Proposed updates – accounting for investments in tax credit structures

by | Sep 9, 2022

ARTICLE | September 09, 2022

On August 22, 2022, the Financial Accounting Standards Board (FASB) issued The Proposed Accounting Standards Update – Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (proposed ASU), which expands the use of the proportional amortization method to all investments made primarily for the purpose of receiving income tax credits and other income tax benefits. Currently, the proportional amortization method is limited to investments in low-income housing tax credit (LIHTC) structures.

The proportional amortization method allows an entity to amortize the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognize the net amortization of the investment along with such tax credits and benefits received as a component of the income tax expense (benefit) in the income statement. Currently, investments in other tax credit structures (that are not investments in LIHTC structures) are typically accounted for using the equity or cost method, with investment gains or losses and tax credits being presented gross on the income statement in their respective line items.

Under the proposed ASU, reporting entities can elect to use the proportional amortization method to account for their tax equity investments, if they meet the following conditions:

  • It is probable that income tax credits allocable to the investor will be available
  • The investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project
  • Substantially all of projected benefits (determined on a discounted basis, using a discount rate that is consistent with the investor’s cash flow assumptions used in making decisions to invest in the project) are from income tax credits and other income tax benefits
  • The investor’s projected yield based solely on the cash flows from the income tax credits and other tax benefits is positive
  • The investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the investor’s liability is limited to its capital investment

The election to use the proportional amortization method would be on a program-by-program basis. Enhanced disclosures to help users understand how the entity’s investments generate income tax credits and other income tax benefits are also included in the proposed ASU. The proposed ASU is available for comment until October 6, 2022.

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This article was written by RSM US LLP and originally appeared on 2022-09-09.
2022 RSM US LLP. All rights reserved.
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