Instructions for Form 4255 - Introductory Material Future Developments What’s New General Instructions Purpose of Form Credit Recapture Requirements and Special Rules Exceptions to recapture. Carryover Adjustment on Recapture Basis Adjustment on Recapture Partnerships, S Corporations, Estates, and Trusts Partners, Shareholders, and Beneficiaries Specific Instructions Lines A through D. Part I. Original Investment Credit Line 1. Line 2. Line 3. Line 4. Line 5. Line 6. Part II. Recapture From Increase in Nonqualified Nonrecourse Financing Line 8. Worksheet 1 Multiple recapture properties. Part III. Recapture From Disposition of Property or Cessation of Use as Investment Credit Property Line 10. Line 11. Line 12. Line 13. Worksheet 2 Multiple recapture properties. Line 14. Line 15. Line 16. Lines 17 and 18. Line 19. Line 20. Instructions for Form 4255 - Notices Paperwork Reduction Act Notice. Instructions for Form 4255 (12/2023) Recapture of Investment Credit Section references are to the Internal Revenue Code unless otherwise noted. Revised: 12/2023 Instructions for Form 4255 - Introductory Material Future Developments For the latest information about developments related to Form 4255 and its instructions, such as legislation enacted after they were published, go to IRS.gov/Form4255. What’s New The Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022 enacted the advanced manufacturing investment credit and added an applicable transaction that requires recapture of the advanced manufacturing investment credit claimed. See Credit Recapture Requirements and Special Rules and Line 15. General Instructions Purpose of Form Use Form 4255 to figure the increase in tax for the recapture of investment credit claimed. Credit Recapture Requirements and Special Rules Generally, you must refigure the investment credit and may have to recapture all or part of it if any of the following apply. You disposed of investment credit property before the end of 5 full years after the property was placed in service (the recapture period). You changed the use of the property before the end of the recapture period so that it no longer qualifies as investment credit property. The business use of the property decreased before the end of the recapture period so that it no longer qualifies (in whole or in part) as investment credit property. Any building to which section 47(d) applies will no longer be a qualified rehabilitated building when placed in service. Any property to which section 48(b), 48A(b)(3), 48B(b)(3), 48C(b)(2), or 48D(b)(5) applies will no longer qualify as investment credit property when placed in service. Before the end of the recapture period, your proportionate interest was reduced by more than one-third in a partnership, S corporation, estate, or trust that allocated the cost or other basis of property to you for which you claimed a credit. You returned leased property (on which you claimed a credit) to the lessor before the end of the recapture period. In the case of a project under the Phase II or Phase III gasification program, failure at any time during the applicable recovery period (as defined in section 168(c)) to attain and maintain the separation and sequestration requirements in section 48B(d)(1)(B). For more information, see Notice 2009-23, 2009-16 I.R.B. 802, available at IRS.gov/irb/2009-16_IRB#NOT-2009-23, as modified by Notice 2011-24, 2011-14 I.R.B. 603, available at IRS.gov/irb/2011-14_IRB#NOT-2011-24; and amplified by Notice 2014-81, 2014-53 I.R.B. 1001, available at IRS.gov/irb/2014-53_IRB#NOT-2014-81. In the case of a project under the Phase II or Phase III qualifying advanced coal project program, failure during the applicable recovery period (as defined in section 168(c)) to attain and maintain the separation and sequestration requirements in section 48A(e)(1)(G). For more information, see Notice 2009-24, 2009-16 I.R.B. 817, available at IRS.gov/irb/2009-16_IRB#NOT-2009-24, as modified by Notice 2011-24, and amplified by Notice 2012-51, 2012-33 I.R.B. 150, available at IRS.gov/irb/2012-33_IRB#NOT-2012-51; and Notice 2015-14, 2015-10 I.R.B. 722, available at IRS.gov/irb/2015-10_IRB#NOT-2015-14; and Notice 2020-88, 2020-53 I.R.B. 1795, available at IRS.gov/irb/2020-53_IRB#NOT-2020-88. You engaged in an applicable transaction, as defined in section 50(a)(6)(D). A net increase in the amount of nonqualified nonrecourse financing occurred for any property to which section 49(a)(1) applied. For more details, see the instructions for Part II , later. Exceptions to recapture. Recapture of the investment credit doesn’t apply to the following. A transfer because of the death of the taxpayer. A transfer between spouses or incident to divorce under section 1041. However, a later disposition by the transferee is subject to recapture to the same extent as if the transferor had disposed of the property at the later date. A transaction to which section 381(a) applies (relating to certain acquisitions of the assets of one corporation by another corporation). A mere change in the form of conducting a trade or business if: The property is retained as investment credit property in that trade or business, and The taxpayer retains a substantial interest in that trade or business. A mere change in the form of conducting a trade or business includes a corporation that elects to be an S corporation and a corporation whose S election is revoked or terminated. For more details on the recapture rules, see section 50(a). See section 46(g)(4) (as in effect on November 4, 1990) to figure the recapture tax if you