2.7 Refundable Tax Credits

Certain tax jurisdictions provide refundable credits (e.g., qualifying R&D credits in certain countries and state jurisdictions and alternative fuel tax credits for U.S. federal income tax) that do not depend on the entity’s ongoing tax status or tax position (e.g., an entity may receive a refund despite being in a taxable loss position). Tax credits, such as refundable credits whose realization does not depend on the entity’s generation of taxable income or the entity’s ongoing tax status or tax position, are not considered an element of income tax accounting under ASC 740. Thus, even if the credit claims are filed in connection with a tax return, the refunds are not considered part of income taxes and therefore are not within the scope of ASC 740. In such cases, an entity would not record the credit as a reduction of income tax expense; rather, the entity should determine the credit’s classification on the basis of its nature.

When determining the classification of these credits, an entity may consider them to be a form of government grant or assistance. An entity may look to paragraphs 24 and 29 of IAS 20 for guidance on government grants. Under paragraph 24 of IAS 20, an entity presents government grants related to assets “either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset.” Further, paragraph 29 of IAS 20 states, “Grants related to income are presented as part of profit or loss, either separately or under a general heading such as ‘Other Income’; alternatively, they are deducted in reporting the related expense.”

In rare circumstances, a tax law may change the way a tax credit is realized. For example, a jurisdiction may have historically required that a credit be realized on the tax return as a reduction in taxes payable but subsequently changes the law so that the credit can be realized even though an entity has not first incurred a tax liability (i.e., the credit amount becomes refundable but was not when it arose). In this situation, an entity would generally continue to apply ASC 740 to the credits recognized at the time of the law change. Any new refundable credits earned after the tax law change would be accounted for as refundable credits in accordance with the guidance in this section.

Credits whose realization ultimately depends on taxable income (e.g., investment tax credits [ITCs] and R&D credits) would be within the scope of ASC 740. See Section 12.2 for more information about the accounting for ITCs.

2.7.1 Selling Income Tax Credits to Monetize Them

Some tax jurisdictions might allow an entity that generates certain types of income tax credits to either use the credit to reduce its income tax liability or effectively “sell” all or a portion of it by assigning the right to claim the credit to another qualified entity. If, however, the credit can be used only to reduce an income tax liability either of the entity that generated it or the entity to which it is sold and would never be refundable by the government, we believe that the credit is within the scope of ASC 740.2

In situations in which an entity does not have sufficient taxable income to use all or a portion of the income tax credit or in which using it might take multiple tax years, the entity might achieve a better economic benefit (i.e., present value benefit) by selling the credit. In such situations, the entity that generated the credit should initially recognize and measure it in accordance with the recognition and measurement criteria of ASC 740. To the extent that the income tax credit does not reduce income taxes currently payable, the entity would recognize a DTA for the carryforward and assess it for realizability in a manner consistent with the sources of income cited in ASC 740-10-30-18.3 See Section 5.3 for additional discussion.

If the entity were to subsequently sell the income tax credit, we understand based on a FASB staff technical inquiry that it would be most appropriate to reflect any proceeds and resulting gain/loss on the sale as a component of the tax provision. Alternatively, we believe the sale could be treated no differently than the sale of any other asset, with gain or loss recognized in pretax earnings for any difference between the proceeds received and the recorded carrying value (i.e., the DTA for the income tax credit recognized under the guidance in ASC 740 on recognition and measurement).

Footnotes

While we believe accounting for the credits within the scope of ASC 740 is most appropriate, consistent with feedback received from the FASB staff, we believe it would also be acceptable for a company to account for the transferable credits in a manner similar to refundable credits as the company generating the credit does not need taxable income in order to monetize the credit.

While we believe such assessment would generally be predicated upon the normal course of business (i.e., an entity would not factor in its ability to sell the underlying tax attribute as a basis for realizing the related DTA), we understand based on a technical inquiry with the FASB staff that it would also be acceptable to consider the expected proceeds when assessing realizability.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.