Simplified accounting for tax equity investments

EITF reaches final consensus to expand use of the proportional amortization method to additional tax equity investments.

Investors in certain tax equity investments may have the option to apply the proportional amortization method.

Equity investors in income tax credit structures through limited liability entities (e.g. partnerships, LLCs) that are flow-through entities for tax purposes (i.e. tax equity investments)

If ratified by the FASB, the EITF’s final consensus will:

Expand the population of qualifying investments to which the PAM may be applied;
Clarify the criteria that must be met for a tax equity investment to qualify for the use of the PAM;
Provide for election of the PAM on a tax credit program-by-program basis;
Require use of the flow-through method of accounting to account for the related tax credit when the PAM is applied even if the investor has generally elected the deferral method of accounting for its investment tax credits;
Include other amendments to the guidance in ASC 323-740 on applying the cost method and equity method to tax equity investments when the PAM is not applied and accounting for delayed equity contributions;
Require disclosures on an interim and annual basis for tax equity investments within tax credit programs for which the PAM is elected, regardless of whether the PAM is applied;
Include an effective date for public business entities for annual and interim periods in fiscal years beginning after December 15, 2023, and one year later for all other entities, with early adoption permitted; and
Allow adoption of the expansion of the PAM and PAM-related clarifications on either a modified retrospective or retrospective basis.

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