Handbook: Tax credits
Handbooks | June 2023
Our in-depth guide explains the accounting for various forms of tax credits in accordance with US GAAP.
The accounting for tax credits can be quite different depending on their nature and characteristics, as well as an array of policy choices that are applied in practice. What you might find is that the tax credits can take a straight or circuitous path to the income tax line, and some don’t end up there at all.
This Handbook covers the accounting for tax credits generated indirectly through ownership of interests in pass-through entities and is prepared on the basis of the guidance in ASC 323-740, as amended by ASU 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. Our in-depth guide on the accounting for income taxes provides guidance applicable before the adoption of the ASU.
Applicability
- Entities that generate tax credits directly through participation in certain activities or ownership of qualifying property or indirectly through ownership of interests in pass-through entities.
Relevant dates
- Effective immediately, except the proportional amortization method guidance
- The proportional amortization method guidance as amended by ASU 2023-02 is effective as follows:
| Public business entities | All other entities | |
| Annual and interim periods – Fiscal years beginning after | December 15, 2023 | December 15, 2024 |
| Early adoption permitted? | Yes | Yes |
Tax credits: pretax or income tax, or some of each
While tax credits are typically claimed on the income tax return, there is diversity in how they are accounted for in the financial statements. This diversity arises from a number of factors, including:
- who generates the tax credit and how the reporting entity obtains the tax credit;
- how the tax credit is realized; and
- what the tax credit is trying to incentivize.
Adding to this diversity are the policy choices in US GAAP, as well as those practices that have developed over time as entities try to apply the limited guidance available.
As if there were not enough sources of diversity when it comes to accounting for tax credits, recent legislation gave rise to new sources by introducing mechanisms to monetize some tax credits that are novel to US federal tax law – including elections for direct pay and third-party transfer.
Signs point to tax credits continuing to be an important instrument to control tax costs and/or support social responsibility initiatives. So, all of these sources of diversity aren’t going anywhere any time soon.
Report contents
- Refundable credits
- Transferable credits
- Nonrefundable, nontransferable tax credits
- Investors in tax credit structures
- Proportional amortization method (post-adoption of ASU 2023-02)
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