Alarm
Extension filers: Only left to file your taxes by October 17
Open
Hide Arrow

TurboTax / Tax Calculators & Tips / All Tax Guides / IRS Tax Forms / What is Form 4255: Recapture of Investment Credit?

What is Form 4255: Recapture of Investment Credit?

Updated for Tax Year 2015


OVERVIEW

When is a tax credit not a tax credit? When the IRS takes it back. If you're in the situation where you have to file IRS Form 4255, you might have to pay back a tax credit you've earned in prior years. This process, known as recapture, occurs if you claim a credit -- in this case, a credit for a specific type of business investment -- and then no longer qualify for that credit.

 


Investment Tax Credit

Before you can file Form 4255 to determine you’re liable for a recapture, you must earn the tax credit in the first place. The "investment tax credit" is actually five different credits used by the IRS to encourage business development in certain qualifying areas. These projects and credits all comprise the investment tax credit:

• gasification projects
• coal projects
• advanced energy projects
• the rehabilitation credit
• the energy credit

Specific uses of the credit are outlined in IRS Form 3468.

Recapture of Investment Tax Credit

If your company no longer uses an asset that you received an investment tax credit for, you may have to forfeit part or all of the credit. According to the IRS, transactions that demonstrate that you “no longer use an asset” include the following:

• sale of an asset
• conversion of an asset from business to personal use
• theft of an asset
• casualty loss of an asset, such as a fire
• gifting of the asset to another party

Typically, you're off the hook to pay back the credit if your business has used the asset for at least five years. However, if you're still within the five-year window, you'll have to file Form 4255 to determine how much of the credit must be recaptured.

Effect on Taxes

As with all tax credits, the investment tax credit reduces your tax liability on a dollar-for-dollar basis. For example, if you owe the IRS $3,000 and claim an investment tax credit of $1,000, your tax liability drops to $2,000 ($3,000 taxes you owed - $1,000 of tax credit = $2,000 total taxes owed). This is different than a deduction, which simply lowers the amount of your income that is taxed.

If you have to file for a recapture of the tax credit, the amount of tax you pay goes up, just the opposite of how you claimed the original credit. For example, if you owe $2,000 on your taxes and Form 4255 indicates a recapture of $1,000 of investment tax credit, your tax liability will rise to $3,000 ($2,000 taxes you owe + $1,000 recapture = $3,000 total taxes owed).

Adjusting Cost Basis

If you claim the investment tax credit, this will lower the cost basis of the assets you originally purchased. The amount will be either 50 or 100% of the credit you originally received. This can translate into a higher tax liability if you later sell the assets within the 5-year window.

For example, if you paid $10,000 for a qualifying coal project and must reduce your cost basis by 50%, from a tax perspective it will be the same as if you originally paid only $5,000.

If you later sell it for $20,000, you'll owe tax on the $15,000 gain ($20,000 - $5,000 = $15,000) rather than a $10,000 gain ($20,000 - $10,000 = $10,000).

Get every deduction you deserve

TurboTax Deluxe searches more than 350 tax deductions and credits so you get your maximum refund, guaranteed.

For only $54.99*
Start for Free

Looking for more information?

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


Security is built into everything we do
Here's how
* Important Offer Details and Disclosures
  • Filing Deadline: IRS filing deadline for tax year 2015 is April 18, 2016 (except for residents of Massachusetts or Maine, where the IRS filing deadline for tax year 2015 is April 19, 2016).
  • Try for Free/Pay When You File: TurboTax online and mobile pricing is based on your tax situation and varies by product. Free 1040EZ/A + Free State offer only available with TurboTax Federal Free Edition; Offer may change or end at any time without notice. Actual prices are determined at the time of print or e-file and are subject to change without notice. Savings and price comparisons based on anticipated price increase expected 3/18/16. Special discount offers may not be valid for mobile in-app purchases.
  • TurboTax CD/Download products: Price includes tax preparation and printing of federal tax returns and free federal e-file of up to 5 federal tax returns. Additional fees apply for efiling state returns. E-file fees do not apply to New York state returns. Savings and price comparison based on anticipated price increase expected 3/18/16. Prices subject to change without notice.
  • Anytime, anywhere: Internet access required; standard message and data rates apply to download and use mobile app.
  • Fastest refund possible: Fastest tax refund with efile and direct deposit; tax refund timeframes will vary.
  • Pay for TurboTax out of your federal refund: A $X.XX Refund Processing Service fee applies to this payment method. Prices are subject to change without notice. This benefit is available with TurboTax Federal products except the TurboTax Home & Business/QuickBooks Self-Employed bundle offers.
  • About our TurboTax Product Experts: Customer service and product support vary by time of year.
  • About our credentialed tax experts: Live tax advice service is available via phone for your toughest tax questions; fees may apply. Service, experience levels, hours of operation and availability vary, and are subject to restriction and change without notice. Not available for TurboTax Business customers.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2014 TurboTax products.
  • Most Popular: TurboTax Deluxe is our most popular product among TurboTax Online users with more complex tax situations.