4255 Instructions for Form 4255

Instructions for Form 4255

Department of the Treasury
Internal Revenue Service

(Rev. December 2018)

(Use with the December 2016 revision of Form 4255.)
Recapture of Investment Credit
Section references are to the Internal Revenue
Code unless otherwise noted.

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.

Reminder
Form 4255 has been revised to reflect the
computational steps required under
section 50(a)(1) and to provide additional
instructions on how to adjust the unused
portion (i.e., carryover) of a recaptured
credit.
An electing large partnership (under
repealed section 775) with a fiscal taxable
year that began in 2017 must use Form
4255 (revised December 2016) and its
related instructions (revised December
2016).

General Instructions
Purpose of Form

Use Form 4255 to figure the increase in
tax for the recapture of investment credit
claimed and for the recapture of a
qualifying therapeutic discovery project
grant.

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.
Nov 13, 2018

• Any property to which section 48(b),
48A(b)(3), 48B(b)(3), or 48C(b)(2) 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 received a grant under section
1603 of the American Recovery and
Reinvestment Tax Act of 2009 for property
for which you were previously allowed an
investment credit for qualified progress
expenditures under section 48(d), and the
amounts constituting the qualified basis
for the credit are also the basis for the
grant.
• 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.
• 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.
Cat. No. 68759M

Exceptions to recapture. Recapture of
the investment credit does not 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:
1. The property is retained as
investment credit property in that trade or
business, and
2. 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
CAUTION 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.

!

Recapture of Qualifying
Therapeutic Discovery Project
Grant

If you received a grant under section 9023
of the Affordable Care Act (ACA), you may
have to recapture it if the project for which
the grant was awarded ceases to be a
qualifying therapeutic discovery project. If
the amount of the grant is more than the
amount allowable as a grant, the excess
must be recaptured as if the investment to
which the excess portion of the grant
related had ceased to be a qualified
investment immediately after the grant
was made.
The increase in tax for any recapture of
the grant is imposed on the person to
whom the grant was made. In the case of

pass-through entities (including
partnerships, S corporations, estates, and
trusts), the tax is determined at the entity
level and allocated to the entity owners as
a credit recapture.
To recapture a qualifying therapeutic
discovery project grant, skip lines 1–18
and complete line 19. For more
information, see Notice 2010-45, 2010-23
I.R.B. 734, available at IRS.gov/irb/
2010-23_IRB#NOT-2010-45.

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

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 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.

For property subject to investment credit
or qualifying therapeutic discovery project
grant recapture, 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 depreciable qualifying
therapeutic discovery project 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 the reason for recapture is due
to receipt of a grant under section 1603 of
the American Recovery and Reinvestment
Act of 2009, the basis of the energy
property is reduced by 50% of the grant
received.

Part I. Original Investment
Credit

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.

Line 3. If section 49(a)(1) did not 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.

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.

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 4. Subtract line 3 from 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)), do not 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 in prior
years. But do not 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,

TIP include any general business

entry on line 2.

credits that could have been
carried forward or carried back to a year
affected by the recapture of the original
credit. Do not include any credits that were
previously recaptured. If you previously

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Instructions for Form 4255 (Rev. 12-2018)

If line 3 is negative, then the entry

TIP on line 4 will be larger than the

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 five years, complete Steps 4 through 6 for those years on additional
copies of the worksheet. Include the total for all years on Step 7.
First
Year
______

Steps

Year
______

Year
______

Year
______

Year
______

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
used the credit to offset the recapture of a
credit on another property, treat it as a
credit allowed in a previous tax year.
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))
CAUTION 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.

!

Instructions for Form 4255 (Rev. 12-2018)

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
or qualified therapeutic discovery grant
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, 2016, enter
02/01/2016 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-. If a
grant was received under section 1603 of
the American Recovery and Reinvestment
Act of 2009, enter -0-.
-3-

Total

______

______
______

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,

TIP 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. Do not 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.
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

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 five years, complete Steps 4 through 6 for those
years on additional copies of the worksheet. Include the total for all years on Step 7.
First
Year
______

Steps

Year
______

Year
______

Year
______

Year
______

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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))
CAUTION 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 if you
received a grant under section 1603 of the
American Recovery and Reinvestment Act
of 2009.

