How To Claim the Credit

To claim a general business credit, you will first have to get the forms you need to claim your current year business credits. The introduction to this chapter contains a list of current year business credits. The form you use to claim each credit is shown in parentheses.

In addition to the credit form, you may also need to file Form 3800. See the next discussion to decide whether you need to file Form 3800.

Who must file Form 3800?   You must file Form 3800 if any of the following apply.

• You have more than one of the credits listed in the introduction (other than the empowerment zone and renewal community employment credit or New York Liberty Zone business employee credit).
• You have a carryback or carryforward of any of these credits (other than the empowerment zone and renewal community employment credit or New York Liberty Zone business employee credit).
• Any of these credits (other than the low-income housing credit, the empowerment zone and renewal community employment credit, or the New York Liberty Zone business employee credit) is from a passive activity. For information about passive activity credits, see Form 8582-CR.

Claiming the empowerment zone and renewal community employment credit.   The empowerment zone and renewal community employment credit is subject to different rules. The credit is figured separately on Form 8844 and is not carried to Form 3800. For more information, see the instructions for Form 8844.

Claiming the New York Liberty zone business employee credit.   The New York Liberty Zone business employee credit is an expansion of the work opportunity credit to include a new targeted group of employees in the New York Liberty Zone. This credit is figured separately on Form 8884 and is, generally, not carried to Form 3800. For more information, see the instructions for Form 8884.

Carryback and Carryforward

This discussion does not apply to the empowerment zone and renewal community employment credit or the New York Liberty Zone business employee credit.

There is a limit on the amount of general business credit you can take in any one tax year. If your credit is more than this limit, you can generally carry the difference to another tax year and subtract it from your income tax for that year. See Rule for carryback and carryforward, later.

Credit limit.   Your general business credit is limited to your net income tax minus the greater of the following amounts.

• Your tentative minimum tax.
• 25% of your net regular tax liability that is more than $25,000.

Net income tax.   Your net income tax is your net regular tax liability (discussed below) plus any alternative minimum tax.

Tentative minimum tax.   You must figure your tentative minimum tax before you figure your general business credit. Use Form 6251 (Form 4626 for a corporation) to figure your tentative minimum tax.

Net regular tax liability.   Your net regular tax liability is your regular tax liability minus certain credits. For more information, see the instructions for Form 3800 or any of the credit forms listed in the introduction.

Example.   Your general business credit for the year is $30,000. Your net income tax and net regular tax liability are both $27,500. Your tentative minimum tax, figured on Form 6251, is $18,487. The general business credit you can take for the tax year is limited to $9,013. This is your net income tax, $27,500, minus the greater of your tentative minimum tax, $18,487, or 25% of your net regular tax liability that is more than $25,000 ($2,500 × 25% = $625).

Married person filing separate return.   If you are married and file a separate return, you and your spouse must each figure your credit limit separately. In figuring your separate limit, use $12,500 instead of $25,000 (see Credit limit, earlier). However, if one spouse has no credit for the tax year and no carryforwards or carrybacks of any credit to that year, the other spouse can use the full $25,000 in figuring the limit based on the separate tax.

Rule for carryback and carryforward.   In general, you can carry the unused part of your credit back one tax year and then forward to each of the 20 tax years after the year of the credit.

There are limits on the carryback of a new credit to periods before the enactment of the credit provision. See the instructions for Form 3800 for more information on these limits.

In any tax year, credits must be used as follows.

1. Carryforwards to that year, the earliest ones first.
2. The credit earned in that year.
3. The carrybacks to that year.

For a credit earned in a tax year before 1998, the carryforward period is 15 years. No part of your carryforward to 2002 should be from a tax year before 1987.

Unused carryforward.   If you have any unused credit carryforward in the year following the end of the 20-year (15 years for pre-1998 credits) carryforward period, you can generally deduct the unused amount in that year. If an individual dies or a corporation, trust, or estate ceases to exist, the deduction is generally allowed for the tax year in which the death or cessation occurs. The deduction may not be allowed to certain corporations whose assets are acquired by another corporation.

Claiming a carryforward.   Use Form 3800 to claim a carryforward of an unused credit from a previous tax year. The carryforward becomes part of your general business credit for the tax year to which it is carried.

Claiming a carryback.   You can claim a refund based on your general business credit carryback to a prior tax year by filing an amended return for the tax year to which you carry the unused credit. Use Form 1040X if your original return was a Form 1040, U.S. Individual Income Tax Return. Use Form 1120X if your original return was a Form 1120, U.S. Corporation Income Tax Return, or 1120-A, U.S. Corporation Short-Form Income Tax Return. Attach Form 3800 to your amended return.

Generally, you must file the amended return for the carryback year within 3 years after the due date, including extensions, for filing the return for the year that resulted in the credit carryback.

Quick refund.   You can apply for a quick refund of taxes for a prior year by filing Form 1045 (Form 1139 for a corporation) to claim a tentative refund from a general business credit carryback. Generally, the application must be filed within 12 months after the end of the tax year in which you earn the credit.

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 amortizable 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. You can take the 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, 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% × $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% × $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.

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.

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 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.

The credit you must recapture depends on when during the recapture period you dispose of, or change the use of, the property. 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.

Instead of using Form 4255 to figure the recapture tax, you can 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 carryover.

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.

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 transactions that are dispositions and some that are not.

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 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.

Gains and Losses

Important Reminder

Lower capital gain tax rates.   The capital gain tax rates for qualified 5-year gain have been lowered. See Qualified 5-Year Gain, later.

Introduction

During the year, you may have sold or exchanged property. This chapter explains how to figure your gain or loss on the sale or exchange and determine the effect it has on your taxes.

Topics

This chapter discusses:

• Sales and exchanges
• Ordinary or capital gain or loss

Useful Items You may want to see:

Publication

• 334   Tax Guide for Small Business
• 523   Selling Your Home
• 544   Sales and Other Dispositions of Assets
• 550   Investment Income and Expenses
• 908   Bankruptcy Tax Guide

Form (and Instructions)

• Sch D (Form 1040)   Capital Gains and Losses
• Sch F (Form 1040)   Profit or Loss From Farming
• 1099-A   Acquisition or Abandonment of Secured Property
• 1099-C   Cancellation of Debt
• 4797   Sales of Business Property

See chapter 21 for information about getting publications and forms.

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