Code of Federal Regulations · Section

§ 1.48D-5 — d-5 Beginning Of Construction

26 C.F.R. § 1.48D-5

View:

(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 § 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 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 § 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 the 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 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 § 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 § 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:

(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 § 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.

26 C.F.R. § 1.48D-4 26 C.F.R. § 1.48D-6

Authorizing Statute