Investment Tax Credit Considerations
The Investment Tax Credit allows for a credit of 30 percent of the cost of installing a solar energy system. Developers and investors in solar projects understand this substantial benefit but may not be aware of the recapture provisions that can be triggered if the property is disposed during the five years that follow.
If the property is disposed within five years after being is placed in service, the tax for that year of disposal is increased by a percentage of the original tax credit taken. This recapture is reduced by 20 percent for each full year that the property is in service, with zero recapture after five full years. For example, there is 100 percent recapture if the property is disposed less than one year after it was originally placed in service. The recapture is 80 percent after one year, 60 percent after two years, 40 percent after three years, 20 percent after four years, and zero after five years. Each year in service is based on the actual date placed in service, not the calendar year end that the property was placed in service. This may be a planning opportunity where it is possible to delay the disposal until after another anniversary date passes, reducing the recapture by an additional 20 percent.
The recapture provisions apply to disposals as well as any event where the property ceases to be investment credit property. This may take the form of a sale, foreclosure, abandonment, retirement, loss by destruction or damage, or theft. The recapture provisions do not apply in the case of a transfer due to death or caused by divorce. Recapture would also not be required based on a change in business structure if the property remains in service and ownership retains a substantial interest in the continuing business. These provisions are often overlooked when selling an ownership interest in an entity during the recapture period.
When a partnership owns investment tax credit property and a partner sells all or a portion of their interest, they may be subject to recapture. If the partner’s interest in the partnership is reduced by more than one third of what it was in the year the property was placed in service, the reduction is treated as a proportional disposition of the property. For example, a partner has a 70 percent interest in the profits of a partnership when a solar project is placed in service. During the recapture period, the partnership admits additional partners, reducing the partner’s interest in profits from 70 percent to 35 percent, which is 50 percent of their original interest. The 50 percent reduction is more than the one third threshold and results in 50 percent of the property ceasing to be investment credit property with respect to that partner. Recapture would be calculated on 50 percent of the credit originally taken by the partner, reduced for the number of years in service up to the date of the change in ownership. Any restructuring during the five-year recapture period should be carefully reviewed for any potential impact.
The Investment Tax Credit recapture provisions can be costly when not considered. Rodman CPAs can help you navigate the process.
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