Form 4255 is the form used to calculate the recapture of investment credit. You can use the System or manually enter information in the section to compute the credit amount. To compute the recapture of investment credit, you must enter the investment credit code, the date the investment was sold and any depreciation you have taken.
If you sell an investment asset before the end of its useful life, the recapture of the credit will reduce your tax liability. If you have invested in real estate, the real estate taxes used to qualify for the credit will also be reduced. However, there are a few exceptions to the recapture of investment credit.
The recapture of investment credit is triggered by the sale of a property within one year. In most cases, the recapture tax will not apply to real estate that has been in a qualified use for more than 12 years. However, when a corporation sells property before the end of its useful life, it will have to pay the recapture tax. The tax amount is based on the amount of credit actually used for the property, and the credit allowed for the remainder is carried forward to the next tax year.
Typically, the recapture of investment credit occurs when an asset is transferred to another corporation. The transfer of investment credit to the new corporation is governed by Sec. 381(a). However, in some cases, the recapture of investment tax credit occurs because the business has ceased using the asset for the intended purpose. This is due to the asset’s sale, exchange, or involuntary conversion.
As a rule, the recapture of investment credit is calculated based on the useful life category and the date the investment was acquired. If the date of acquisition is not available, a 35% reduction is computed. The 35% reduction is adjusted for months if necessary. However, the reduction must be less than three-five percent.
The IRS may assess a recapture of the accelerated portion of a low-income housing credit if the property is disposed of within three years. This amount may include the interest accrued. The recapture of investment credit is subject to certain limitations. If the property has been disposed of before the third year, the recapture may be higher than the actual amount.
Investing in energy-efficient energy projects can qualify for the investment tax credit. The credit can reduce the amount of taxes owed on a dollar-for-dollar basis. For example, a company that invests $1,000 in solar energy will receive a $1,000 credit. The total amount of taxes owed on that investment is two thousand dollars. This credit is a valuable tool for businesses that are interested in saving money on their electricity bills.
