IRS Form 4255, Certain Credit Recapture, Excessive Payments, and Penalties, is used to calculate additional tax or other amounts you may owe when a business-related tax credit must be recaptured.
“Recapture” means paying back some or all of a credit you claimed in an earlier year. This can happen when property stops qualifying for the credit during a required recapture period, which is often five full years after the property was placed in service.
Form 4255 may also be used for certain excessive elective payments, excessive credit transfers, and penalties or recapture amounts tied to prevailing wage and apprenticeship requirements.
When might you need to file Form 4255?
You may need to complete Form 4255 if any of the following situations apply:
- You sold, exchanged, transferred, or otherwise disposed of investment credit property before the end of its recapture period.
- You changed how the property was used, and it no longer qualifies as investment credit property.
- The property’s business use decreased, causing all or part of it to stop qualifying for the credit.
- A building subject to the rehabilitation credit rules no longer qualifies as a qualified rehabilitated building.
- Property involving certain progress expenditures no longer qualifies as investment credit property when it is placed in service.
- Your ownership interest in a partnership, S corporation, estate, or trust decreased by more than one-third during the recapture period.
- You returned leased property to the lessor before the recapture period ended.
- Nonqualified nonrecourse financing for the property increased.
- Certain solar or wind property stopped qualifying for the low-income communities bonus credit.
- A clean electricity facility’s greenhouse gas emissions rate exceeded the permitted level during its five-year recapture period.
- Certain advanced coal, gasification, semiconductor manufacturing, clean hydrogen, or other energy-related property failed to meet ongoing eligibility requirements.
- Property that received an increased credit for meeting prevailing wage requirements failed to continue meeting those requirements during the applicable five-year period.
These rules can get technical quickly. If the credit came from a Schedule K-1, you may also need the original Form 3468 used to claim the investment credit.
Program Entry
To report an investment credit recapture:
- Select Federal.
- Select Other Taxes.
- Select Recapture of Investment Credit.
- Enter the requested details from your prior-year credit forms and any records related to the recapture event.
Keep the original credit calculation, the date the property was placed in service, the date its use changed or it was disposed of, and any applicable Schedule K-1 with your tax records.
Are there exceptions to investment credit recapture?
Yes. Investment credit recapture generally doesn’t apply in the following situations:
- The property was transferred because of the taxpayer’s death.
- The property was transferred between spouses or as part of a divorce under Internal Revenue Code section 1041. However, the spouse who receives the property may have to recapture the credit if they later dispose of it during the original recapture period.
- The transaction qualifies under section 381(a), which covers certain corporate acquisitions.
- Only the legal form of the business changed, and both of the following are true:
- The property remains qualifying investment credit property used in the same trade or business.
- The taxpayer keeps a substantial interest in that trade or business.
A change in business form may include a corporation electing S corporation status or having its S corporation election revoked or terminated.
How much credit will you have to recapture?
The amount depends on the type of credit, what happened to the property, and when the recapture event occurred.
In many cases, the amount subject to recapture decreases as the property remains in qualifying service. Form 4255 uses information about the original credit, the property’s credit base, the date it was placed in service, and the date or type of recapture event to determine the amount due.
Recapture may also affect:
- The property’s adjusted tax basis
- Unused credit carryforwards or carrybacks
- Passive activity credit amounts
- The tax basis of a partnership interest or S corporation stock
For example, the property’s basis may increase by either 50% or 100% of the recapture-related amount, depending on the type of investment credit property.
What if the credit was transferred to another taxpayer?
Special rules apply when an eligible credit was transferred under section 6418.
The taxpayer who originally owned the credit generally must notify the buyer, known as the transferee taxpayer, when a recapture event occurs. The transferee taxpayer may be responsible for calculating and reporting the recapture attributable to the transferred credit. If only part of the credit was transferred, the original taxpayer may remain responsible for recapture on the portion that wasn’t transferred. For more information see this IRS link here.