7894 / What is the investment tax credit?
If the investment tax credit was taken with respect to leased equipment placed in service after 1985 (generally, transition property), the basis of the equipment was reduced by the amount of the credit taken.2 Thus, the basis of the property for purposes of depreciation was reduced. However, if the lessor elected to pass the investment tax credit to the lessee, the lessor was not required to adjust the basis in the equipment, though the lessee is required to include the credit amount in gross income.3 The IRS released temporary regulations in 2016 providing that if a partnership or S corporation is the lessee, each partner or S corporation shareholder who is the ultimate credit claimant must include the applicable credit amount in gross income (i.e., the gross income is not a partnership or S corporation item, and must be included at the individual level). The partner or S corporation shareholder is not entitled to increase his or her basis in the partnership or S corporation interest as a result. The regulations apply to investment credit property placed into service after September 18, 2016.4
An amount equal to some of the tax offset by the credit previously taken under the investment tax credit may have been “recaptured” if the equipment was disposed of within five years after it was placed in service.5
If the credit was recaptured upon a disposition of equipment for which there was a basis reduction, the basis of the equipment for purposes of determining gain or loss was increased immediately prior to disposition by the recapture amount.6