Article
EITF decision on amortization could spark interest in tax credit investing
Jan. 29, 2023 · Authored by Adam DeZego
The Emerging Issues Task Force (EITF) adopted a final consensus in December 2022, allowing the use of the proportional amortization method with respect to equity investments in tax credit programs beyond the low-income housing tax credit (LIHTC).
The final consensus may allow entities to elect the proportional amortization method with respect to all equity investments that meet the criteria of Accounting Standards Codification® (ASC) 323-740-25-1, more specifically:
Final consensus impact
The ability to apply proportional amortization removes a layer of complexity from the accounting for tax credit transactions, as the impact of both the tax credit and the associated cost of the investment can now be shown as a component of income tax expense (benefit).
The proportional amortization method of accounting is already an option for LIHTC investments. The impact of allowing this method for LIHTC investments simplified the process and welcomed more investors to the market, increasing demand for those credits.
The lowered barriers to entry from the final consensus, as well as the robust focus on Environmental, social, and governance (ESG) investing, should similarly drive more demand for other tax credit investments from financial institutions and corporate entities.
Effect on tax credit pricing
This increased demand will put upward pressure on tax credit pricing. While increased pricing has an inverse impact on investor yields, it should help more projects reach completion by helping to fill project-level financing gaps in the current rising interest rate environment.
An entity’s application of proportional amortization is likely to have the most immediate impact on NMTC transactions because NMTC transactions inherently tend to meet the eligibility criteria outlined below.
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