Certain expenditures may generate credits or other tax incentives under various governmental programs. These programs take many forms, including programs related to research and development, alternative fuels, renewable energy, and emissions allowances. These programs are often designed to foster infrastructure, research, and other targeted business investment. In some cases, these credits and incentives are transferrable or refundable.
While credits and incentives often arise in the tax laws and may be claimed on a tax return, they may not be subject to ASC 740
. A number of features can make them more akin to a government grant or subsidy. Therefore, each credit and incentive must be carefully analyzed to determine whether it should be accounted for under ASC 740
, whether in substance it constitutes a government grant, or whether another accounting framework may apply..
The application of income tax accounting is warranted if a particular credit or incentive can be claimed only on the income tax return and can be realized only through the existence of taxable income. When there is no connection to income taxes payable or taxable income and when the credits are refundable regardless of whether an entity has an income tax liability, we believe the beneﬁt should be accounted for outside of the income tax model and presented within pre-tax income.
Some credits or other tax incentives may be refundable either through the income tax return or in some other manner (e.g., direct cash received from the government) at the option of the taxpayer. In the case of a refundable credit, regardless of the method a reporting entity chooses to monetize the beneﬁt, the accounting would be outside the scope of ASC 740
if the monetization of the credit does not have a direct linkage to a reporting entity’s income tax liability. This would apply to credits with a “direct-pay” option (wherein an eligible entity can elect to treat the amount of the credit as a payment of tax) even if there are other options to monetize (e.g., the ability to transfer or sell the credit to a third party). There may be some exceptions. For example, if the method of monetizing the beneﬁts could result in signiﬁcantly different taxation of the beneﬁt, it may be that the method of monetization will impact the accounting for these beneﬁts. If, for example, a company will be taxed by a jurisdiction if they claim a refund for the credit but not taxed if they reflect the credit through the income tax return, it may be appropriate to reflect the credit in accordance with ASC 740
if the impact of the incremental tax would be significant and therefore the company intends to reflect the credit on the income tax return.
On August 16, 2022, the Inflation Reduction Act (IRA) was signed into law. The IRA includes significant extensions, expansions, and enhancements of numerous energy-related tax credits and also creates new credits in multiple categories. The law provides an election to transfer (i.e., sell) certain credits to another taxpayer. The transfer may be for all or a portion of a credit, but any credit may only be transferred once. The transferee only has the option to use the credit against their income tax liability. The cash received in exchange for the credits transferred is not includable in taxable income of the transferor nor deductible to the transferee.
does not directly address how to account for nonrefundable transferable credits that may be used by a reporting entity as a reduction of income tax payable on its income tax return or that may be sold to another taxpayer. As it relates to the specific credit transferability provisions introduced by the IRA, we understand that the FASB staff believes it is most appropriate to account for such credits as part of the provision for income taxes under ASC 740
, regardless of whether the reporting entity that receives the credit claims the credit on its tax return or if that entity sells the credit to another taxpayer. The FASB staff further believes that if a credit is sold, it is most appropriate for any difference between the notional amount of the credit originally received and the proceeds from sale to be recorded in the income tax provision. Because there is no directly applicable GAAP, the FASB staff acknowledges that other views may be acceptable, such as accounting for transferable credits similar to refundable or direct-pay credits by accounting for the entire credit outside of the tax line.
If a reporting entity accounts for transferable credits, including any difference between the proceeds and the notional value of the credits, as part of the income tax provision, it would be appropriate for the reporting entity to consider any expected sale of the credits as a source of realization in its valuation allowance assessment.