made a withdrawal from a capital construction fund set up under the Merchant Marine Act of 1936 to pay the principal of any debt incurred in connection with a vessel on which you claimed investment credit. Carryover Adjustment on Recapture For property subject to investment credit recapture, reduce any remaining carryforwards and carrybacks from the property by the recapture percentage used for the property on line 15. Basis Adjustment on Recapture For property subject to investment credit, increase the property’s basis as follows. For rehabilitation credit property, qualifying advanced coal project property, qualifying gasification project property, qualifying advanced energy project property, or advanced manufacturing investment property, increase the basis by 100% of the amount, attributable to each such property, of the recapture tax, adjustments to carrybacks and carryforwards under section 39, or adjustments to disallowed passive activity credits. For energy property, increase the basis by 50% of the amount, attributable to each such property, of the recapture tax, adjustments to carrybacks and carryforwards under section 39, or adjustments to disallowed passive activity credits. If you are a partner or S corporation shareholder, adjust the basis of your interest in the partnership or stock in the S corporation to take into account the adjustment made to the basis of property held by the partnership or S corporation. For more information, see section 50(c) and Regulations section 1.469-3(f). Partnerships, S Corporations, Estates, and Trusts A partnership, S corporation, estate, or trust that allocated any or all of a qualified investment to its partners, shareholders, or beneficiaries, must provide the information they need to refigure the credit. See Regulations sections 1.46-3(f), 1.47-4(a) and (c), 1.47-5, and 1.47-6. Partners, Shareholders, and Beneficiaries If you are a partner, shareholder, or beneficiary and your Schedule K-1 shows recapture of investment credit claimed in an earlier year, you will need your copy of the original Form 3468, Investment Credit to complete this form. Specific Instructions Lines A through D. Describe the property for which you must refigure the credit. Use the corresponding column for each property in Parts I, II, and III. If you need more property columns, use additional Forms 4255 or other statements that include all the information shown on Form 4255. Enter the total from all the separate statements on lines 17 and 18. Part I. Original Investment Credit Use Part I to refigure the original credit. Line 1. Enter the rate you used to figure the original credit from the Form 3468 that you filed. For combined heat and power system property, enter the effective rate used to figure the original credit, taking into account the limit under section 48(c)(3)(B). Line 2. Enter the credit base (cost or other basis) that you used to figure the original credit. If section 49(a)(1) applied to the property and there was a net increase in nonqualified nonrecourse financing with respect to the property in previous tax years, enter the credit base you used to figure the original credit, reduced by the amount of that net increase. If there was a net decrease in nonqualified nonrecourse financing with respect to the property in previous tax years, enter the credit base you used to figure the original credit, increased by the amount of that net decrease. For more details, see the instructions for Part II. Line 3. If section 49(a)(1) didn’t apply to the property, enter -0-. If section 49(a)(1) applied to the property, enter the net change in nonqualified nonrecourse financing related to the property during the tax year. Enter a net increase in nonqualified nonrecourse financing as a positive number. Enter a net decrease in nonqualified nonrecourse financing as a negative number. For more information about section 49, see the instructions for Part II. Line 4. Subtract line 3 from line 2. If line 3 is negative, then the entry on line 4 will be larger than the entry on line 2. Line 5. Multiply line 1 by line 4. If the credit for the property for which you must refigure the credit was limited to a dollar amount (for example, by the kilowatt limit in section 48(c)(1)(B)), don’t enter more than the amount of the applicable limit on line 5. Line 6. Enter the total of all credits taken for the property on Form 3800, General Business Credit in prior years. But don’t include the amount of any credit previously recaptured due to an increase in nonqualified nonrecourse financing. Part II. Recapture From Increase in Nonqualified Nonrecourse Financing Use Part II to figure any increase in tax for the recapture of an investment tax credit under section 49. Generally, section 49(a)(1) applies to property: Placed in service by individuals or certain closely held corporations during a tax year in which they were engaged in activities described in section 465, and Used in connection with an activity subject to the at-risk limitations under section 465. The credit base of this property for investment credit purposes may be limited if you borrowed against the property and are protected against loss, or if you borrowed money from a person who is related or who has an interest (other than as a creditor) in the business activity. The credit base must be reduced by the amount of any nonqualified nonrecourse financing related to the property at the end of the tax year. If, at the close of a tax year following the year property described in section 49(a)(1) was placed in service, the nonqualified