What triggers potential recapture of the credit?
According to the IRS temporary regulations, there is a recapture event with respect to an equity investment in a CDE if (i) the entity ceases to be a CDE; (ii) the proceeds of the investment cease to be used in a manner that satisfies the substantially-all requirement outlined above; or (iii) the investment is redeemed by the CDE. Bankruptcy of a CDE is not a recapture event. In this event, the IRS will recapture all credits allowed to the taxpayer who purchased the equity investment from the CDE at its original issue and to all subsequent holders of that investment. Those taxpayers will also owe non-deductible interest on the amounts so recaptured. A CDE may apply for a waiver or extension on recapture, and such a waiver or extension may be granted in specific circumstances. If such a waiver or extension is granted, then the CDE may be required to adjust its policies in order to rectify the situation in the future.
