The FASB should extend the accounting rule used for low-income housing tax credit (LIHTC) investments to all federal and state tax credit investment structures that meet certain conditions, a special task force tentatively said on March 24, 2022.
The Emerging Issues Task Force (EITF) by 10 to 3 tentatively voted that the board should propose extending the proportional amortization method of accounting, used only by LIHTC investments, to other tax credit structures such as New Markets Tax Credit (NMTC), Historic Rehabilitation Tax Credit (HTC), Renewable Energy Tax Credit (RETC), that meet the criteria of the method.
In general, EITF members said the change would provide more consistency in financial reporting for tax credit investments that qualify.
“I think we built a model, a model to me that says when you purchased a tax benefit, it makes a lot of sense to put the cost of that tax benefit in the same place as the benefit itself which is in the income tax line item, and that’s what this accounting model does and it tells us about how to do that from a timing perspective as well,” Kimber Bascom a partner at KPMG LLP said. “And to me I think we can do that for more than just LIHTCs and New Market Tax Credits if there are other things that meet those conditions,” he said.
The EITF’s decision goes beyond what FASB staff suggested, which was that the model be extended only to NMTCs, which are similar to LIHTCs.
The panel also voted by 7 to 6 to require entities that elect to use the proportional amortization model to do so to all tax credit investments that meet the five conditions that are required to qualify for the model. A company that elects to use the proportional amortization method would need to apply it to either all of its tax credits that qualify, or none of the tax credits, according to the discussions.
The discussions come at a time when more tax credit investment structures are emerging. Companies are attracted to the proportional amortization method because it is simpler and better reflects the characteristics of the investment.
The proportional amortization method allows an entity to amortize its investment in relation to the total proportion of tax credits it received during that period, in comparison to the total tax credit it expects to receive over the life of the investment. That investment amortization is recorded on a net basis in the income tax line item with the tax credits received.
Investments that do not qualify for the proportional amortization method, in most cases, are accounted for under the equity method of accounting, which is very complex as it uses a hypothetical liquidation at book value (HLBV) accounting method.
Potential Tweak to Criteria
A big issue in relation to the proportional amortization method is that five criteria currently need to be met to qualify for the model:
- it is probable that the tax credits allocable to the investor will be available;
- the investor does not have the ability to exercise significant influence over the operating and financial policies of the limited liability entity;
- substantially all of the projected benefits are from tax credits and other tax benefits;
- the investor’s projected yield based solely on the cash flows from the tax credits and other tax benefits is positive; and
- the investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the investor’s liability is limited to its capital investment.
The task force tentatively voted to tweak one criterion that states “the investor does not have the ability to exercise significant influence over the operating and financial policies of the limited liability entity” to clarify that in a multi-tiered investment structure, the evaluation of whether or not there is significant influence, should be performed for the whole operating structure.
The EITF’s discussions will continue at another meeting and therefore the decisions can change.
The decisions are specific to EITF Issue No. 21-A, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.
This article originally appeared in the March 28, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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