Handbook: Tax credits
Handbooks | May 2024
Our in-depth guide explains the accounting for various forms of tax credits in accordance with US GAAP.
Accounting for income tax credits continues to be a hot topic given the wide array of policy choices that are available under US GAAP and recent developments in the US federal tax law.
We share new guidance and examples based on our recent experience in practice, including considerations related to purchases and sales of tax credits and investments in pass-through entities that generate tax credits. We also include a new chapter that explains how the US federal tax law works, with a summary of the important features and the appropriate accounting guidance for each individual tax credit available under the Inflation Reduction Act.
Applicability
- Entities that generate tax credits through participation in certain activities or ownership of qualifying property or obtain the benefit of tax credits 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
- how the tax credit can be monetized
- what the tax credit is designed to incentivize.
Adding to this diversity are the policy choices in US GAAP – of which there are many - and practices that have developed over time as entities try to apply the limited guidance available.
Signs point to tax credits continuing to be an important instrument to control tax costs and/or support social and political initiatives. So, all of these sources of diversity aren’t going anywhere any time soon.
Report contents
- Overview of US federal tax credits
- Refundable credits
- Nonrefundable, nontransferable tax credits
- Transferable credits
- Applying the equity method to investments in pass-through entities that generate tax credits
- Applying the PAM to investments in pass-through entities that generate tax credits
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