For three years, CFOs and controllers at clean energy developers, semiconductor manufacturers, and other companies generating transferable tax credits under the IRA, the CHIPS and Science Act, and the OBBBA have been navigating a genuine gap in US GAAP. The gap exists because current GAAP does not explicitly address how to account for tax credits that can be used to reduce the generating entity's own income tax liability or sold to a third party. Lacking explicit guidance, companies have adopted one of three approaches: ASC 740 income tax accounting, ASC 832 government grant accounting, or financial instrument accounting. The same tax credit, in the same transaction structure, is being recorded three different ways by different companies.
On May 13, 2026, FASB resolved the question. The board voted to add a project to its technical agenda to specify that nonrefundable transferable tax credits must be accounted for in accordance with ASC Topic 740, Income Taxes. The board also decided not to provide guidance on the derecognition of nonrefundable transferable tax credits, leaving that specific question for stakeholder input through the standard-setting process.
This post explains what nonrefundable transferable tax credits are, why practice has been so inconsistent, what FASB decided and why, what the ASC 740 treatment means in practice for both sellers and purchasers of credits, what the valuation allowance question is, how this interacts with ASU 2025-10, and what the Q2 2026 10-Q should disclose while the formal standard is being drafted.
What Is a Nonrefundable Transferable Tax Credit and Who Is Affected?
A transferable tax credit is a credit against income taxes that the generating entity can either use to reduce its own income tax liability or sell to a third-party taxpayer who uses it to reduce their income tax liability. The transfer is a sale of the credit itself, not a sale of the underlying asset that generated the credit.
Nonrefundable means the credit cannot be recovered as a direct cash payment from the government if it exceeds the taxpayer's tax liability. The credit can only be used to offset a tax liability, either by the generating entity or by a purchaser. This distinguishes nonrefundable transferable credits from refundable or direct-pay credits, where the government pays the difference in cash.
The three pieces of legislation that created most of the nonrefundable transferable credits in the US market are:
The Inflation Reduction Act, enacted August 2022, which introduced or expanded transferable credits for clean energy generation, energy storage, electric vehicles, clean hydrogen production, advanced manufacturing, and several other categories. The Section 48E clean electricity investment tax credit, the Section 45Y clean electricity production tax credit, and the Section 45X advanced manufacturing production tax credit are among the most frequently transferred.
The CHIPS and Science Act, enacted August 2022, which created the Section 48D advanced manufacturing investment tax credit for semiconductor fabrication facilities. This credit is transferable, making semiconductor manufacturers another major participant in the credit transfer market.
The OBBBA, enacted July 2025, which modified several of the IRA credits and preserved the transferability features of the clean energy credits.
The affected companies are those generating credits (clean energy developers, semiconductor manufacturers, advanced manufacturers) and those purchasing credits (banks, insurers, industrial companies, and other tax-paying entities with sufficient tax liability to use the credits). Brokers and intermediaries that facilitate credit transfers are also affected in how they recognise fees and gains from the transaction.
Why Has Practice Been So Inconsistent: Grants, Deferred Revenue, or Income Taxes?
The practice diversity that FASB is resolving was not a result of carelessness. It was the direct consequence of a genuine gap in the guidance.
The Deloitte Accounting Spotlight on transferable tax credits, published June 2025, captures the state of practice precisely: GAAP does not indicate how companies should account for credits that can be used to either reduce an income tax payment by a company or sold to another taxpayer. Three approaches have emerged, each with a reasonable technical basis.
The ASC 740 approach treats transferable credits as income tax credits within the scope of ASC Topic 740. The generating entity recognises a deferred tax asset for the credit when earned, assesses the DTA for realizability, and recognises any gain or loss on a transfer as a component of income tax expense or benefit. The EY Technical Line updated in 2025 and 2026 reflects the FASB staff's view that the most appropriate way to account for nonrefundable tax credits with transferability features is to apply ASC 740, with any gain or loss on transfer recognised as a component of the tax provision.
The government grant approach analogises to IAS 20 by analogy, because ASC 832 and its predecessor guidance excluded transfers of assets from governments to business entities. Under IAS 20 by analogy, the credit is recognised as a government grant when there is reasonable assurance that conditions will be met and the grant will be received.
The financial instrument approach treats the transferable credit as a receivable or financial asset, because the ability to sell the credit to a third party for cash makes it economically similar to a financial asset that can be monetised.
