Avoiding income tax credit recapture by a corporation.

• Author: Ellentuck, Albert B.

A CORPORATION THAT DISPOSES OF REAL PROPerty may be required to increase its tax liability by the amount of recaptured credits with respect to that property, specifically, via a recapture of the investment tax credit or the low-income housing credit. Fortunately, there are exceptions that can apply as well as some actions that the corporation can take during the tax year to reduce or avoid liability for recapture, which are addressed in the following paragraphs.

Recapturing the Investment Tax Credit

The Sec. 46 investment tax credit (ITC) is composed of several credits, including the credit for rehabilitation expenditures under Sec. 47 and the energy credit under Sec. 48.. The ITC is subject to recapture if property is disposed of, or otherwise ceases to be investment credit property, within five years after the property is placed in service (Sec. .50(a)(1)(B)). The corporation's tax for that year is increased by the total credit taken, multiplied by a recapture percentage based on how long the ITC property was held. The recapture amount is reduced 20% for each full year that elapses after the corporation places the property in service. Consequently, there is 100% recapture if the property is disposed of (or ceases to be investment credit property) less than one year after the property is first placed in service. There is 80% recapture after one year, 60% after two years, 40% after three years, 20% after four years, and no recapture after five years.

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The recapture percentage is tied to the date the property was placed in service, not the end of the tax year in which the property was placed in service. Therefore, one simple way to eliminate liability for recapture is to wait until more than five years have passed from when the property was placed in service to dispose of the property. Similarly, waiting a little while to dispose of the property when nearing an anniversary of the date it was placed in service will reduce recapture by 20%. For example, if a corporation claimed a $10,000 credit on property that the corporation placed in service on March 1, 2011, and delayed the sale of the property from Feb. 25, 2013, to March 5, 2013, it would save $2,000 in recapture tax (60% recapture instead of 80% recapture).

Recapture is triggered by the sale of property on which the ITC was claimed, as well as a transfer of the property by foreclosure of a mortgage or other security interest on the property. However, recapture is...