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12.10 Investments in tax credit structures
Publication date: 30 Jun 2023
us IFRS & US GAAP guide
US GAAP permits reporting entities to make an accounting policy election to account for their investments in limited partnerships or limited liability companies that generate various tax credits using the proportional amortization method if certain conditions are met. Historically, this election was only available for investments in qualified affordable housing projects. However, ASU 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, issued in March 2023, expanded the use of the proportional amortization method of accounting to equity investments in other tax credit structures that meet certain criteria, such as renewable energy tax credit programs.
ASU 2023-02 is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. IFRS Accounting Standards do not have such specific guidance.
US GAAP | IFRS Accounting Standards |
An investor that owns a passive investment in limited liability entities that manage or invest in projects that generate various tax credits and other tax benefits can use the proportional amortization method if certain conditions are met.
Under the proportional amortization method, the initial cost of the investment, less any expected residual value, is amortized in proportion to the tax benefits received over the period that the investor expects to receive the tax credits and other benefits.
Both the amortization expense determined under the proportional amortization method and the tax benefits received are recognized as a component of income taxes.
Use of the proportional amortization method for investments that meet the requisite conditions is an accounting policy election made for each type of tax credit program. Once elected, the proportional amortization method should be applied to all qualifying investments in that type of tax credit program.
If an investor does not meet the requisite conditions for use of the proportional amortization method (or has elected not to apply this method for a particular type of tax credit program), the investor will account for its equity interests using either the equity method or ASC 321, depending on the facts and circumstances, or ASC 310 if the investor has a loan.
Before adoption of ASU 2023-02, the use of the proportional amortization method of accounting is limited to investments in qualified affordable housing projects.
| IFRS Accounting Standards do not contain any guidance specific to accounting for investments in tax credit structures.
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