Navigating Form 4255: Investment tax credit recaptures and PW&A penalties

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).