FASB expands proportional amortization method to investments in tax credit structures

The Financial Accounting Standards Board this week issued an accounting update expanding the range of tax credit structures for which the proportional amortization method of accounting may be applied—something the American Bankers Association had called on the board to address. Until now, the proportional amortization method has been limited to investments in low-income housing tax credit structures.

“Current accounting for participants in non-LIHTC tax credit investments requires the use of these tax credits to be presented as an expense in pre-tax income line while presenting the corresponding economic benefit as a reduction to income tax expense,” ABA pointed out in a 2021 letter to FASB. “This distorts the pre-tax income and other key performance metrics of the tax credit investor and, as a result, further effort must be made by them to explain these accounting complexities to the users of their financial statements. In addition, the timing of the recognition of this expense and the associated tax credit benefit are often misaligned, exacerbating the distortion.”

According to the update, to qualify for the proportional amortization method, it must be probable that the income tax credits allocable to the tax equity investor will be available; the tax equity investor must not have the ability to exercise significant influence over operating and financial policies of the underlying project; substantially all of the projected benefits must be from income tax credits and other income tax benefits; the tax equity investor’s projected yield based solely on the cash flows from the income tax credits and other income tax benefits must be positive; and the tax equity investor must be a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor’s liability is limited to its capital investment.

While ABA welcomed the update, it noted in previous comments that FASB should go further to address the remaining reporting issues with various tax credit investments that will fail to qualify for the proportional amortization method under the new criteria.