FERC Accountant Suggests Changes to Income Tax Credit Transferability
TL/DR –
The Chief Accountant of the Federal Energy Regulatory Commission (FERC) has issued a proposal to modify the transferability of income tax credits (ITCs) related to energy projects under the Inflation Reduction Act of 2022 (IRA). The proposed changes will classify the transfer of ITCs as “nonoperating activity” under FERC’s accounting procedures and also outline how the receiving entities will handle the transferred tax credits. The document also opens a comment period until October 25, 2024, allowing stakeholders to provide feedback on the proposed modifications.
FERC’s NOPAR on Income Tax Credit Transferability
The Chief Accountant at the Federal Energy Regulatory Commission (FERC) issued a notice of proposed accounting release (NOPAR) on September 12, 2024. This NOPAR aims to amend the transferability of income tax credits (ITCs) linked to certain energy projects as per the Inflation Reduction Act of 2022 (IRA). With this proposal, entities can monetize these ITCs by transferring them to independent third parties for cash.
According to the proposal, the transfer process, encompassing both the cash proceeds and transfer-associated costs, should be treated as “nonoperating activity” under FERC’s Uniform System of Accounts (USofA) accounting procedures. The proposed amendments are set to affect public utilities, licensees, and natural gas companies.
The IRA permits a non-tax-exempt entity possessing an ITC to transfer it to another non-tax-exempt entity. This transferred ITC cannot be resold. The FERC maintains that categorizing these tax credit transfers as non-recurring operational activities aligns with its long-established accounting policies. Once the ITC transfer is complete, the recipient must derecognize all related previously recorded balances, including deferred income tax balances.
The NOPAR also proposes that entities purchasing a non-investment tax credit should record the credit as if it was generated by the receiving entity on their own tax return. Purchasers of investment tax credits would have to apply the flow-through or deferred accounting method. In both scenarios, necessary transfer costs must be recorded as non-operating.
This proposed accounting change welcomes comments on four key aspects:
(1) Treating ITC transfers, including revenue and costs, as “nonoperating activities;”
(2) Derecognizing all associated balances, including deferred income tax balances, after the ITC transfer;
(3) Recording a purchased non-investment tax credit as self-generated on the entity’s income tax return, with necessary costs classified as non-operating; and
(4) Using the flow-through or deferred method for accounting purchased ITCs and recording associated costs as nonoperating.
Comments can be submitted until 5:00 p.m. Eastern Time on October 25, 2024. Post-review, the Chief Accountant will issue a final accounting release effective from the issue date.
Access the full notice of proposed accounting release here.
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