Investment Tax Credit (ITC) is a way that the federal government has
to encourage businesses to selectively invest in approved, socially
useful, items. ITC disappeared, with a few exceptions, when the
Congress repealed it in 1986. However, with the government’s desire to
encourage spending on alternate energy development, ITC reappeared in
2005.
ITC is different from depreciation in that it is an actual credit to
be applied against income tax owed, as opposed to a business expense
that lowers taxable income. ITC also impacts depreciation by reducing
the depreciable basis of the asset.
Enabling ITC Basis Reduction
ITC Basis Reduction is enabled in the Edit Company dialog box. To open
this dialog box, go to File, and select Edit Company from the pull-down
menu. This dialog box will appear:
Select the Book Overrides tab, and go to the Reduce by ITC row in
the Tax book, and any other applicable book (State, AMT, etc.). The
default is “Yes,” but if that has been changed, simply change it back
and push the “OK” button. Please note that you would be able to enter
ITC on assets regardless of whether this is “Yes” or “No”. However, if
this is set as “No”, FAS will not indicate any ITC basis reduction.
Adding Assets
When adding an asset, enter ITC information in the Tax book. When you
click on the ITC field, the following dialog box will appear:
The first item to be addressed is to identify the ITC credit that
has been used. The default is “X,” which is “No Investment Tax Credit.”
The available credits are determined by the asset’s placed-in-service
date, and change as tax laws evolve. This table gives a master list of
all the ITC codes that are in the program:
| Code |
ITC Option |
| A |
New Property, Full Credit |
| B |
New Property, Reduced Credit |
| C |
Used Property, Full Credit |
| D |
Used Property, Reduced Credi |
| E |
30-year Rehabilitation Property |
| F |
40-year Rehabilitation Property |
| G |
Certified Historic Structures |
| H |
Pre-1936 Building |
| R |
Reforestation Property |
| S |
Solar Energy Property |
| T |
Other Energy Property |
| U |
Fuel Cell property |
| V |
Microturbine Property |
| W |
Advanced Coal Project |
| X |
No Investment Tax Credit (Default) |
| Y |
Gasification Project |
When the asset is entered, a pull-down menu of the eligible codes will appear:
Select an ITC Credit code, and the rest of the fields will
automatically fill in the defaults. The ITC Credit percentage that
shows up by default can be changed, but can be no more than 30%. The
ITC credit amount is a straight multiplication of acquired value and
percentage. The basis reduction amount is determined by the ITC Credit
Amount selected.
As an example, a solar energy property is added with a Property Type
of “R,” an acquired value of $100,000, and an estimated life of 39
years. When completed with the sample Solar Energy Property asset, the
dialog box will look like this:
This gives an ITC credit amount of $30,000, and the basis reduction
is one half of that, or $15,000. This makes the depreciable basis of
this asset in the Tax book $85,000. The Tax book column in the Detail
View will look like this after the information is added:
Since ITC does affect the depreciable basis, it shows up in the
Depreciation Expense Report. A Depreciation Expense Report that shows
the Solar Energy Property depreciated through December 31, 2006 is
shown below.
Note the difference between the Acquired Value and the Depreciable
Basis. That difference reflects the reduction of basis resulting from
the ITC claimed on the asset. For a $30,000 ITC claim, there will be a
$15,000 reduction in depreciable basis as was indicated in the ITC
entry dialog box. Also note the key code of “r,” which indicates that
the depreciable basis has been reduced.
Disposals with ITC
ITC is similar to Section 179 in that if you dispose of an asset early,
there is a recapture tax. The rule is that an asset with a 3-year life
must be held for three years to avoid recapture. Assets with a life of
5 years or longer must be held for five years to avoid recapture.
If an asset is disposed early, the recapture rate is determined by
the length of time it is held. If it’s a three-year asset disposed in
the first year of life, the recapture rate is 100%; if it is disposed
in the second year, the rate is 66.7%; if it is disposed in the third
year, the recapture rate is 33.3%. If the disposal is done after the
third anniversary of the asset’s acquisition, there is no recapture tax.
There is a similar situation with longer-life assets, except that
the recapture rate decreases by 20% per year each year the asset is
held. If an asset is disposed in its first year of life, the recapture
tax is 100%; if disposed in the second year, the rate is 80%; if
disposed in the third year, it is 60%, etc. If the disposal is done
after the fifth anniversary of the asset’s acquisition, there is no
recapture tax.
Disposing an asset that uses ITC is no different than a normal
disposal. The only difference will be the calculation of ITC recapture.
Below is the disposal screen that reflects a disposal of the Solar
Energy Property asset as of October 1, 2007. Note the ITC Recapture,
which is circled below. Since the disposal occurs in the second year of
life, the Recapture rate is 80% of the $30,000 credit, which is
reflected in the $24,000 Recapture Tax. Note that this recapture is
reflected in all of the tax-related books (State, AMT, and ACE).
Reports That Show ITC
There are two reports in FAS that are concerned with ITC. These are two
tax worksheets for the IRS Forms 3468 (ITC) and 4255 (ITC Recapture).
Both of these reports need to be run after you have finished running
depreciation for either the year of acquisition, or the year of
disposal.
The Form 3468 creates a worksheet that captures information on ITC
assets in the year of acquisition. This information is used on Part 1
of the IRS Form 3468. This report is sorted by the ITC code, and will
show you the individual assets you are claiming ITC on, displaying the
system number and extension, company asset number, description, the ITC
code, ITC basis, the credit rate, and the amount of the ITC Credit. It
will subtotal by credit type and give you a grand total at the end.
Below, you can see how the sample asset shows up on this report.
The Form 4255 creates a worksheet on ITC recapture of assets that
are disposed prior to the end of the 3-year or 5-year holding period.
This report lists the individual assets that have been disposed that
require this recapture and shows the ITC taken, the disposal date,
number of years held, recapture percentage, and the recapture tax. The
example below shows the sample asset and reflects a disposal after only
one year.
FAS Asset Accounting gives you a way to maintain and report on ITC
information, and gives you worksheets to file ITC information for your
tax returns. With the increased importance that is now given to the
Investment Tax Credit for alternate energy development, these features
will continue to be important for the future.
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