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Breaking it down: Key provisions of the act
Climate and clean energy
The IRA includes more than $200 billion in tax incentives designed to combat climate change. Many of these incentives are enhanced if certain requirements are met, such as producing and sourcing materials in the U.S., satisfying prevailing wage and apprenticeship standards, and locating facilities in low-income communities or communities targeted for environmental cleanup.
The following is a list of some of the new, enhanced, and extended credits and deductions affected by the IRA:
- Extended and modified credits for carbon sequestration
- New credits for advanced technologies related to nuclear power, hydrogen production, clean fuel production, aviation fuel, and energy storage
- Enhanced solar and wind credits, including extension of certain expiration and phaseout dates
- Extended expiration dates through 2024 for certain energy credits, such as credits for biodiesel and renewable diesel, alternative fuel, and alternative fuel mixtures
- Extended and enhanced credit for energy-efficient homes
- Expanded deduction for energy-efficient commercial buildings
Certain eligible taxpayers may elect for direct payment of several climate and energy tax credits within the IRA. Taxpayers eligible for refundable credits include tax-exempt entities, states or political subdivisions thereof, the Tennessee Valley Authority, "Indian tribal governments", and any Alaska Native corporation. This direct-pay option allows an entity to elect to treat the credit as having made a payment of tax in equal value. Also, for certain credits, taxpayers may elect to transfer all or any part of a tax credit to an unrelated taxpayer in exchange for cash.
Financial reporting impact: Reporting entities should carefully evaluate each credit provided under the IRA to determine if the credit should be accounted for under the income tax accounting model in Accounting Standards Codification (ASC) 740 or other accounting guidance (for example, as government assistance). ASC 740 applies only to credits that are based on a reporting entity’s taxable income.
Crowe observation: When a company receives the benefit of a credit regardless of whether it has taxable income or taxes payable, we believe the benefit is outside the scope of ASC 740 and should be reported outside of the income tax provision. Often, such credits would be considered a form of government assistance. Currently, no explicit U.S. GAAP addresses how business entities would account for government assistance. As a result, most business entities generally would analogize to ASC 958-605, “Not-for-Profit Revenue Recognition,” or International Accounting Standard (IAS) 20, “Accounting for Government Grants and Disclosure of Government Assistance.”
The direct-pay election effectively treats the tax credit generated as an equivalent to taxes paid on a filed return. Under these provisions, the tax credit is refundable to the taxpayer even if the taxpayer does not have taxable income or a tax liability; therefore, we believe the benefit would be accounted for outside of the scope of the ASC 740 accounting model.
ASC 740 does not directly address how to account for transferable credits that may be used by a reporting entity as a reduction of income taxes payable on its income tax return or that may be sold to another taxpayer. There are several views in practice as to how transferable credits should be accounted for:
| View A |
View B |
View C |
Account for the credits under ASC 740.
If a credit is sold, any difference between the notional amount of the credit originally received and the proceeds from the sale are recorded in the income tax provision.
|
Account for the credits under ASC 740.
If a credit is sold, any difference between the notional amount of the credit originally received and the proceeds from the sale are recorded within pretax income (loss).
|
Account for the credits applying guidance other than ASC 740.
Accounting for the entire credit would be outside of the income tax provision similar to refundable or direct-pay credits. |
The FASB staff acknowledges all three of these views as possible accounting outcomes due to the lack of directly applicable GAAP. However, we understand the FASB staff believes the most appropriate accounting is View A – accounting for the transferable credits, including the sale of the credits, as part of the provision for income taxes.
If a reporting entity applies View A and records all impacts within the income tax provision, it would be appropriate for the reporting entity to consider any expected sale of the credits as a source of realization in its valuation allowance assessment.
Corporate alternative minimum tax
The IRA imposes a new 15% CAMT on “applicable corporations” for taxable years beginning after Dec. 31, 2022. Generally, an applicable corporation is any U.S. multinational (other than an S corporation, a regulated investment company, or a real estate investment company) with average adjusted financial statement income (AFSI) of more than $1 billion for the three taxable years ending prior to the current taxable year (testing period). For instance, a calendar year corporation would test financial statement income for 2020, 2021, and 2022 to determine if it is subject to the alternative minimum tax applicable in 2023.
