Article
Navigating Form 4255: Investment tax credit recaptures and PW&A penalties
A new form used to report ITC recaptures, excessive payments and prevailing wage and apprentice requirement penalties
Apr 25, 2025 · Authored by Robert Moczulewski, Jowan Abouhosah, Jiyoon Choi
The IRS has released Form 4255 for the tax year 2024, which is used for the reporting and payment of recapture of investment credit, excessive payments and prevailing wage and apprenticeship (PW&A) requirement-related penalties. This form is essential for taxpayers who must report the recapture of credits previously claimed under various investment credit programs, report any extra credits claimed by a direct pay entity or show the penalties associated with PW&A compliance. Specifically, under section 50, the recapture occurs when either the property for which the credit was claimed is disposed of, its use changes or it no longer qualifies as investment credit property within a specific period.
Purpose of Form 4255
Reporting ITC recaptures
Form 4255 calculates the increase in tax due to the recapture of investment credits. This includes credits that were initially eligible for investment credits but later experienced changes that disqualify them.
Under Internal Revenue Code (IRC) section 50(a), if during any taxable year, investment credit property is disposed of or otherwise ceases to be investment credit property to the taxpayer before the close of the recapture period, then the tax will be increased by the recapture percentage of the decrease of the credits allowed for all prior taxable years. The recapture period is typically five years, but in some cases, it is three years.
A taxpayer needs to report the recapture of credits on Form 4255 in the taxable year when the recapture event occurs. The recapture amount reported under Form 4255 will increase the tax liability. If the taxpayer fails to report the recapture accurately, penalties and interest will apply.
Excess payments and credit transfers
The form also addresses excess payments and excess credit transfers. Taxpayers that received higher amounts of direct payments than the actual credit amounts or transferred higher amounts of credits than the actual credit amounts can use Form 4255 to report the excess payments and excess credit transfers.
In the case of any amount treated as a payment which is made by the applicable entity (i.e., direct pay entity), which the IRS determines constitutes an excessive payment, the tax imposed on such entity for the taxable year in which such determination is increased by the amount equal to the sum of the amount of excessive payment plus 20% if no reasonable cause. IRC section 6417(d)(6).
In the case of any portion of an eligible credit that is transferred to a transferee taxpayer in pursuance to section 6418 which the IRS determines constitutes an excessive credit transfer, the tax imposed on the transferee taxpayer for the taxable year in which such determination is made is increased by the amount equal to the sum of the amount of such excessive credit transfer plus 20% if no reasonable cause. IRC section 6418(g)(2).
The excessive payments or excessive credit transfers can be reported under Form 4255. The reported excessive amounts under Form 4255 will increase the tax liability.
PW&A penalties
Under IRC section 45 and other sections that have PW&A requirements, tax credits can be multiplied by five times (5x multiplier) if certain requirements are satisfied, including the PW&A requirements. In case any prevailing wage violations occur, and correction payments are paid but the penalty waivers are not met, penalties of $5,000 multiplied by the total number of laborers and mechanics who were paid below the prevailing wage for any period during such year need to be paid to the IRS. The penalties will be $10,000 per laborer and mechanic if the IRS determines that the violations were caused due to intentional disregard. Furthermore, if apprenticeship requirements (labor hour requirements, participation requirements and ratio requirements) are failed to be satisfied, the penalties of $50 multiplied by the total labor hours for which the requirements were not satisfied will need to be paid to the IRS. The base credit rate of $50 will be increased to $500 per hour if the IRS determines that the violations were caused due to intentional disregard.
Taxpayers that claim the 5x multiplier but have violations will generate penalties reported on Form 4255. Taxpayers must be sure to calculate and pay penalties correctly when incurred. For tax-exempt entities, the form allows for the offsetting of penalties against the credit, rather than paying the penalties and receiving higher credit amounts.
How to report and who should report
Taxpayers who have claimed investment credits and subsequently experienced a recapture event must complete Form 4255. This includes corporations, partnerships, s-corporations, estates and trusts. The form must be filed with the taxpayer’s annual return, and specific instructions are provided for reporting recapture amounts directly on the partnership or s-corporation return. Form 4255 has been updated to now include the reporting and payment of penalties related to PW&A, which are reported directly in Part I, Column (p) of the form.
Impact to different filers
Relevant form lines
- Schedule J, Lines 1g and 9a
Key notes
- Corporations face limitations on the use of credits, with up to 75% of the tax fee being offset. This means that even after applying for credits, corporations may still have a tax liability.
- Taxpayers must have enough tax due to offset the tax credits.
- Credits are allowed under Form 3800 and allow credits to be reduced by the amount of PW&A penalties.
Relevant form lines
- ‘Tax and Payment’ section, Line 27
Key notes
- Penalties are paid on the partnership level directly from partnership funds, as they cannot offset penalties through K-1 or schedule payments.
Relevant form lines
- ‘Tax and Payment’ section, Line 23c
Key notes
- Partners must report recapture amounts directly on partnership returns, impacting overall tax liability.
- Corporations are liable for any required investment credit recapture attributable to credits allowed for tax years not classified as an s-corporation.
Relevant form lines
- Part II, Line 4a
- Part III, Line 3a
Key notes
- Penalties can offset the credits claimed.
The new Form 4255 provides a structured approach for taxpayers to report the recapture of investment credits, addressing various scenarios and penalties. Understanding the implications for different types of filers is crucial for accurate reporting and minimizing tax liabilities.
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
