The Creating Helpful Incentives to Produce Semiconductors and Science Act, commonly referred to as the CHIPS Act, established the advanced manufacturing investment credit under Internal Revenue Code (IRC) Section 48D to incentivize the manufacture of semiconductors and semiconductor manufacturing equipment in the United State based on certain criteria related to the types of property used in the manufacturing process.
One important factor in determining eligibility for the credit is identifying the components of the building used in the manufacturing process. An engineering-based cost segregation study can be a valuable tool in identifying these components.
Cost Segregation Study
A cost segregation study is a method of identifying the components of a building that can be depreciated over shorter periods of time than the building itself. The components that are classified as personal property can be depreciated over shorter periods of time than the building, resulting in a faster tax write-off.
The study is typically done by a team of engineers and tax professionals who review the building plans and specifications, perform a detailed site inspection, and analyze the building components to determine which components can be classified as personal property, rather than real property.
For example, while a building may be depreciated over 39 years, certain components may be depreciated over five, seven, or 15 years. This can result in significant tax savings, as the building owner can accelerate the depreciation of these components to increase deductions in earlier years, thereby reducing their taxable income.
Advanced Manufacturing Investment Credit
The advanced manufacturing investment credit provides an income tax credit of up to 25% of the investment in qualified property placed into service by the taxpayer during the taxable year beginning on or after January 1, 2023, or for which construction begins on or before December 31, 2026.
Qualified property includes facilities dedicated to manufacturing semiconductors or related equipment as well as certain tangible property, such as buildings or structural components integral to operation.
Some exceptions include buildings or portions thereof used for offices, administrative services, or other nonmanufacturing functions. Additionally, any advanced manufacturing expenditures attributable to qualified rehabilitation as defined in IRC Section 47(c)(2) wouldn’t be eligible.
One important factor in determining eligibility for the credit is identifying the components of the building used in the manufacturing process. This can be a complex task, as many building components may have multiple uses and it may be difficult to determine which components are specifically used in the manufacturing process.
Benefits of Cost Segregation Study in Identifying Eligible Components
An engineering-based cost segregation study can be a valuable tool in identifying the components of a building eligible for the advanced manufacturing investment credit.
The study provides a detailed analysis of the building components, including their location, function, and use in the manufacturing process, which can help determine credit eligibility.
In addition, the cost segregation study provides a detailed breakdown of the cost of each component, which is necessary to determine the amount of credit the building owner is eligible to claim.
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Building owners considering investing in an advanced manufacturing facility should consult with experienced engineering and tax professionals to determine whether a cost segregation study is appropriate and to ensure they fully understand the eligibility criteria for the credit. For more information on the advanced manufacturing investment credit, contact your Moss Adams professional.