FASB approves tax credit amortization change

The Financial Accounting Standards Board voted to approve an accounting standards update that would enable more companies to opt for a proportional amortization accounting method for their tax credit investments.

During a meeting Wednesday, the board voted to allow entities to elect to use a proportional amortization method on a tax-credit-program-by-tax-credit-program basis. In August, FASB and its Emerging Issues Task Force issued an exposure draft after questions arose about a 2014 accounting standard that allowed companies to elect to apply the proportional amortization method to account for investments mostly made for the purpose of receiving income tax credits and other income tax benefits (see story). The guidance issued by FASB in 2014 limited the proportional amortization method to investments in Low-Income Housing Tax Credit structures. 

Under the proportional amortization method, a company amortizes the initial cost of the investment in proportion to the income tax credits and other tax benefits received, and recognizes the net amortization and income tax credits and other tax benefits in the income statement as a component of the income tax expense or benefit. Investments in other types of tax credit structures are usually accounted for using the equity or cost method.

Courtesy of GASB

The original guidance limited the option to Low-Income Housing Tax Credits, but over the years, FASB has heard requests from companies asking if they can elect to apply the proportional amortization method to tax equity investments that generate tax credits through other programs, such as the New Markets Tax Credit, the Historic Rehabilitation Tax Credit and the Renewable Energy Tax Credit. They pointed out that the proportional amortization method gives users of financial statements a better understanding of the returns from investments that are made mainly for the purpose of receiving income tax credits and other income tax benefits than the equity or cost methods. 

At Wednesday's meeting, FASB made a number of decisions, according to a summary, including allowing the proportional amortization method to be elected by entities on a tax-credit-program-by-tax-credit-program basis. It also decided to retain some criteria with a clarification that they would be evaluated in relation to the operating and financial policies of the underlying project. The existence of refundable tax credits would not automatically preclude an investor from applying the proportional amortization method. 

Some companies had asked for even wider applicability when FASB asked for comment letters last year, according to The Wall Street Journal, including Allstate, which asked for the ability to use the accounting method to cover state-based premium tax credit programs, and Bank of America, which asked for expanded guidance and examples for other types of tax credits. 

The standard will take effect for public companies for fiscal years starting after Dec. 15, 2023, including interim periods in those fiscal years, and for other types of entities for fiscal years beginning after Dec. 15, 2024, including interim periods within those fiscal years. FASB will also permit early adoption.