[Federal Register Volume 89, Number 182 (Thursday, September 19, 2024)]
[Notices]
[Pages 76821-76822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-21290]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. AI24-1-000]


Accounting for Transferability of Income Tax Credits; Notice of 
Proposed Accounting Release

    Take notice that the Chief Accountant of the Federal Energy 
Regulatory Commission proposes to issue an accounting release 
(attached) to provide guidance on the accounting for the 
transferability of income tax credits related to certain energy 
projects as a result of the Inflation Reduction Act of 2022, which 
allows entities to monetize such credits via transfers to independent 
third parties for cash.\1\ The proposed accounting release would 
require an entity to treat the transfer of income tax credits as a 
nonoperating activity, including revenue (i.e., the entirety of the 
cash received) and associated costs to facilitate the transfer. This 
proposed accounting release would apply to jurisdictional public 
utilities and licensees and natural gas companies.
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    \1\ Inflation Reduction Act of 2022 (IRA), H.R. 5376--117th 
Congress (2021-2022). The IRA transferability provision allows a 
non-tax-exempt entity (seller) with an income tax credit to transfer 
the income tax credit to another non-tax-exempt entity (purchaser) 
and such credit cannot later be resold; as such, the seller would 
effectively receive cash from the sale as if it was paid directly by 
the IRS, as an incentive to encourage investment in energy projects, 
and the buyer would be able to use the purchased income tax credit 
for its own income tax return purposes.
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    This proposed accounting release is not intended to prejudice the 
rate treatment of the transfer of income tax credits in any proceeding 
before the Commission.
    The Commission has reviewed the proposed Accounting Release. At the 
conclusion of the comment period specified at the end of this notice, 
the Chief Accountant will consider the comments received, make any 
necessary changes, and issue the final accounting release. The 
effective date of the final accounting release will be the day that it 
is issued.
    Specifically, comments on the following accounting topics are 
requested:
    1. The proposed accounting release would require an entity to treat 
the transfer of income tax credits as a nonoperating activity, 
including the revenue received from the transfer of the income tax 
credit (i.e., the entirety of the cash proceeds) and any costs to 
facilitate the transfer of income tax credits. If you disagree with 
this conclusion, please provide the basis for your disagreement.
    2. The proposed accounting release would require an entity, upon 
the transfer of its income tax credits to an independent third party, 
to derecognize all associated balances previously recorded on its 
books, including associated accumulated deferred income tax (ADIT) 
balances. If you disagree with this conclusion, please provide the 
basis for your disagreement.
    3. The proposed accounting release would require an entity that 
purchases a non-investment tax credit, such as a production tax credit, 
from an independent third party, to record the tax credit on its books 
using the same account (i.e., an ADIT asset) that it would have used 
had it itself generated the tax credit for use on its own income tax 
return, with any costs incurred to facilitate the purchase recorded as 
nonoperating. If you disagree with this conclusion, please provide the 
basis for your disagreement.
    4. The proposed accounting release would require an entity that 
purchases an investment tax credit from an independent third party to 
use either the flow-through or deferred method of accounting for 
investment tax credits, consistent with the Commission's existing 
accounting regulations, as if it itself received the upfront tax credit 
from the IRS, with any costs incurred to facilitate the purchase 
recorded as nonoperating. If you disagree with this conclusion, please 
provide the basis for your disagreement.
    All interested parties are invited to submit comments on this 
proposed accounting release using the ``eFiling'' link at http://www.ferc.gov. In lieu of electronic filing, you may submit a paper copy 
which must reference the accounting docket number.

To file via U.S. Postal Service: Debbie-Anne A. Reese, Acting 
Secretary, Federal Energy Regulatory Commission, 888 First Street NE, 
Washington, DC 20426
To file via any other courier: Debbie-Anne A. Reese, Acting Secretary, 
Federal Energy Regulatory Commission, 12225 Wilkins Avenue, Rockville, 
Maryland 20852

    Comment Date: 5:00 p.m. Eastern Time on October 25, 2024.

    Dated: September 12, 2024.
Debbie-Anne A. Reese,
Acting Secretary.

Attachment

Federal Energy Regulatory Commission

Proposed Accounting Release: Docket No. AI24-1-000 Accounting for 
Transferability of Income Tax Credits

To All Jurisdictional Public Utilities and Licensees and Natural Gas 
Companies

Subject: Accounting for Transferability of Income Tax Credits

    The Inflation Reduction Act of 2022 allows for transferability of 
income tax credits related to certain energy projects and permits 
entities to monetize such credits via transfers to independent third 
parties for cash.\2\ The Commission has previously determined that 
dispositions of assets are not part of normal recurring operating 
activities,

