Handbook: Tax credits

Our in-depth guide explains the accounting for various forms of tax credits in accordance with US GAAP.

Applicability

Entities that generate tax credits through participation in certain activities or ownership of qualifying property, or those that obtain the benefit of tax credits through ownership of interests in pass-through entities.

Relevant dates

Effective immediately

Have you ever tried to compare the effects of tax credits on the effective tax rate across entities? You may find that tax credits can follow a direct or winding path to the income tax line – or, in some cases, bypass it altogether.

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; and
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.

The Inflation Reduction Act (IRA) ushered in a new era of tax credit monetization – introducing elective payment (direct pay) and third-party transfer provisions that expanded access to tax credits well beyond the traditional tax-paying population. Since then, subsequent legislation has further modified the federal tax credit landscape- including by accelerating phase-outs, repealing certain credits and imposing new eligibility restrictions-- while preserving many of the mechanisms that have transformed how tax credits are used and reported.