HAR § 18-235-110.7-15 — Recapture event (i

e., property ceases to be eligible property). (a) In general. Property ceases to be eligible property with respect to a taxpayer: (1) As a result of the occurrence of an event on a specific date (e.g., a sale, transfer, retirement, gift, distribution, or other disposition). The cessation shall be treated as having occurred on the actual date of the event; or (2) For any reason other than the occurrence of an event on a specific date (e.g., the property is used predominantly in connection with the furnishing of lodging during the taxable year and does not fall within one of the exceptions; decrease in business use of listed property). The cessation shall be treated as having occurred on the first day of the taxable year. (b) Decrease in the business use of listed property to less than fifty percent. During the recapture period, all or a portion of the credit taken in an earlier year for listed property may be subject to recapture if: (1) the percentage of business use falls below the percentage of business use for the year the listed property was placed in service; or (2) the listed property is converted from business use to personal use and does not satisfy the more-than-fifty per cent business use test. The terms “listed property” and “the more-than-fifty per cent business use test” are defined in section 18-235-110.7-11(j). (c) Example. Subsection (b) is illustrated as follows: A, a calendar-year taxpayer, places in service on January 15, 1988, listed property (i.e., automobile) for $7,000. In 1988, A uses the automobile 75 percent for business, 15 percent for the production of income, and 10 per cent for personal use. For taxable year 1988, A claims a credit in the amount of $189 ($7,000 x 90% x 3%). In 1989, A uses the automobile 60 per cent for business, 15 per cent for the production of income, and 25 per cent for personal use. The increased personal use triggers partial recapture of the credit of $20.79 [[($7,000 x 90% x 3%) -($ 7,000 x 75% x 3%)] x 66%]. In 1990, A uses the automobile 50 per cent for business, 25 per cent for the production of income, and 25 per cent for personal use. Although recapture is not required on the basis that the percentage of personal use remains the same in taxable years 1989 and 1990, I.R.C. §280F, which is adopted by section 235-110.7(d), HRS, requires recapture because the automobile ceases to be eligible property for failure to satisfy the more-than-50 per cent business use test. Accordingly, A must recapture a further $51.98 [[($7,000 x 75% x 3%) -($7,000 x 0% x 3%)] x 33%]. (d) Decrease in basis of eligible property. During the recapture period, all or a portion of previously taken credit may be subject to recapture as a result of a cessation such as a decrease in the basis of eligible property (either through a refund in purchase price or usage of the property for personal purposes). (e) Example. Subsection (d) is illustrated as follows: A, a calendar-year taxpayer, places in service on January 1, 1988, property, which is not listed property, with a basis of $20,000. In taxable year 1988, A uses the property 80 per cent for business, and 20 per cent for personal purposes. Thus, for taxable year 1988, only 80 per cent, or $16,000 ($20,000 x 80%) of the basis of the asset qualifies as eligible property. The credit HRS §235-110.7 §18-235-110.7-15 allowable in 1988 is $480 ($16,000 x 3%). In taxable year 1989, A uses the asset 60 per cent for business, and 40 per cent for personal purposes. The increased personal use triggers partial recapture of the credit in taxable year 1989 of $79.20 [[($20,000 x 80% x 3%) - ($20,000 x 60% x 3%)] x 66%]. (f) Partnership, S corporation, estate, or trust. (1) In general. In the case of a partnership, S corporation, estate, or trust, the recapture rule applies to a partner, shareholder, or beneficiary who originally received the benefit of a credit if within the recapture period: (A) the S corporation, partnership, estate, or trust disposes of eligible property (or if eligible property otherwise ceases to be eligible property in the hands of the entity); or (B) the partner’s, shareholder’s, or beneficiary’s interest in the entity is reduced (for example, by a sale of the partner’s, shareholder’s, or beneficiary’s interest in the entity) below a specified percentage. See section 18-235-110.7-16 for exceptions to the recapture rule for transfers by reason of death of a partner, and a downward basis adjustment pursuant to I.R.C. §754 (regarding manner of electing optional adjustment to basis of partnership property). (2) “Specified percentage”, defined. The term specified percentage is defined by the following two rules: (A) 66 2/3 per cent rule; and (B) 33 1/3 per cent rule. (3) “66 2/3 per cent rule”, defined. The 66 2/3 per cent rule means that if a partner’s, shareholder’s, or beneficiary’s interest in the entity is reduced below 66 2/3 per cent of its interest at the time the credit was taken, a pro rata share of the partner’s, shareholder’s, or beneficiary’s interest in the entity’s eligible property will cease to be eligible property with respect to the partner, shareholder, or beneficiary, and credit recapture will be required. (4) “33 1/3 per cent rule”, defined. The 33 1/3 per cent rule means that once there has been a recapture by reason of the 66 2/3 per cent rule, there is no further recapture until the partner’s, shareholder’s, or beneficiary’s interest is reduced to less than 33 1/3 per cent of its interest at the time the credit was taken. Thereafter, any reduction in interest, however small, will again subject the partner, shareholder, or beneficiary to the recapture provisions. (5) Prior recapture determination. In making a recapture determination, there should be taken into account any prior recapture determination made with respect to the partner, shareholder, or beneficiary in connection with the same property. (6) Example. Paragraphs (1) to (5) are illustrated as follows: Example 1. General Facts. Corporation S, a calendar year S corporation, places in service on June 1, 1988, the following three items of eligible property: Asset number Basis 1 ........................... $30,000 2 ........................... $30,000 3 ........................... $30,000 On December 31, 1988, Corporation S has 200 shares of stock outstanding which are owned equally by shareholders A and B, calendar year taxpayers. The total basis of the three eligible properties are apportioned to shareholders A and B as follows: Total basis ......................... $90,000 Shareholder A (100/200) .. $45,000 Shareholder B (100/200) .. $45,000 In taxable year 1988, each shareholder takes a credit of $450 ($15,000 x 3%) for each of the three eligible properties, or a total credit of $1,350 ($15,000 x 3% x 3). Example 2. Assume the facts as in Example 1 and the following fact. On December 21, 1989, Corporation S sells asset No. 3 to Corporation X. For taxable year 1989, shareholders A and B must each recapture $297 ($450 x 66%) of their previously taken credit. Corporation X will not be subject to recapture because it never benefited from the credit.