18.6 Tax Legislation

For a discussion of challenges associated with an entity’s accounting for tax credits available under the CHIPS Act, the IRA, or both, see Deloitte’s June 27, 2025, Accounting Spotlight; Deloitte’s April 3, 2023, Financial Reporting Alert; and Section 12.2.2 of Deloitte’s Roadmap Income Taxes. For further discussion of the IRA, see Deloitte’s August 12, 2022, Tax Alert Clean Energy Credits and Incentives in the Inflation Reduction Act of 2022 — Details and Observations, as well as On the Radar and Sections 3.3.4.10 and 5.7.1 of Deloitte’s Roadmap Income Taxes. For a discussion of accounting considerations related to the One Big Beautiful Bill Act, see Deloitte's July 15, 2025, Heads Up.

Entities that generate transferable tax credits may choose either of two acceptable approaches to account for the initial recognition of the credits. Specifically, such entities can account for the initial recognition and measurement of the credits as either (1) tax credits within the scope of ASC 740 or (2) government grants. Although the recognition and measurement of transferable tax credits depend on the accounting policy elected, recognized credits are typically viewed as nonmonetary assets (which are similar to nonfinancial assets). Consequently, the derecognition (i.e., upon sale) of the credits would typically be accounted for in accordance with ASC 610-20. See Section 17.2.4 for further discussion of the applicability of ASC 610-20 to transferable tax credits.

ASC 610-20-25-5 through 25-7 provide guidance on when an entity should derecognize a nonfinancial asset. Such guidance states that an entity must first determine that the contract with the other party meets the criteria in ASC 606-10-25-1 and identify all distinct nonfinancial assets in the sale. We believe that an entity should carefully consider whether any conditions that must be met before the close of the sale to avoid making the transfer and sale agreement cancelable have been satisfied. That is, for the criteria in ASC 606-10-25-1 to be met, the agreement must be noncancelable. Once the criteria in ASC 606-10-25-1 are met, the entity derecognizes the nonfinancial asset when control is transferred to the purchaser in accordance with ASC 606-10-25-30, which addresses an entity’s satisfaction of performance obligations at a point in time.

Note that to transfer control of a credit, an entity must first have control of the credit. That is, the relevant credit must have already been generated, and the selling entity must have the present ability to direct the use of, and obtain the benefit from, the credit. The entity must also consider whether it has met the applicable criteria for recognizing (i.e., earning) the credit under either ASC 740 or the government grant model (depending on its policy election). If the entity has not recognized the transferable credit (because it does not control the credit), it cannot sell the credit and therefore would not record a gain or loss. Further, we believe that if an entity receives cash proceeds from the sale of credits that have not yet been generated, the entity should record a liability (e.g., a deposit liability) for any cash consideration received until the recognition (and derecognition) criteria have been met.

When derecognizing transferable credits, an entity may need to use significant judgment to determine when control has been transferred to the purchaser. ASC 606-10-25-25 defines control as “the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.” For help with determining when control of a credit has been transferred to a purchaser, an entity should assess the five indicators in ASC 606-10-25-30 (see Section 8.6).