The tax is imposed to the extent the alternative minimum tax exceeds the company’s regular tax liability, including the base erosion and anti-abuse tax. When computing the corporate alternative minimum tax, the starting point is financial statement income adjusted as follows:
- Tax depreciation deductions are used rather than the amounts deducted in the financial statements.
- The corporation’s pro rata share of a controlled foreign corporation (CFC) financial statement income is taken into account.
- Financial statement income of a foreign corporation (other than a CFC) is taken into account only to the extent that it is effectively connected to a U.S. trade or business.
- Federal income taxes and income taxes paid to a foreign country or a U.S. possession are disregarded.
- Subchapter T financial statement income is adjusted for cooperative patronage dividends and per-unit allocations.
- Amounts treated as tax credits under a Section 6417 or Section 48D(d) election are disregarded to the extent that these amounts were not taken into account under Section 56A(c)(5).
- Amounts related to mortgage servicing rights are treated as adjustments to prevent the inclusion of income before it is taken into account for federal income tax purposes.
- Tax deductions for covered benefit plans are taken into account rather than the deductions taken for financial statement purposes.
- A tax-exempt entity takes into account financial statement income of an unrelated trade or business or derived from debt-financed property to the extent that income from such property is treated as unrelated business taxable income.
- Tax amortization deductions related to qualified wireless spectrum acquired and placed into service after Dec. 31, 2007, are taken into account rather than the amounts taken in the financial statements.
The CAMT is reduced by net operating losses (NOLs), limited to the lesser of the financial statement NOL or 80% of AFSI, and credits. A corporation that pays alternative minimum tax is eligible for a credit against income tax in future years.
Financial reporting impact: To determine its U.S. federal income tax liability, a company will need to compute taxes under both systems – the regular tax system and the CAMT system. ASC 740 requires a company to measure its deferred taxes using the regular tax rate.
Crowe observation: We believe that the CAMT generally should be treated as an alternative minimum tax, as prescribed in ASC 740. As such, the amount of the CAMT is recognized as a current period tax expense in the period incurred, and a company should recognize a deferred tax asset for any CAMT credit carryforwards allowed. As with other deferred tax assets, a valuation allowance is recognized against recorded CAMT credit carryforwards, if necessary, to reduce the net deferred tax asset to the amount that is more likely than not to be realized.
Excise tax on repurchased corporate stock
The IRA imposes a new excise tax of 1% of the fair market value of any stock repurchased by a covered corporation. A covered corporation is any domestic corporation whose stock is traded on an established securities market. Exclusions exist for certain repurchases, such as repurchases that are treated as a dividend, that are contributed to an employer-sponsored retirement plan, or that are less than $1 million. The amount subject to the tax is reduced for stock sold to the public or issued to employees. Stock repurchases by regulated investment companies and real estate investment trusts also are excluded. The excise tax applies to repurchases of stock made after Dec. 31, 2022.
Financial reporting impact: Because the excise tax is not based on income, it is outside the scope of the income tax accounting guidance in ASC 740. U.S. GAAP does not contain explicit guidance for taxes that are not subject to ASC 740. In practice, taxes such as franchise taxes or excise taxes are reported outside of the income tax provision.
Crowe observation: Under U.S. GAAP, stock repurchases frequently are accounted for as equity transactions with no impact to the income statement. We believe when the repurchase of equity-classified stock is accounted for as a Treasury stock transaction, a reporting entity could consider the excise tax to be part of the cost basis of the Treasury stock with a corresponding liability for the excise tax payable. If the reporting entity subsequently issues shares that reduce the excise tax payable, the reporting entity would reduce the cost of the prior Treasury stock transaction.
If a reporting entity repurchases shares not classified as equity under U.S. GAAP, the appropriate accounting treatment for the excise tax might differ.
Looking ahead
Companies should evaluate which provisions of the IRA affect their business operations, taxes, and financial reporting. The U.S. Department of the Treasury and the IRS likely will issue additional guidance, though it is unclear when that guidance will be released.
