D.4 Applying the Proportional Amortization Method

See Section 12.2.1 of Deloitte’s Roadmap Income Taxes.

When evaluating whether the proportional amortization method should be expanded to apply to tax equity investments that generate ITCs, the EITF considered (1) the potential interaction between the deferral method of accounting for ITCs described in ASC 740 and (2) the goal of the proportional amortization method. Paragraph BC20 of ASU 2023-02 states, in part:

Accordingly, the transition guidance in ASC 323-740-65-2(f) states that “[i]nvestments for which the proportional amortization method is used shall follow the flow-through method described in paragraph 740-10-25-46. An entity may have previously elected to apply the deferral method. That election is not applicable to investments that are accounted for using the proportional amortization method.”

If an investor had previously elected to apply the deferral method to account for ITCs, it is not precluded from applying the proportional amortization method. Further, it is not required to change its previous accounting policy election to account for ITCs by using the deferral method if the associated investment will not be accounted for by using the proportional amortization method. Instead, the investor would be required to apply the flow-through method to account for ITCs generated from tax equity investments accounted for by using the proportional amortization method while continuing to apply the deferral method to account for ITCs generated from other sources.

If an investor elects to apply the proportional amortization method to account for tax equity investments that generate ITCs, it would need to evaluate whether any existing ITC-generating investments qualify for the proportional amortization method by using the transition guidance discussed in Section D.8. If an investor determines that existing ITC-generating investments qualify for the proportional amortization method and the ITCs previously generated by those investments were accounted for by using the deferral method, the investor would be required to transition its accounting for the previously generated ITCs from the deferral method to the flow-through method. In practice, there is more than one way the deferral method can be applied, and the transition from the deferral method to the flow-through method will depend on how the deferral method was initially applied. See Deloitte’s Roadmap Income Taxes for additional guidance on the initial application of the deferral method to account for ITCs.

If an investor wants to change its accounting policy election so that all ITCs are accounted for by using the flow-through method, this change would be subject to the requirements in ASC 250.

Once the election is made, the proportional amortization method must be applied to all investments in which the predominant income tax credit is within an elected tax credit program that meets the scope criteria described in Section D.3. An investor cannot decide, on an investment-by-investment basis, when to apply the proportional amortization method. Paragraph BC14 of ASU 2023-02 elaborates on this point and notes that “an entity could elect to apply the proportional amortization method to investments that meet the conditions in paragraph 323-740-25-1 that generate income tax credits and other income tax benefits from qualified affordable housing projects and not apply the proportional amortization method to investments that meet the conditions in paragraph 323-740-25-1 that generate income tax credits and other income tax benefits from an NMTC program.” See Section D.4.3 for guidance on the applicability of the proportional amortization method when an investee generates more than one type of income tax credit.

While we believe that an entity needs to carefully consider the nature of the investment, we do not think that a tax equity investment that generates an income tax credit from a tax credit program for which the investor has not elected the proportional amortization method would necessarily preclude the investor from applying the proportional amortization method. Rather, an investor would need to determine whether income tax credits generated from a program for which the investor has elected the proportional amortization method are the predominant credits that the tax equity investment generates. For example, we believe that if 51 percent of the tax credits generated by a tax equity investment are generated through a tax credit program for which the investor has elected the proportional amortization method and the remaining 49 percent are generated through a program for which the investor has not elected that method, it would generally be appropriate to conclude that the investment should be accounted for by using the proportional amortization method provided that the other scope requirements are met.