nonrecourse financing for the property has increased or decreased, then the credit base for the property changes accordingly. The changes may result in an increased credit or a recapture of the credit in the year of the change. See sections 49 and 465 for details. Line 8. If the original credit had been figured using the current-year tax base in the year the property was first placed in service, you may have been able to use other general business credits instead. Use Worksheet 1 to calculate the amount of unused general business credits that would have been allowed under section 38. When making this calculation, include any general business credits that could have been carried forward or carried back to a year affected by the recapture of the original credit. Don’t include any credits that were previously recaptured. If you previously used the credit to offset the recapture of a credit on another property, treat it as a credit allowed in a previous tax year. Worksheet 1 Use Worksheet 1 to calculate the amount of unused general business credits that would have been allowed instead of the credit from the recapture property. If you need to account for more than 5 years, complete Steps 4 through 6 for those years on additional copies of the worksheet. Include the total for all years on Step 7. Steps First Year ______ Year ______ Year ______ Year ______ Year ______ Total Step 1. Identify the first year that the aggregate amount of credit allowed for the property was more than the amount on line 5. Enter the excess as a positive number ______ Step 2. Figure the amount of other general business credits that could have been used in that year had the amount in Step 1 not been allowed. Enter the result as a positive number ______ Step 3. Subtract any general business credits that were actually allowed in any previous tax year from the result of Step 2 ______ ______ Step 4. For the following year, figure the reduction in general business credits that would have been allowed for that year if: 1. No amount on line 7 had been allowed as a credit, and 2. Any other credits were used as calculated in Step 2 above ______ ______ ______ ______ Step 5. Figure the amount of other general business credits that would have been allowed to offset the reduction figured in Step 4 ______ ______ ______ ______ Step 6. Subtract any general business credits that were actually allowed in any previous tax year from the result of Step 5 ______ ______ ______ ______ ______ Step 7. Repeat Steps 4 through 6 above for each of the following tax years. Then add the amount from Step 3 to the amount from each iteration of Step 6. Enter the result on line 8 ______ Multiple recapture properties. If you are recapturing investment credits from multiple properties in Part II, complete Form 4255, line 7, for each property before using Worksheet 1. Then fill out Worksheet 1, reapplying any allowable investment credits as if no credit had been allowed for any of the properties in excess of the refigured credit for that property on line 5. As you complete the worksheet, separately identify the amount of unused general business credits that could have been used instead of the excess credit from each property. If an unused general business credit could have been used instead of the excess credit from more than one property (for example, the amount figured in Step 1 or Step 3 for a single year is attributable to more than one property), apply the unused credit to the property with the highest original credit rate on line 1. When completing Step 7, add the amounts from Steps 3 and 6 separately by property and enter the results in the corresponding property column of line 8. Disallowed passive activity credits (as defined in section 469(d)(2)) can be used in the calculation of line 8 only to the extent that credits from passive activities are included in the credits subject to recapture. Unused credits other than “specified credits” (as defined in section 38(c)(4)(B)) and eligible small business credits (ESBCs) can be used in the calculation of line 8 taking into account the limitation under section 38(c)(1)(A). Part III. Recapture From Disposition of Property or Cessation of Use as Investment Credit Property Use Part III to figure any increase in tax for the recapture of an investment tax credit under section 50. Line 10. Enter the date (month/day/year) on which the property was placed in service, using the first day of the month in which the property was placed in service. For example, if the property was placed in service on February 20, 2021, enter 02/01/2021 on line 10. See Regulations section 1.47-1(c) for more information. Line 11. Generally, this will be the date you disposed of the property. For more details, see Regulations section 1.47-1(c). Line 12. Do not enter partial years. If the property was held less than 12 months, enter -0-. In case of failure to attain or maintain the separation and sequestration requirements applicable to a Phase II or III gasification program or a Phase II or III advanced coal program, enter -0-. In case of an applicable transaction by an applicable taxpayer before the close of the 10-year period beginning on the date such taxpayer placed in service investment credit property that is eligible for the advanced manufacturing investment credit, enter -0-. Line 13. If you had never taken the recaptured credit, you may have been able to use other general business credits instead. Use Worksheet 2 to calculate the amount of unused general business credits that would have been allowed under section 38. When making this