IF the number of full
years on line 12 of
Form 4255 is . . .

THEN the recapture
percentage is . . .

0
1
2
3
4
5 or more

100
80
60
40
20
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 2016, Kumar earned a
rehabilitation credit of $100,000 on
property A. Kumar used $20,000 of the
credit to offset tax in 2016 and used
$16,000 as a carryforward to offset tax in
2017. He had $64,000 remaining
carryforward for property A at the end of
2017. Kumar has no other tax credits for
other properties for any other years.
Kumar disposed of the property in June
of 2018. His recapture percentage is 60%.
Because Kumar has no other credits for
properties for other years, he enters -0- on
line 13. He enters $36,000 on line 6 (the
credit from property A used in 2016 and
2017). Kumar’s total increase in tax for
2018 is $21,600 (60% of $36,000). His
remaining credit carryforward for property
A also is reduced by the recapture
percentage of 60%. Kumar’s remaining
carryforward is $25,600 (40% of $64,000).
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Total

______

______
______

Kumar increases his basis for property A
by $60,000 ($21,600 + $38,400).
Example 2. The facts are the same as
in Example 1, except that Kumar also
earned a rehabilitation credit on property
B in 2016 of $12,000, which he did not use
to offset his tax. As before, he disposed of
property A in June of 2018. He enters
$36,000 on line 6 (the credit from property
A used in 2016 and 2017). However,
Kumar could have used his $12,000 of
unused credit from property B for 2016
against his 2016 tax had no credit been
available from property A. Therefore, he
enters $12,000 on line 13 and $24,000
($36,000 - $12,000) on line 14. Kumar’s
total increase in tax for 2018 is $14,400
(60% of $24,000). His remaining credit
carryforward for property A also is
reduced by the recapture percentage of
60%. Kumar’s remaining carryforward is
$25,600 (40% of $64,000). Kumar
increases his basis for property A by
$52,800 ($14,400 + $38,400).
Example 3. In January of 2016,
Maayan earned a rehabilitation credit of
$100,000 from property A. She used all of
the credit to offset $100,000 of tax in
2016. In 2017, Maayan earned a
rehabilitation credit of $75,000 from
property B and used none of the credit to
offset tax. In June of 2018, 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
rehabilitation credit of $75,000 from
Instructions for Form 4255 (Rev. 12-2018)

property B back to 2016 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 2018 is
$15,000 (60% of $25,000). She increases
her basis in property A by $15,000.
Example 4. In 2016, Ian earned a
rehabilitation credit of $100,000 from
property A. Ian used $1,000 of the credit
to offset tax in 2016 and used $99,000 as
a carryforward to offset tax in 2017. In
2018, he earned a rehabilitation credit of
$75,000 from property B and used none of
the credit to offset tax.
On February 1, 2018, 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 2016 to offset the $1,000
credit used for property A. However, Ian
could have carried the rehabilitation credit
of $75,000 from property B back to 2017
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 2018 is $20,000 (80% of $25,000).
He increases his basis in property A by
$20,000.
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. Enter the amount of any
qualifying therapeutic discovery project

Instructions for Form 4255 (Rev. 12-2018)

grant required to be recaptured under
section 9023(e) of the ACA.
Do not complete lines 1 through 18 to
figure this increase in tax. Attach a
statement showing how you figured the
increase in tax. Do not adjust the increase
in tax for any unused investment credit.
Partnerships, S corporations, estates,
and trusts, determine the increase in tax at
the entity level. This amount will be
allocated to the entity owners as a credit
recapture.
Line 20. Enter the line 20 amount on the
appropriate line of your tax return (for
example, 2018 Form 1120, Schedule J,
line 9a). Partnerships, enter the amount
from line 20 on Form 1065, 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 1120S,
Schedule K, line 17d, using code G. See
the Instructions for Form 1120S for more
information. Estates and trusts, enter the
amount from line 20 on Form 1041,
Schedule G, line 5. See the Instructions
for Form 1041 for more information.
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

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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.