Current through September 18, 2024
A. In general, a recapture of a portion of
the credit is required where the property on which a credit has been allowed is
disposed of or ceases to be in qualified use. The following are examples of
some types of incidents which require recapture of the credit (this list is not
all-inclusive):
1. A legal
dissolution;
2. A trade
in;
3. Foreclosure of a security
interest;
4. Retirement before
expiration of its useful life;
5.
Destruction or damage by fire, storm or other casualty or by reason of its
theft or other involuntary conversion;
6. Where property is leased to
others;
7. Removal of property from
this state;
8. Cease to own
property;
9. Cease to be in
qualified use.
B.
Generally, recapture is computed:
1. Recapture
= Tax Credit taken on property ceasing to qualify
2. Multiplied by (Useful life months -
qualified use in months)
3. Divided
by Useful life of property in months
C. The following rules apply to transactions
between taxpayers:
1. A recapture of this
credit is required unless all of the following elements are present in the
transaction:
a. The property is transferred
from one taxpayer to another by a transaction in which the basis of the
property in the hands of the transferee is determined in whole or in part by
reference to the basis in the hands of the transferor, or a mere change in the
form of the taxpayer's business; and
b. the acquiring taxpayer is taxable under
R.I. Gen. Laws Chapters 44-11 or 44-30; and
c. the property continues to be in qualified
use if all of the preceding elements are present in the transaction, the
transfer will not require a recapture of the credit and any unused credit on
the transferred property may be passed through to and carried forward by the
acquiring taxpayer. If the property in the hands of the acquiring taxpayer is
not in qualifying use for its entire life or for the period of time outlined in
the recapture provisions below, a recapture by the acquiring taxpayer is
required. In measuring the period of qualified use, the period during which the
property was held by the transferor taxpayer and the acquiring taxpayer shall
be taken into account.
2. The above rules do not strictly conform to
federal treatment.
a. For example, a recapture
is required where a transfer is made other than to an acquiring taxpayer
taxable under R.I. Gen. Laws Chapters 44-11 or 44-30 (on the theory that the
property is no longer in qualified use).
D. Recapture of
26 U.S.C. §
167 property:
1. In the year initially claimed: If property
depreciable under 26 U.S. Code §167 of the Internal Revenue Code is
disposed of or ceases to be in qualified use prior to the end of the taxable
year in which the credit is to be taken, the amount of the credit shall be that
portion of the credit provided for in this section which represents the ratio
which the months of qualified use bear to the months of useful life.
2. In subsequent years: If property on which
credit has been taken is disposed of or ceases to be in qualified use prior to
the end of its useful life, the difference between the credit taken and the
credit allowed for actual use must be added back in the year of
disposition.
3. After 12
consecutive years: If qualifying property is disposed of or ceases to be in
qualified use after it has been in qualified use for more than twelve (12)
consecutive years, it shall not be necessary to recapture any remaining credit
as provided in this subparagraph. The amount of credit allowed for actual use
shall be determined by multiplying the original credit by the ratio which the
months of qualified use bear to the months of useful life. For purposes of this
subparagraph, useful life of property shall be the same as the taxpayer uses
for depreciation purposes when computing the federal income tax
liability.
E. Recapture
of the
26 U.S.C. §
168, (3 year property): This type of
recapture applies to three (3) year property, as defined in
26 U.S.C. §
168(c), other than that type
of property included in the recapture of buildings and structural components of
buildings (§
14.8(F) of
this Part).
1. In the year initially claimed:
If the property is disposed of or ceases to be in qualified use prior to the
end of the taxable year in which the credit is to be taken, the amount of the
credit shall be that portion of the credit which represents the ratio which the
months of qualified use bear to thirty-six.
2. In subsequent years: If property on which
credit has been taken is disposed of or ceases to be in qualified use prior to
the end of thirty-six (36) months, the difference between the credit taken and
the credit allowed for actual use must be added back in the year of
disposition. The amount of credit allowed for actual use shall be determined by
multiplying the original credit by the ratio which the months of qualified use
bear to thirty-six (36).
F. Recapture of the
26 U.S.C. §
168 property: This section deals with
recapture and any recovery property which is a building or a structural
component of a building to which
26 U.S.C. §
168 applies.
1. In the year initially claimed: If
qualifying property which is a building or a structural component of a building
is disposed of or ceases to be in qualified use prior to the end of the taxable
year in which the credit is to be taken, the amount of the credit shall be that
portion of the credit provided for in this section which represents the ratio
which the months of qualified use bear to the total number of months over which
the taxpayer chooses to deduct the property under
26 U.S.C. §
168.
2. In subsequent years: If property on which
credit has been taken is disposed of or ceases to be in qualified use prior to
the end of the period over which the taxpayer chooses to deduct the property
under
26 U.S.C. §
168, the difference between the credit taken
and the credit allowed for actual use must be added back in the year of
disposition.
3. After 12
consecutive years: If such property is disposed of or ceases to be in qualified
use after it has been in qualified use for more than twelve (12) consecutive
years, it shall not be necessary to add back the credit as provided in this
subparagraph. The amount of credit allowed for actual use shall be determined
by multiplying the original credit by the ratio which the months of qualified
use bear to the total number of months over which the taxpayer chooses to
deduct the property under
26 U.S.C. §
168.
G. Where property is disposed of or ceases to
be in qualified use during other than the initial taxable year, the taxpayer
may not reduce the amount of tax liability created by a recapture of this
credit by credits of this type allowed for the year in which the asset is
disposed of, nor can that liability be reduced by any carryovers of this credit
to that year. The amount of recapture must be added to the taxpayer's tax in
that year.
