Recapturing the Investment Tax Credit
The investment tax credit is a part of the general business credit and is comprised of the energy credit, the rehabilitation credit, the qualifying advanced coal project credit, the qualifying gasification project credit, the qualifying advanced energy project credit, and the qualifying therapeutic discovery project credit.
A trade or business that placed eligible investment credit property into service likely would have passed the entire amount of the investment credit to its investors, without consideration as to how long the eligible investment credit property might be expected to remain in use. If the asset ceased to qualify as investment credit property during its recovery period due to the sale, exchange, involuntary conversion, termination of business use, return of leased property (on which the credit was claimed) to the lessor, gift or other disposition, the amount of “unearned” investment tax credit may be required to be recaptured by the ultimate taxpayer that claimed the investment tax credit. The amount of the credit to be recaptured is treated as an additional tax to the taxpayer in the year of early disposition.
The recapture percentage starts at 100% if the investment credit property was disposed of or no longer qualifies as investment credit property during the first full year after it was placed into service. The recapture percentage decreases by 20% for each succeeding full year. After the fifth full year, no recapture is required.
The following is a footnote disclosure that might accompany your Schedule K-1. In this example, the investment credit property was placed into service on September 17, 2013 and was disposed of on October 21, 2021.
As the disposition date is more than five full years after the placed in service date, no recapture is required to take place. The footnote disclosure is informational and should not create any fear or anxiety.
You may refer to IRS Form 4255, Recapture of Investment Credit, and the corresponding instructions, for additional information on recapture requirements.
Source: Bloomberg Tax, IRS.gov
- Carey M. Heyman, CPA
- Managing Principal of Industry - Real Estate
- CliftonLarsonAllen LLP
- Century City (Los Angeles)
Carey is the Managing Principal of the Real Estate Industry at CLA. He is a trusted advisor with close to 20 years of experience providing accounting, assurance, tax, and consulting services to real estate industry owners, operators, family offices, developers and syndicators. Carey has a strong track record of helping clients build and retain capital by leveraging tax- and cost-saving strategies and employing tax credits and incentives. He also consults with high net worth individuals, large family groups, and owners of closely-held businesses on all aspects of tax planning, estate planning, and retirement planning.
Good info