calculation, include any general business credits that could have been carried forward or carried back to a year affected by the recapture of the original credit. Don’t include any credits that were previously recaptured. If you previously used the credit to offset the recapture of a credit on another property, treat it as a credit allowed in a previous tax year. Worksheet 2 Use Worksheet 2 to calculate the amount of unused general business credits that would have been allowed under section 38 had there been no credit from the recapture property. If you need to account for more than 5 years, complete Steps 4 through 6 for those years on additional copies of the worksheet. Include the total for all years on Step 7. Steps First Year ______ Year ______ Year ______ Year ______ Year ______ Total Step 1. Identify the first year that an amount from line 6 was allowed as a credit. Enter that amount as a positive number ______ Step 2. Figure the amount of other general business credits that could have been used in that year had the amount in Step 1 not been allowed. Enter the result as a positive number ______ Step 3. Subtract any general business credits that were actually allowed in any previous tax year from the result of Step 2 ______ ______ Step 4. For the following year, figure the reduction in general business credits that would have been allowed for that year if: 1. No amount on line 6 had been allowed as a credit, and 2. Any other credits were used as calculated in Step 2 above ______ ______ ______ ______ Step 5. Figure the amount of other general business credits that would have been allowed to offset the reduction figured in Step 4 ______ ______ ______ ______ Step 6. Subtract any general business credits that were actually allowed in any previous tax year from the result of Step 5 ______ ______ ______ ______ ______ Step 7. Repeat Steps 4 through 6 above for each of the following tax years. Then add the amount from Step 3 to the amount from each iteration of Step 6. Enter the result on line 13 ______ Multiple recapture properties. If you are recapturing investment credits from multiple properties in Part III, complete Form 4255, line 6, for each property before using Worksheet 2. Then fill out Worksheet 2, reapplying any allowable investment credits as if no credit had been allowed for any of the properties. As you complete the worksheet, separately identify the amount of unused general business credits that could have been used instead of the recaptured credit from each property. If an unused general business credit could have been used instead of a recaptured credit from more than one property (for example, the amount figured in Step 1 or Step 3 for a single year is attributable to more than one property), apply the unused credit first to the property with the highest recapture percentage on line 15. When completing Step 7, add the amounts from Steps 3 and 6 separately by property and enter the results in the corresponding property column of line 13. Disallowed passive activity credits (as defined in section 469(d)(2)) can be used in the calculation of line 13 only to the extent that credits from passive activities are included in the credits subject to recapture. Unused credits other than “specified credits” (as defined in section 38(c)(4)(B)) and eligible small business credits (ESBCs) can be used in the calculation of line 13 taking into account the limitation under section 38(c)(1)(A). Line 14. Subtract line 13 from line 6 to calculate the aggregate decrease in general business credits that would have been allowed under section 38 had there been no credit from this property. Line 15. Enter the recapture percentage from the following table. Enter 100 for certain expansions in connection with advanced manufacturing facilities. See section 50(a)(3)(A). IF the number of full years on line 12 of Form 4255 is . . . THEN the recapture percentage is . . . 0 100 1 80 2 60 3 40 4 20 5 or more 0 Line 16. Multiply the amount on line 14 by the percentage on line 15 to calculate the recapture tax due to disposition or cessation of use as an investment credit property. Example 1. In January of 2021, you earned an energy credit of $100,000 on property A. You used $20,000 of the credit to offset tax in 2021 and used $16,000 as a carryforward to offset tax in 2022. You had $64,000 remaining carryforward for property A at the end of 2022. You have no other tax credits for other properties for any other years. You disposed of the property in June of 2023. Your recapture percentage is 60%. Because you have no other credits for properties for other years, you enter -0- on line 13. You enter $36,000 on line 6 (the credit from property A used in 2021 and 2022). Your total increase in tax for 2023 is $21,600 (60% of $36,000). Your remaining credit carryforward for property A is also reduced by the recapture percentage of 60%. Your remaining carryforward is $25,600 (40% of $64,000). You increase your basis for property A by $60,000 ($21,600 + $38,400). Example 2. The facts are the same as in Example 1, except that you also earned an energy credit on property B in 2021 of $12,000, which you didn’t use to offset your tax. As before, you disposed of property A in June of 2023. You enter $36,000 on line 6 (the credit from property A used in 2021 and 2022). However, you could have used your $12,000 of unused credit from property B for 2021 against your 2021 tax had no credit been available from property A. Therefore, you enter $12,000 on line 13 and $24,000 ($36,000 - $12,000) on line 14. Your total increase in tax for 2023 is $14,400 (60% of $24,000). Your remaining credit carryforward for property A is also reduced by the recapture percentage of 60%. Your remaining carryforward is $25,600 (40% of $64,000). You increase your basis for property A by $52,800 ($14,400 + $38,400). Example 3. In January of 2021, Maayan earned an energy credit of $100,000 from property A. She used all of the credit to offset $100,000 of tax in 2021. In 2022, Maayan earned an energy credit of $75,000 from property B and used none of the credit to offset tax. In June of 2023, property A ceased to be investment credit property and Maayan must refigure the credit from property A. Her recapture percentage is 60%. She enters $100,000 on line 6. However, Maayan could have carried the energy credit of $75,000 from property B back to 2021 had no credit been available from property A. Therefore, she enters $75,000 on line 13 and $25,000 ($100,000 - $75,000) on line 14. Maayan’s total increase in tax for 2023 is $15,000 (60% of $25,000). She increases her basis in property A by $15,000. Example 4. In July of 2021, Ian earned an energy credit of $100,000 from property A. Ian used $1,000 of the credit to offset tax in 2021 and used $99,000 as a carryforward to offset tax in 2022. In 2023, he earned an energy credit of $75,000 from property B and used none of the credit to offset tax. On February 1, 2023, property A ceased to be investment credit property and Ian must refigure the credit from property A. His recapture percentage is 80%. He enters $100,000 on line 6. No carryback or carryforward credits are available for 2021 to offset the $1,000 credit used for property A. However, Ian could have carried the energy credit of $75,000 from property B back to 2022 had no credit been available from property A that year. Therefore, he enters $75,000 on line 13 and $25,000 ($100,000 - $75,000) on line 14. Ian’s total increase in tax for 2023 is $20,000 (80% of $25,000). He increases his basis in property A by $20,000. Example 5. A and B each contributed $150,000 of cash to AB partnership for the purpose of investing in energy property. The partnership agreement provides that A and B share equally in all items of income, gain, loss, deduction, and credit of AB partnership. AB partnership invests $300,000 in an energy property in accordance with section 48 and places the energy property in service on January 1, 2023. As of the end of 2023, AB partnership has $90,000 of eligible credits under section 48 for the energy property. Before the due date for AB partnership's 2023 tax return (with extension), AB partnership transfers the $90,000 of eligible credits to an unrelated transferee taxpayer X for $80,000. In 2024, A reduces her proportionate interest in the general profits of the partnership by 50%, causing a recapture event to A under Regulations section 1.47-6(a)(2). The energy property is not disposed of by the transferor partnership and continues to be energy property with respect to such transferor partnership. AB partnership should not provide notice of recapture to transferee taxpayer X as a result of the recapture event under Regulations section 1.47-6(a)(2) for A's sale and transferee taxpayer X is not liable for any recapture amount. A, however, is subject to recapture as provided in Regulations section 1.47-6(a)(2) and based on her share of the basis (or cost) of the energy property to which the eligible credits were determined under Regulations section 1.46-3(f)(2). Lines 17 and 18. If you used separate statements to list additional properties, write to the left of the entry space “Tax from attached” and the total tax from the separate statements. Include the amounts from these statements in the totals for lines 17 and 18, respectively. Line 19. Reserved for future use. Line 20. Enter the line 20 amount on the appropriate line of your tax return (for example, 2023 Form 1120, U.S. Corporation Income Tax Return, Schedule J, line 9a). Partnerships, enter the amount from line 20 on Form 1065, U.S. Return of Partnership Income, Schedule K, line 20c, using code H. See the Instructions for Form 1065 for more information on how to allocate this amount to the partners. S corporations, enter the amount from line 20 on Form 1120-S, U.S. Income Tax Return for an S Corporation, Schedule K, line 17d, using code G. See the Instructions for Form 1120-S for more information. Estates and trusts, enter the amount from line 20 on Form 1041, U.S. Income Tax Return for Estates and Trusts, Schedule G, line 6a. See the Instructions for Form 1041 for more information. Instructions for Form 4255 - Notices Paperwork Reduction Act Notice. We ask for the information on this form to carry out the Internal Revenue laws of the United States. You are required to give us the information. We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax. You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103. The time needed to complete and file this form will vary depending on individual circumstances. The estimated burden for individual and business taxpayers filing this form is approved under OMB control number 1545-0074 and 1545-0123 and is included in the estimates shown in the instructions for their individual and business income tax returns. The estimated burden for all other taxpayers who file this form is shown below. Recordkeeping 6 hr., 27 min. Learning about the law or the form 1 hr., 35 min. Preparing and sending the form to the IRS 1 hr., 46 min. If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. See the instructions for the tax return with which this form is filed.
