ASC 740 allows companies to apply the flow-through method or the deferral method when accounting for investment tax credits. However, that foundational policy choice is followed by a series of additional policy choices that can lead to varied financial reporting results.
Have you ever tried to compare the impacts of energy tax credits on the effective tax rate across investor groups? What you might find is that the credits can take a straight or circuitous path to the tax line and some don’t end up there at all.
Companies typically invest in energy tax credits through direct ownership of qualifying energy property or indirect ownership of noncontrolling interests in pass-through tax credit structures. Owners of qualifying property are often the producers and sellers of energy and tax credit investors are often seeking alternative means to control their tax costs, support their social responsibility initiatives, or both. Although the risk profiles and pretax accounting for these groups are often very different, one common characteristic of both investment groups is the diversity within the group in reporting the tax benefits.
Some investors recognize the full tax benefit of the tax credits when they arise, some recognize none. Some report a regular effective tax rate on the asset’s pretax activity and some don’t. Although we may often feel comfortable that taxes are in the tax line, sometimes they’re not.
So who to blame – or thank – for the diversity in the accounting for investment tax credits? Some of the diversity arises from an explicit policy choice in US GAAP and some has developed over time as investors try to apply limited guidance to ever-evolving structures. We hope this publication will help you understand what you’re seeing, or not seeing, and why.