Investment Credit The investment credit is the total of the following credits. Reforestation credit. Rehabilitation credit. Energy credit. Reforestation credit.The 10% reforestation credit applies to up to $10,000 ($5,000 ifyou are married filing a separate return) of the costs you incur eachyear to forest or reforest property you hold for growing trees forsale or use in the commercial production of timber products. Thesecosts must qualify for amortization. You can take the investmentcredit for reforestation costs whether you choose to amortize them oradd them to the basis of your property. There is no carryforward orcarryback of costs exceeding the dollar limit. For more informationabout these costs, see Amortization in chapter 8. Example.You incurred $9,000 of qualified reforestation costs during theyear. You may take a reforestation credit of $900 (10% of $9,000) forthe year. Rehabilitation credit.The rehabilitation credit applies to costs you incur forrehabilitation and reconstruction of certain buildings. Rehabilitationincludes renovation, restoration, or reconstruction. It does notinclude enlargement or new construction. Generally, the percentage ofcosts you can take as a credit is 10% for buildings placed in servicebefore 1936 and 20% for certified historic structures. See theinstructions for Form 3468 for more information. Energy credit.The 10% energy credit applies to certain costs for solar orgeothermal energy property you placed in service during your tax year.See the instructions for Form 3468 for more information. Basis adjustment.You generally must reduce the basis of assets on which you take aninvestment credit. The reduction is 100% of the rehabilitation creditand 50% of the reforestation and energy credits. See the instructionsfor Form 3468. Example.You amortized qualified reforestation costs of $9,000 incurredduring the year. You are also taking a $900 reforestation credit. Youmust reduce your amortizable basis by $450 (50% of $900). As a result,your amortizable basis will be $8,550 ($9,000 - $450). How to take the investment credit.Use Form 3468 to figure your credit. You may also needto file Form 3800. See How To Claim the Credit, earlier. Carrybacks and carryforwards.Even if you cannot take an investment credit for the year, you mayhave unused credits from earlier years that may reduce your tax. Theseunused credits are carried to your current tax year as generalbusiness credit carryforwards and the rules for the general businesscredit, discussed earlier, apply. Recapture ofInvestment Credit At the end of each tax year, you must determine whether youdisposed of or stopped using in your business (either partially orentirely) any property for which you claimed an investment credit in aprior year. If you dispose of property before the end of the recaptureperiod, you must recapture a percentage of the credit by adding it toyour tax. See Recapture Rule, later, for a discussion ofrecapture period. Use Form 4255 to figure the recapture tax or attach adetailed statement to your return for the year you dispose of theasset showing the computation of the recapture tax and the decrease inany investment credit carryforward. Dispositions An outright sale of property is the clearest example of adisposition. Another type of disposition occurs when you exchange ortrade worn-out or obsolete business assets for new ones. If theproperty ceases to be qualifying property, it is considered to bedisposed of for investment credit recapture purposes. For example, theconversion of business property to personal use is considered adisposal for investment credit recapture purposes. Certain transactions result in dispositions for investment creditrecapture purposes. The following illustrate those that are and thosethat are not dispositions. Mortgaging and foreclosure.There is no disposition if title to property is transferred assecurity for a loan. However, a disposition does occur if there is atransfer of property by foreclosure. Leased property.The leasing of investment credit property by the lessor who tookthe credit is generally not a disposition. However, if the lease istreated as a sale for income tax purposes, it is a disposition. Adisposition also occurs if property ceases to be investment creditproperty in the hands of the lessor, the lessee, or any sublessee. Decrease in basis.If the basis of investment credit property decreases, the decreaseis considered to be a disposition of part of the property. Thisoccurs, for example, if you buy property and later receive a refund ofpart of the original purchase price. You must then refigure the creditas if the decrease in basis was never part of the original basis. Ifyour refigured credit is less than the credit you originally took, youmust add the difference to your tax. Retirement or abandonment.You dispose of property if you abandon it or otherwise retire itfrom use. Normal retirements are also dispositions. Transfer by reason of death.There is no disposition of investment credit property if theproperty is transferred because the owner-taxpayer died. Gifts.You are considered to have disposed of property that youtransferred by gift. Transfers between spouses.If you transfer investment credit property to your spouse, or youtransfer the property to your former spouse incident to a divorce, yougenerally are not considered to have disposed of the property. Thisalso applies if the transfer is made in trust for the benefit of yourspouse or former spouse. However, if your spouse or former spouselater transfers the property, your spouse or former spouse willreceive the same tax treatment that would have applied to you if youhad made the transfer. Casualty, theft, or involuntary conversion.You are considered to have disposed of property that was destroyedby casualty or lost by theft or other involuntary conversion. Disposition of assets by S corporation, partnership, estate,or trust.If you are a shareholder of an S corporation that disposes ofassets on which you figured the investment credit, you are treated ashaving disposed of the share of the investment on which you figuredyour credit. This same rule applies if you are a member of apartnership or a beneficiary of an estate or trust. Change in form of doing business.A disposition does not occur because of a change in the form ofdoing business if certain conditions are met. For more information,see section 1.47-3(f) of the regulations. Choosing S corporation status.The choice by a corporation to become an S corporation generallywill not cause the recapture of investment credit previously claimedby the corporation. The choice is treated as a change in the form ofdoing business and not as a disposition of property. No dispositionoccurs when an S corporation terminates or revokes its choice not tobe taxed as a corporation. Sale and leaseback.There is no disposition when investment credit property is sold bythe taxpayer who claimed the credit and it is then leased back to thattaxpayer as part of the same transaction. Recapture Rule If you dispose of investment credit property before the end of therecapture period, you must recapture, as an additional tax, part ofthe original credit you claimed. You may also have to recapture partor all of the credit if you change the use of investment creditproperty to one that would not have originally qualified for thecredit. Recapture period.The credit you must recapture depends on when during the recaptureperiod you dispose of, or change the use of, the property. Therecapture period is the length of time the property must be used toget the full investment credit. The recapture period for investmentcredit property is 5 full years from the date it was placed inservice. If you dispose of the property during the first full year ofservice, you must recapture the full amount of the credit that wasused to reduce your tax. The recapture amount decreases for each yearthe property remains in qualified service. Form 4255.Use Form 4255 to figure the recapture amount. The credit recaptureis figured by multiplying the original investment credit taken by therecapture percentage from the tables shown on Form 4255. The result ofthis computation is the recapture amount. See Form 4255 for moreinformation. If the refigured credit is less than the credit you originallytook, you must add the difference to your tax. Net operating loss carrybacks.If you have a net operating loss carryback from the recapture yearor a later year that reduces your tax for the recapture year or anearlier year, you may have to refigure your recapture. See section1.47-1(b)(3) of the regulations. At-risk reduction.If your investment credit property is subject to the at-risklimits, you may have to recapture part of the credit if the amount atrisk is decreased. See the instructions for Form 3468 for moreinformation.