[co-author: Ben Duwve]
On September 12, 2024, FERC’s Chief Accountant issued a notice of proposed accounting release (“NOPAR”) to modify the transferability of income tax credits (“ITCs”) related to certain energy projects under the Inflation Reduction Act of 2022 (“IRA”), which allows entities to monetize such ITCs via transfers to independent third parties for cash. The proposal seeks to treat the transfer of ITCs, including both the cash proceeds of the credit and necessary costs to complete the transfer, as “nonoperating activity” under FERC’s Uniform System of Accounts (“USofA”) accounting procedures. The proposed modifications are applicable to public utilities, licensees, and natural gas companies.
The IRA’s transferability provision permits a non-tax-exempt entity holding an ITC to transfer the ITC to another non-tax-exempt entity, which cannot later be resold. FERC argues that treating transfers of tax credits of this kind as not normal recurring operating activities is consistent with its long-standing accounting policy of similar dispositions of assets. Finally, after the income tax credit transfer is complete, the receiving entity must derecognize all previously recorded associated balances, including associated accumulated deferred income tax balances.
Further, the NOPAR proposes to require that entities purchasing a non-investment tax credit record the credit as if it had been generated by the receiving entity on their own income tax return. Entities purchasing investment tax credits would be required to use the flow-through or deferred method of accounting. In either case, the entity is required to record necessary costs to complete the transfer as nonoperating.
The NOPAR requests comments on the following aspects of the proposed accounting changes:
(1) requiring an entity to treat the transfer of ITCs, including revenue and associated costs, as “nonoperating activity;”
(2) requiring an entity, after the transfer of ITCs, to derecognize all previously recorded associated balances, including accumulated deferred income tax balances;
(3) requiring an entity purchasing a non-investment tax credit to record the credit as if itself had generated the credit on its income tax return and record any necessary costs to complete the transaction as “non-operating” costs; and
(4) requiring an entity that purchases an ITC to use the flow-through or deferred method of accounting for such credits as if itself received the credit from the IRS and record any necessary costs to complete the transaction as “nonoperating” costs.
The comment period closes at 5:00 p.m. Eastern Time on October 25, 2024. Following a review of comments, the Chief Accountant will issue a final accounting release, which will take effect on the date it is issued.
A copy of the notice of proposed accounting release, issued in Docket No. AI24-1, can be found here
