Priorities Beyond Extension of Favorable Accounting Practices to Additional Tax Credits Will Keep the GAAP Working Group Busy into 2023
Novogradac created the GAAP Accounting for Tax Credits Working Group in 2021 to provide a platform for tax credit industry participants who wanted to be proactive in seeking the extension of favorable accounting principles to community development and renewable energy tax credits.
In November 2021, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) announced it was open to considering the extension of the generally accepted accounting practices (GAAP) for tax credit investments beyond the low-income housing tax credit (LIHTC), eight years after the favorable accounting method was made available to corporations that invested in that credit. Knowing that expansion of the proportional amortization method could have major implications for investors, Novogradac saw an opportunity to bring together a coalition of stakeholders to engage the EITF. Gaining favorable treatment for community development tax credits–including the new markets tax credit (NMTC), historic tax credit (HTC) and renewable energy investment tax credit (ITC) and production tax credit (PTC)—would not only bring these credits in line with the treatment LIHTC enjoys, it would also increase the desire of publicly traded corporations to invest in federal tax credits. In its brief existence, the GAAP Working Group has been at the forefront of engaging EITF and will continue its work into 2023.
Novogradac’s GAAP Working Group Provides a Platform for Tax Credit Stakeholders
Novogradac, along with other community development stakeholders involved with tax credit transactions, was heavily involved in the effort to get the GAAP accounting for the LIHTC and other community development tax credits changed in 2014. Ultimately, the EITF only changed the GAAP accounting for the LIHTC, which was an incredible achievement, but stakeholders continued to work to have this treatment extended to additional community development tax credits. Being that investments made in the federal community development tax credits are economically similar, with the shared purpose of receiving income tax credits and other income tax benefits, stakeholders argue the NMTC, HTC and RETCs, as well as any other tax credits created in the future, should also have the same election to apply the proportional amortization method as LIHTC has. One of the GAAP Working Group’s main objectives is to encourage FASB to allow reporting entities to elect to apply the proportional amortization method on a tax credit program-by-program basis to account for tax equity investments that generate tax credits through other programs.
The GAAP Working Group counts among its membership investors, developers or project sponsors, and consultants who meet monthly to discuss issues, provide or develop answers to frequently asked questions and recommended practices for correcting the accounting treatment for investments in tax credits, and–based on those discussions–provide comments and suggestions that are submitted in writing to FASB. As exhibited below, this varied coalition of tax credit stakeholders have made the most of the group’s brief existence, taking numerous opportunities to engage EITF and FASB since the beginning of 2022.
Extending Favorable Treatment to Existing and Future Tax Credits is the Primary Goal of the GAAP Working Group
After holding their first public meeting in February, the GAAP Working Group wasted no time in engaging FASB in advance of the EITF’s first board meeting for 2022, which took place March 24. Submitted March 17, the GAAP Working Group’s first comment letter introduced the group and thanked the EITF for taking up the project of examining the extension of GAAP accounting to other federal tax credits, project–EITF 21-A, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This letter also laid out why EITF should consider reevaluating the five criteria currently included in the proportional amortization method. Covered in more detail below, as this will be an issue that the GAAP Working Group will focus on in 2023, ensuring that the criteria does not hinder investors from participating is just as important as having favorable treatment extended to additional tax credits. Even if favorable accounting is extended to additional tax credits, failing to meet the criteria as currently written could prevent participation, jeopardizing the impact tax credit investments can have on communities across the country.
In its second comment letter, submitted to EITF June 7, the GAAP Working Group responded to specific recommendations laid out by EITF during that March 24 board meeting. Addressing the 11 questions in the Issue Summary No. 1C document included in the March 24 meeting materials, the Working Group highlighted those areas where the group agreed with and supported staff recommendations, as was the case concerning Question 3, where the recommendation was to provide clarification that the significant influence criterion should be evaluated at the project’s operating company level. Perhaps more importantly, the letter identifies those questions that require additional consideration by staff and ultimately, the EITF. One example is the staff recommendation on Question 4, which looks at the calculation of “substantially all.” The GAAP Working Group disagreed with the staff’s assessment that refundable credits should only be included in the denominator of the substantially all test and proposed that considering them tax benefits would be consistent with the overall scope of the project. Additionally, the working group again took the opportunity to stress the need for either EITF or FASB to reexamine the five criteria.
