Form 4255: When an Investment Credit Gets Clawed Back

Everything below comes from the IRS Instructions for Form 4255 (Rev. December 2025) and the December 2025 Form 4255, as of October 2026.

What triggers recapture

You generally refigure the credit, and may have to pay some or all of it back, if before the end of the recapture period you:

• dispose of the investment credit property,
• change its use so it no longer qualifies, or business use drops so it no longer qualifies in whole or part,
• see your share in a partnership, S corporation, estate or trust that passed the credit to you cut by more than one-third,
• return leased property to the lessor, or
• have a section 48E facility whose greenhouse gas emissions rate goes above 10 grams of CO2e per kWh in its first five years.

The credit you claimed on Form 3468 is the starting point for the calculation.

How much comes back: the recapture table

Recapture shrinks the longer you keep the property. Line 15 uses this table, based on the number of full years the property was in service:

Full years in service	Recapture percentage
0	100
1	80
2	60
3	40
4	20
5 or more	0

The IRS worked example: a $100,000 energy credit claimed in January 2023, with $20,000 used in 2023 and $16,000 in 2024. The property is sold in June 2025, so the recapture percentage is 60%. The tax increase for 2025 is $21,600, which is 60% of the $36,000 used, and the remaining $64,000 carryforward is cut to $25,600.

The part people miss: basis goes back up

Recapture isn't all bad news. In the same example, the basis of the property rises by $60,000. For rehabilitation and several manufacturing and project credits, basis increases by 100% of the recapture amount. For energy property and clean electricity investment property it increases by 50%. That higher basis reduces the gain on the sale that triggered the recapture, so run both numbers together, alongside your Form 4562 depreciation records.

Your carryforwards shrink too

Recapture doesn't only add tax. Any remaining carryforward or carryback from the same property is reduced by the recapture percentage used on line 15. In the IRS example, a $64,000 carryforward fell to $25,600 because the 60% recapture percentage also applied to it. Forget that step and you'll overclaim the credit in later years.

Less obvious triggers

• A building expected to be a qualified rehabilitated building that won't be one when it's placed in service.
• Property claimed through progress expenditures that won't qualify once it's placed in service.
• A net increase in nonqualified nonrecourse financing on property covered by section 49(a)(1).
• Solar or wind property that stops qualifying for the low-income communities bonus credit.
• An applicable transaction involving the material expansion of semiconductor manufacturing capacity.

When recapture doesn't apply

• A transfer because of the death of the taxpayer.
• A transfer between spouses or incident to divorce, though a later sale by the spouse who received it can still trigger recapture.
• Certain corporate acquisitions of assets covered by section 381(a).
• A mere change in the form of the business, if the property stays in the business and you keep a substantial interest. A corporation electing S status counts.

Excessive payments and transferred credits

Since the elective payment and transfer rules, Form 4255 does more than recapture. If the IRS decides an elective payment was excessive, the tax for that year rises by the excess plus 20% of it, unless there's reasonable cause. The same applies to an excessive credit transfer: the buyer of the credit pays the excess plus 20%.

When a credit has been transferred under section 6418 and a recapture event happens, the original owner must notify the buyer. The buyer then works out and pays the recapture on the transferred part, and tells the original owner the amount so it can adjust basis.

What changed in the December 2025 revision

• The excessive payments section was renamed and columns (m) to (p) expanded for more detail.
• Columns (o) and (p) report penalties for failing the prevailing wage and the apprenticeship requirements.
• Part III now figures emissions tier recapture for clean hydrogen production facilities.
• Recapture can apply under sections 48 and 48E if prevailing wages aren't paid for alteration or repair during the 5-year period after the property is placed in service.

Partnerships and S corporations

Certain amounts from Form 4255 are reported directly on the partnership or S corporation return rather than passed out to owners. If you're a partner or shareholder, your basis adjustment follows what the entity reports to you.

The verdict

Before you sell, scrap or repurpose property that earned an investment credit, count the full years it's been in service. A sale in year two can cost 60% of the credit used, while waiting past the fifth anniversary costs nothing. If you bought or sold a transferable credit, put the notification step in writing so nobody is surprised by a recapture bill. And keep the placed-in-service date with the asset register, because that single date drives every number on this form.

Frequently asked questions

What is Form 4255 used for?

It figures the increase in tax from investment credit recapture, excessive elective payments, excessive credit transfers and penalties for failing the prevailing wage and apprenticeship requirements.

How long is the investment credit recapture period?

Generally 5 full years after the property is placed in service. The recapture percentage is 100 with 0 full years in service and falls to 0 once 5 or more full years have passed.

Does selling the property always trigger recapture?

Not always. Transfers because of death, transfers between spouses or incident to divorce, certain section 381(a) acquisitions and a mere change in business form are exceptions.

What is the penalty for an excessive elective payment?

The tax is increased by the excessive payment plus 20% of it, unless there's reasonable cause.

Does recapture change the property's basis?

Yes. Basis increases by 100% of the recapture amount for some credits and by 50% for energy property and clean electricity investment property.