Publication 225 |
2000 Tax Year |
Investment Credit
The investment credit is the total of the following credits.
- Reforestation credit.
- Rehabilitation credit.
- Energy credit.
Reforestation credit.
The 10% reforestation credit applies to up to $10,000 ($5,000 if
you are married filing a separate return) of the costs you incur each
year to forest or reforest property you hold for growing trees for
sale or use in the commercial production of timber products. These
costs must qualify for amortization. You can take the investment
credit for reforestation costs whether you choose to amortize them or
add them to the basis of your property. There is no carryforward or
carryback of costs that are more than the dollar limit. For more
information about these costs, see Amortization in chapter 8.
Example.
You incurred $9,000 of qualified reforestation costs during the
year. You may take a reforestation credit of $900 (10% x $9,000)
for the year.
Rehabilitation credit.
The rehabilitation credit applies to costs you incur for
rehabilitation and reconstruction of certain buildings. Rehabilitation
includes renovation, restoration, and reconstruction. It does not
include enlargement or new construction. Generally, the percentage of
costs you can take as a credit is 10% for buildings placed in service
before 1936 and 20% for certified historic structures. See the
instructions for Form 3468 for more information.
Energy credit.
The 10% energy credit applies to certain costs for solar or
geothermal energy property you placed in service during your tax year.
See the instructions for Form 3468 for more information.
Basis adjustment.
You generally must reduce the basis of assets on which you take an
investment credit. The reduction is 100% of the rehabilitation credit
and 50% of the reforestation and energy credits. See the instructions
for Form 3468.
Example.
You amortized qualified reforestation costs of $9,000 incurred
during the year. You are also taking a $900 reforestation credit. You
must reduce your amortizable basis by $450 (50% x $900). As a
result, your amortizable basis will be $8,550 ($9,000 - $450).
How to take the investment credit.
Use Form 3468 to figure your credit. You may also need
to file Form 3800. See How To Claim the Credit, earlier.
Carrybacks and carryforwards.
Even if you cannot take an investment credit for the year, you may
have unused credits from earlier years that may reduce your tax. These
unused credits are carried to your current tax year as general
business credit carryforwards and the rules for the general business
credit, discussed earlier, apply.
Recapture of
Investment Credit
At the end of each tax year, you must determine whether you
disposed of or stopped using in your business (either partially or
entirely) any property for which you claimed an investment credit in a
prior year. If you dispose of property before the end of the recapture
period, you must recapture part of the credit by adding it to your
tax. See Recapture Rule, later, for a discussion of
recapture period.
Use Form 4255 to figure the recapture tax or attach a
detailed statement to your return for the year you dispose of the
asset showing the computation of the recapture tax and the decrease in
any investment credit carryforward.
Disposition
An outright sale of property is the clearest example of a
disposition. Another type of disposition occurs when you exchange or
trade worn-out or obsolete business assets for new ones. If the
property ceases to be qualifying property, it is considered to be
disposed of for investment credit recapture purposes. For example, the
conversion of business property to personal use is considered a
disposition.
Certain transactions result in dispositions for investment credit
recapture. The following illustrate some that are and some that are
not dispositions.
Mortgaging and foreclosure.
There is no disposition if title to property is transferred as
security for a loan. However, a disposition does occur if there is a
transfer of property by foreclosure.
Leased property.
The leasing of investment credit property by the lessor who took
the credit is generally not a disposition. However, if the lease is
treated as a sale for income tax purposes, it is a disposition. A
disposition also occurs if property ceases to be investment credit
property in the hands of the lessor, the lessee, or any sublessee.
Decrease in basis.
If the basis of investment credit property decreases, the decrease
is considered to be a disposition of part of the property. This
occurs, for example, if you buy property and later receive a refund of
part of the original purchase price. You must then refigure the credit
as if the decrease in basis was never part of the original basis. If
your refigured credit is less than the credit you originally took, you
must add the difference to your tax.
Retirement or abandonment.
You dispose of property if you abandon it or otherwise retire it
from use. Normal retirements are also dispositions.
Transfer due to death.
There is no disposition of investment credit property if the
property is transferred because the owner-taxpayer died.
Gift.
You are considered to have disposed of property you transferred by
gift.
Transfer between spouses.
If you transfer investment credit property to your spouse, or you
transfer the property to your former spouse incident to a divorce, you
generally are not considered to have disposed of the property. This
also applies if the transfer is made in trust for the benefit of your
spouse or former spouse. However, if your spouse or former spouse
later transfers the property, your spouse or former spouse will
receive the same tax treatment that would have applied to you if you
had made the transfer.
Casualty, theft, or involuntary conversion.
You are considered to have disposed of property that was destroyed
by casualty or lost by theft or other involuntary conversion.
Disposition of assets by S corporation, partnership, estate,
or trust.
If you are a shareholder of an S corporation that disposes of
assets on which you figured the investment credit, you are treated as
having disposed of the share of the investment on which you figured
your credit. This same rule applies if you are a member of a
partnership or a beneficiary of an estate or trust.
Change in form of doing business.
A disposition does not occur because of a change in the form of
doing business if certain conditions are met. For more information,
see section 1.47-3(f) of the regulations.
Choosing S corporation status.
The choice by a corporation to become an S corporation generally
will not cause the recapture of investment credit previously claimed
by the corporation. The choice is treated as a change in the form of
doing business and not as a disposition of property. No disposition
occurs when an S corporation terminates or revokes its choice not to
be taxed as a corporation.
Sale and leaseback.
There is no disposition when investment credit property is sold by
the taxpayer who claimed the credit and it is then leased back to that
taxpayer as part of the same transaction.
Recapture Rule
If you dispose of investment credit property before the end of the
recapture period, you must recapture, as an additional tax, part of
the original credit you claimed. You may also have to recapture part
or all of the credit if you change the use of investment credit
property to one that would not have originally qualified for the
credit.
Recapture period.
The credit you must recapture depends on when during the recapture
period you dispose of, or change the use of, the property. The
recapture period is the length of time the property must be used to
get the full investment credit. The recapture period for investment
credit property is 5 full years from the date it was placed in
service. If you dispose of the property during the first full year of
service, you must recapture the full amount of the credit that was
used to reduce your tax. The recapture amount decreases for each year
the property remains in qualified service.
Form 4255.
Use Form 4255 to figure the recapture amount. The credit recapture
is figured by multiplying the original investment credit taken by the
recapture percentage from the tables shown on Form 4255. The result is
the recapture amount. See Form 4255 for more information.
If the refigured credit is less than the credit you originally
took, you must add the difference to your tax.
Net operating loss carryback.
If you have a net operating loss carryback from the recapture year
or a later year that reduces your tax for the recapture year or an
earlier year, you may have to refigure your recapture. See section
1.47-1(b)(3) of the regulations.
At-risk reduction.
If your investment credit property is subject to the at-risk
limits, you may have to recapture part of the credit if the amount at
risk is decreased. See the instructions for Form 3468 for more
information.
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