At a meeting today, the Financial Accounting Standards Board Emerging Issues Task Force considered how entities should account for limited partnership investments in low-income housing tax credit (LIHTC) projects. By a majority vote, the group agreed to expose for comment a change that would allow effective yield accounting for LIHTC investments when a guarantee is not provided when certain criteria are met.
Allowing the expanded use of effective yield accounting would expand the pool of potential LIHTC investors. The key benefit of effective yield accounting is that both the deductions and the tax credits generated by federal income tax credit investments are recorded below the line as part of a company’s income tax expense. The effective yield accounting treatment appropriately nets income and expenses in the same place on a company’s income statement.
This change has been supported by a group of industry stakeholders that formed in 2010 to advocate for expanding the effective yield method. This effort was led by Ron Diner, Executive Chairman of Raymond James Tax Credit Funds, Inc. Last year, a white paper, written by Michael Beck of CohnReznick and Bentley Stanton of Novogradac & Company, addressed issues related to the accounting methods that the FASB currently requires be applied to tax credit investments. The white paper, “Significant Changes Needed in Accounting for Affordable Housing and Other Tax Credit Investments,” describes the need for changes to accounting rules that reflect the unique nature of tax credit investments.
At its meeting today, the group agreed to move ahead with a proposal to allow an entity to elect to account for a LIHTC investment using the effective yield method if certain conditions are met.
During today’s discussion the EITF members agreed to tweak the criteria included in the Issues Summary distributed in advance of today’s meeting. The list of criteria included in the Issues Summary are (emphasis added):
- It is probable that the tax credits allocable to the investor will be available.
- The investor retains no operational influence over the investment, and substantially all of the projected benefits are from tax credits and other tax benefits.
- The investor’s projected yield based solely on the cash flows from the tax credits and other tax benefits (for example, tax benefits generated from the operating losses of the investment) is positive.
- The investor is a limited partner in the affordable housing project for both legal and tax purposes, and the investor’s liability is limited to its capital investment.
There was a fair amount of discussion at the meeting about why this change shouldn’t be broadened to other tax credits at this time, but for expediency purposes it was currently limited to LIHTC investments. There was also discussion about making the topic part of a broader project in the future.
The EITF staff will create and publish an exposure draft for public comment. Exposure drafts represent a proposed standard and individuals and organizations will have the opportunity to provide feedback and comments expressing agreement or disagreement. Based on discussion at the meeting, the draft will center on the effective yield method. EITF staff may also prepare examples comparing the effective yield and straight-line method of expensing the investment balance within the income tax expense line. After public comment is gathered, the EITF will likely hold another meeting to discuss that feedback and consider additional modifications to the proposal. In the best-case scenario, the earliest the LIHTC industry might expect a final rule is this fall.
The EITF action today is an important and welcome step in a years-long process. Based on the comments made during the meeting and the overall direction the task force appears to be headed, this appears to be a very positive development for the LIHTC industry.
If you are interested in joining the group of industry stakeholders who are working on this accounting change, please contact my partner Bentley Stanton, CPA, at (678)867-2333 or firstname.lastname@example.org. Contact Bentley as well if you have questions about this development, or about the effective yield method more generally.
Some additional issues to consider as part of commenting on the coming draft paper:
- What is the effective date of any new rule?
- Might the new rule apply to other tax credit investments?
- What refinements are needed to the “no operational influence” condition?
- Perhaps look to distinctions between protective and participating rights of limited partners in an investment.
- Should the cost of an investment be recovered within the income tax expense line on a straight line or effective yield method?