Defining Recapture
The recapture of a tax credit occurs when you must pay back a tax credit to the government you have claimed in prior years because you are no longer eligible to claim the credit. For instance, you may have claimed a tax credit for a particular type of business investment, such as a New Markets Tax Credit (NMTC). However, a recapture event has occurred, which means that you no longer qualify for the tax credit. As a result, you must retroactively pay back the tax credit you already claimed on your taxes. Essentially, you’re paying the taxes that you would have owed and paid in the past had you not claimed the tax credit for the business investment or NMTC.
When NMTCs May Be Recaptured from Investors
NMTCS may be subject to recapture from investors during the seven-year NMTC compliance period under selected circumstances. The events that trigger recapture include the following:
- The QEI fails the “substantially all” requirement:
- Failure to invest 85% of original QEI;
- Failure to meet “Qualified Active Low-Income Business” (QALICB) requirements; or
- Failure to meet one-year investment/reinvestment requirement
- The CDE redeems the investment
- The CDE ceases to qualify as a CDE
Unlike other tax credits, if there is a recapture event during the seven-year NMTC compliance period, all NMTCs from previous years are subject to recapture and NMTCs from the year of recapture and the remainder of the seven years also are subject to recapture. In other words, 100% of the NMTCs are recaptured.
Total recapture means that the investor must repay the federal government the full amount of tax credits previously claimed by the investor, plus interest and penalties. This provision of the NMTC program creates a unique element of risk that investors must understand and account for as they structure their transactions. As a result, avoiding recapture is critical to avoid these unwanted consequences.
Allow Savage & Associates to Help You Develop Your Vision
We are an economic development law firm dedicated to offering complex and innovative legal and transactional advice to developers, investors, nonprofit organizations, entrepreneurs, and changemakers in society. We are not a traditional law firm. Instead, we are a small boutique law firm that focuses on what you need to develop the strategies necessary to impact communities.
We have worked with clients to obtain all types of tax credits and other government programs to finance the revitalization of communities. Savage & Associates has handled over a billion dollars in New Markets Tax Credit financing transactions and more than 300 commercial real estate closings. As a result, we know how to leverage the available tax credit tools to transform your communities. You can contact our offices by calling 215.880.9441 in Philadelphia or 202.817.3941 in Washington D.C. to discuss your ideas with us. You also can find out more about our services online. We look forward to working with you to build your communities through traditional and alternative investment mechanisms based on your individual needs.