Home › For CPAs
Recapture Risk and Insurance for Buyers of Transferable Credits
Recapture is the risk that tends to concern CPAs most. It applies to investment credits such as the §48 and §48E credits, not to production credits.
The five-year schedule
If investment credit property is disposed of, or ceases to be investment credit property, before the end of the recapture period, the tax is increased by a recapture percentage of the credit (§50(a)(1)): 100% within the first full year after placed in service, then 80%, 60%, 40% and 20%.
Who pays
The transferee is responsible for its proportionate share of recapture, the recapture amount times the credit transferred over the total credit (§1.6418-5(d)(3)). The eligible taxpayer must notify the transferee in time to compute it. The IRS FAQ (Q13) confirms this.
Events to diligence
- Sale, foreclosure or change in ownership.
- Casualty loss; abandonment.
- Change of use.
- Changes in a partner's or shareholder's financing (limited for buyers; see at-risk rules).
Protection
| Protection | What it does | Watch for |
|---|---|---|
| Seller indemnity | Seller reimburses for recapture, disallowance, reduction | Creditworthiness of the indemnitor |
| Tax credit insurance | Policy for specified tax-credit risks | Exclusions, retention, who pays the premium |
| Property insurance, site control | Reduce casualty and loss-of-site events | Covenants should run the full recapture period |
Indemnity and insurance are market practices described by participants such as Reunion and Aprio; the Code does not require them.
The accounting side
See how recapture exposure is considered under ASC 740.
Illustration
A project earns a $1,000,000 investment credit. A buyer purchases $400,000 of it. If the property ceases to qualify during the third year, the §50(a) recapture percentage is 60%. The recapture amount is $600,000; the buyer's share is 40%, or $240,000 (§1.6418-5(d)(3)). Indemnity or insurance, if in place, would respond according to its terms.
| Year property ceases to qualify | Recapture percentage |
|---|---|
| First year | 100% |
| Second | 80% |
| Third | 60% |
| Fourth | 40% |
| Fifth | 20% |
Frequently asked questions
Do production tax credits have recapture?
The §50 recapture rules apply to investment credit property. Production credits such as §45 and §45Y do not follow the five-year investment credit schedule.
Is tax credit insurance required?
No. It is a market practice many buyers choose, alongside seller indemnity.
- 26 U.S.C. §50, Other special rules, recapture (Cornell LII)
- 26 CFR §1.6418-5, Rules for transferee taxpayers and recapture
- IRS: Elective pay and transferability FAQs, Transferability (Q4-Q15)
- Reunion: Section 48 ITC due diligence guide (market practice)
- Aprio: Sell Tax Credits for Cash or Buy Them at a Discount
Owe $50k or more in federal tax?
Tell us your estimated liability and timing. We will show you what transferable credits are available and walk your CPA through the diligence.
Get a tax credit quote §48E buyer guide or call (888) 328-4718