The recapture of investment credit is a tax due by corporations that receive investment tax credits that are not used in the current tax year. The recaptured amount is treated as additional tax in the year of early disposition. The recapture of investment credit is generally calculated on the basis of the useful life category of the property at the time of recapture.
The recapture tax can be a complicated issue when carrying over balances and complex assets are involved. In addition, the recapture tax may be triggered if a corporation sells real property that was based on the investment credit. This tax can be avoided if the property is in qualified use for 12 years or more.
The recapture of investment credit is calculated by entering certain information into the IRS Form 4255. The recapture tax is also computed automatically when depreciation input is made. However, if the asset is subject to limitation, the system will not calculate the recapture. To calculate the recapture, the accountant must enter the amount of tax due in the “Recapture Tax from Partnership” field and enter the adjusted basis in the “Cost” field.
Tax credits in New York State may be subject to recapture. This means that taxpayers may have to pay back tax credits that they received in prior years. For example, if the taxpayer’s investment credit was based on real estate taxes, the state may reduce that tax credit based on the actual property taxes paid.
In many cases, an investment credit is not recaptured after it has been transferred to an acquiring corporation. These cases generally involve a transfer of substantially all properties, complete liquidation of a subsidiary, and statutory mergers. However, when an asset is not disposed of in this manner, it may be a legitimate recapture of investment credit.
If the investment credit property is disposed of in the first full year, the recapture percentage starts at 100% and decreases by 20 percent each full year. If the property is disposed of within five years, the recapture is not required. However, you should discuss this with a tax professional before making a decision.
Investment tax credit is a federal tax incentive to encourage businesses to make investments. The tax credit can lower the tax liability if the taxpayer has invested in qualifying business or residential properties. A typical investment tax credit may be as much as $1,000. Consequently, the investor will have to pay only $2,000 in taxes.