 is increased by $250,000 (1.0 x 
$250,000) for the 2026 taxable year. Pursuant to section 48D(c), for 
the 2026 taxable year, X Corp is not an eligible taxpayer and is 
ineligible to claim or carryforward the advanced manufacturing 
investment credit.
    (e) Applicability date. This section applies to property that is 
placed in service after December 31, 2022, and during a taxable year 
ending on or after October 23, 2024.

Douglas W. O'Donnell,
Deputy Commissioner.
    Approved: October 8, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-23857 Filed 10-22-24; 8:45 am]
BILLING CODE 4830-01-P