Release of Exposure Draft Provides GAAP Working Group Opportunity to Formally Engage EITF
FASB released an exposure draft Aug. 22 of a proposed accounting standards update that would allow the expanded use of the proportional amortization method to account for investments in tax credit structures. The draft proposal would allow reporting entities to use the proportional amortization method for all community development tax credit incentive reporting that meets the five criteria. The guidance would also allow a reporting entity to make an accounting policy election on a tax-credit-program-by-tax-credit-program basis, rather than at the reporting entity level or for individual investments.
The GAAP Working Group provided comments on the 14 questions FASB posed to respondents in the exposure draft of its Proposed Accounting Standards Update. The comment letter submitted Oct. 6 contained responses mainly supporting FASB’s position on issues raised, though even when the GAAP Working Group was in agreement with FASB, there were still opportunities for the board to take a closer look at some of its proposals. One such instance is Question 1. The working group agreed that a reporting entity that makes tax equity investments primarily for the benefit of tax credits and other tax benefits through limited liability entities may elect to account for those investments using the proportional amortization method. Beyond that, the working group requested that FASB remove the addition of “income” before tax credits in the amended language throughout the update as the use of “income” unnecessarily limits tax credit investments to tax credits that reduce income tax liabilities.
Looking Toward 2023, the GAAP Working Group Will Ask FASB to Consider an Additional Project
As the working group awaits a decision on the proposals included in FASB’s exposure draft, the GAAP Working Group will continue to request that either EITF or FASB consider the reexamination of the five criteria. Even if favorable treatment is extended, without changing any of the current five criteria currently included in the proportional amortization method, only some tax credit investments would qualify. There is no question that extension would be a welcomed improvement, particularly by those that are able to meet the existing criteria. Many investors, especially those that invest in multiple credits, would see it as falling short of what is needed to truly level the playing field for all tax credit investments.
As outlined in the GAAP Working Group letter submitted to FASB in March and June, of the five criteria listed, the working group believes that the following three will need to be reexamined to determine ways that they can be changed to allow more tax credit investments to be eligible for the proportional amortization method:
- 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 (for example, tax benefits generated from the operating losses of the investment).
- The investor’s projected yield based solely on the cash flows from the tax credits and other tax benefits is positive.
In those letters, the GAAP Working Group recommends that the EITF or FASB include the reexamination of these criteria in its current project. As that did not occur, the working group will encourage the EITF to take up a follow-up project that performs a deeper dive into reviewing the existing criteria so that proportional amortization may be applied equitably.
During the March 24 EITF meeting, a board member acknowledged that there was stakeholder interest in reexamining the proportional amortization criteria and it was their recommendation, if FASB agreed to add the issue to the agenda, that it should be a FASB board project rather than an EITF project. The GAAP Working Group takes this recommendation as a positive sign that the five criteria, specifically the substantially all and positive yield criteria, will remain on FASB’s radar. The GAAP Working Group will make encouraging EITF to consider these criteria a priority moving into 2023.
As expressed in the comment letters submitted throughout the year, the GAAP Working Group will continue to support any effort to make the proportional amortization method available to not only tax credit investments in the NMTC, HTC and RETCs, but also to tax credits created in the future. The working group will also continue to encourage FASB to allow for the early adoption of the proportional amortization method to provide investors the ability to reflect the nature of their tax credit investments in a timely fashion. Additionally, the group will continue to engage EITF and FASB on any issues that arise from the extension of favorable GAAP accounting methods to the various community development tax credits.
Join the GAAP Working Group to Remain Engaged and Informed
Though the comment period has passed for getting more suitable accounting treatment for existing and yet to be created federal tax credits, there is still the aforementioned criteria the working group hopes to have EITF consider, as well as the consideration of all the different technical issues that may arise from FASB’s proposal draft for the working group to consider. One way to stay informed and engaged would be to get involved in the GAAP Working Group. As the group’s first year draws to a close, whether you work in the LIHTC or the NMTC, HTC or RETC spaces, there is still time to get involved.
To join the group or submit input on GAAP topics please contact Brad Elphick at [email protected].