[[Page 76822]]

and, therefore, generally should be accounted for using nonoperating 
accounts.\3\ Consistent with this long-standing policy, the transfer of 
income tax credits should be treated as a nonoperating activity.
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    \2\ Inflation Reduction Act of 2022, H.R. 5376--117th Congress 
(2021-2022) (which includes a provision that allows a non-tax-exempt 
entity (seller) with an income tax credit to transfer the income tax 
credit to another non-tax-exempt entity (purchaser) and such credit 
cannot later be resold; as such, the seller would effectively 
receive cash from the sale as if it was paid directly by the IRS, as 
an incentive to encourage investment in energy projects, and the 
buyer would be able to use the purchased income tax credit for its 
own income tax return purposes).
    \3\ See 18 CFR parts 101 and 201, Plant Instruction No. 5 (f), 
Plant Purchased or Sold (where the Commission's regulations require 
the use of nonoperating accounts to record gains and losses, and 
sales costs, associated with the sale of plant); Cent. La. Elec. 
Co., Opinion No. 394, 71 FERC ] 61,225 (1995) (where the Commission 
determined that sales of receivables should be treated as 
nonoperating activities, and the expenses associated with such sales 
should likewise be recorded as nonoperating); and Sw. Pub. Serv. 
Co., 188 FERC ] 61,102 (2024) (where the Commission determined 
transaction costs associated with sales of production tax credits 
are nonoperating in nature).
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    Accordingly, this accounting guidance requires an entity to treat 
the revenue received from the transfer of the income tax credit (i.e., 
the entirety of the cash proceeds) and any costs to facilitate the 
transfer, as nonoperating income or expense consistent with the 
underlying nature of the transfer as a nonoperating activity. 
Additionally, upon a transfer of an income tax credit to an independent 
third party, an entity must derecognize all associated balances 
previously recorded on its books, including associated accumulated 
deferred income tax (ADIT) balances, consistent with the accounting 
treatment for a disposition of an asset that had associated ADIT prior 
to a sale.\4\
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    \4\ See, e.g., Ga. Power Co., Docket No. AC16-109-000 (Aug. 5, 
2016) (unpublished letter order).
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    An entity that purchases a non-investment tax credit, such as a 
production tax credit, from an independent third party, is required to 
record the tax credit on its books using the same account (i.e., an 
ADIT asset) that it would have used had the entity itself generated the 
tax credit for use on its own income tax return. An entity that 
purchases an investment tax credit from an independent third party is 
required to use either the flow-through or deferred method of 
accounting for investment tax credits, consistent with the Commission's 
existing accounting regulations, as if the entity itself received the 
upfront tax credit from the IRS. In all cases, an entity is required to 
record the costs incurred to facilitate a transfer of income tax 
credits as nonoperating.
    This guidance is for accounting purposes only and is not intended 
to prejudice the rate treatment of the transfer of income tax credits 
in any proceeding before the Commission.
    Appendix A provides an example that describes the accounting for 
transferability of an investment tax credit, and an example that 
describes the accounting for transferability of a non-investment tax 
credit such as a production tax credit.

Appendix A
Illustrative Examples of the Application of the Accounting Release
    Example 1: Accounting for transferability of an Investment Tax 
Credit (ITC).
    The entire cash received from the transfer of ITCs is treated as 
nonoperating income because the transferred ITC is intended to merely 
take a new form (i.e., the ITC is monetized into cash) upon its sale to 
a third party (i.e., the seller effectively receives the entirety of 
the cash from the sale as if the IRS directly paid the seller for the 
ITC). Any costs to facilitate the sale are likewise treated as 
nonoperating expense. If an entity previously maintained accumulated 
deferred income tax (ADIT) (e.g., in Account 190) associated with ITCs 
(i.e., in Account 255), such an entity should derecognize, both the ITC 
and its associated ADIT upon transfer.

Journal entry to record the entire cash proceeds from the sale of the 
ITC:
    Debit Account 131, Cash, Credit Account 421, Miscellaneous 
Nonoperating Income
Journal entry to record costs to facilitate the sale of the ITC:
    Debit Account 426.5, Other Deductions Credit Account 131, Cash
Journal entry to derecognize the ITC upon the sale:
    Debit Account 255, Accumulated Deferred Investment Tax Credits, 
Credit Account 411.4, ITC Adjustments, Utility Operations
Journal entry to derecognize the associated ADIT asset upon the sale of 
the ITC:
    Debit Account 410.1, Provision for Deferred Income Taxes, Operating 
Income, Credit Account 190, Accumulated Deferred Income Taxes

    Example 2: Accounting for transferability of a Production Tax 
Credit (PTC).
    The entire cash received from the transfer of PTCs is treated as 
nonoperating income, and any costs to facilitate the sale are likewise 
treated as nonoperating expense. If an entity previously maintained 
ADIT assets (e.g., in Account 190) for unutilized PTCs (i.e., unused on 
the entity's income tax return), such ADIT should be derecognized upon 
the sale of the PTC.

Journal entry to record the entire cash proceeds from the sale of the 
PTC:
    Debit Account 131, Cash, Credit Account 421, Miscellaneous 
Nonoperating Income
Journal entry to record costs to facilitate the sale of the PTC:
    Debit Account 426.5, Other Deductions, Credit Account 131, Cash
Journal entry to derecognize the associated ADIT asset upon the sale of 
the PTC:
    Debit Account 410.1, Provision for Deferred Income Taxes, Operating 
Income, Credit Account 190, Accumulated Deferred Income Taxes

[FR Doc. 2024-21290 Filed 9-18-24; 8:45 am]
BILLING CODE 6717-01-P