The FASB board member Fred Cannon's comment at the May 13 meeting captured the resolution rationale precisely: "I think the gating issue really is nonrefundability. If it's nonrefundable, by definition that's a tax issue. That's going to be in the tax line, so it's going to stay there." Board member Hillary Salo added that concern about the inconsistency had been building for some time, including during the board's consideration of the government grants and environmental credits standards. Board member Christine Botosan said she supported the staff recommendation to add the project.
What Did FASB Decide on May 13, 2026?
The FASB board voted on May 13, 2026 to add a project to its technical agenda specifically to address the accounting for nonrefundable transferable tax credits. The decision was to specify that these credits must be accounted for in accordance with ASC Topic 740, Income Taxes.
The decision has two parts that must be understood together.
What FASB decided: that nonrefundable transferable tax credits fall within the scope of ASC Topic 740 and must be accounted for accordingly. This resolves the question of which standard governs. The ASC 832 government grant approach and the financial instrument approach are not appropriate for nonrefundable transferable tax credits.
What FASB specifically did not decide: the board voted not to provide guidance on the derecognition of nonrefundable transferable tax credits at this time. The Accounting Today report of the meeting confirms this explicitly. Derecognition refers to when and how the credit should be removed from the balance sheet, specifically the accounting for the credit transfer transaction itself. This is the most operationally significant open question for companies that sell their credits to third parties, because it determines how the gain or loss on the sale is recognised and presented.
The reason FASB did not address derecognition at the May 13 meeting is that it requires a separate standard-setting deliberation. Stakeholders provided multiple suggestions on how to approach derecognition, including analogising to ASC 606, ASC 610-20, and ASC 958-605. The board will address derecognition through the normal proposed ASU and comment period process.
The board's decision is a technical agenda addition, not yet a final accounting standard. Until a final standard is issued, the May 13 decision represents the direction of travel. Companies applying ASC 740 to nonrefundable transferable credits today are aligned with the board's indicated direction but are not yet required to change their accounting if they have been applying a different approach.
What Does "ASC Topic 740 Income Taxes" Treatment Actually Mean?
Under ASC 740, an income tax credit reduces the entity's current income tax liability in the period the credit is generated, or if the credit cannot be used in the current period, it creates a deferred tax asset representing the expected future tax benefit. The deferred tax asset is then assessed for realizability through the valuation allowance analysis.
For a nonrefundable transferable credit, the ASC 740 treatment means:
When the credit is generated (the qualifying investment is placed in service or the qualifying production occurs), the entity recognises a current tax benefit or a deferred tax asset in the period the credit is earned.
If the entity retains the credit for its own use, the credit reduces the entity's current income tax liability when the tax return is filed. The credit flows through the income tax line on the income statement, not through revenue or operating income.
If the entity intends to sell the credit to a third party, the gain or loss on the sale of the credit is recognised as a component of income tax expense or benefit. The EY Technical Line confirmed this specific presentation conclusion based on the FASB staff's view communicated through a technical inquiry.
For the purchaser of a transferred credit, the credit is applied to reduce the purchaser's income tax liability in the year of transfer. The amount paid for the credit represents the purchaser's cost. The difference between the face value of the credit and the purchase price is recognised as an additional income tax benefit.
What Changes for Companies That SELL Transferable Credits?
For clean energy developers, semiconductor manufacturers, and other companies generating and selling nonrefundable transferable credits, the ASC 740 direction changes the income statement presentation of the gain from the sale.
Under the ASC 832 government grant approach or the financial instrument approach, a company selling a tax credit might recognise the proceeds as revenue (under ASC 606), as other income, or as a separate government grant recognised outside the tax provision. Those approaches place the gain above the tax line, affecting EBIT and EBITDA.
Under ASC 740, the gain from selling a transferable credit is a component of income tax expense or benefit. It is presented in the income tax line, below operating income. This means:
EBIT and EBITDA are unaffected by the credit sale gain under ASC 740. Companies that have been presenting credit sale proceeds as revenue or other operating income will see a reduction in those line items and a corresponding increase in the income tax benefit in the tax line.
The effective tax rate presentation changes materially. A company with significant credit sales will show a material income tax benefit in the period of the sale, and analysts tracking effective tax rates will see that benefit in the tax line rather than in operating metrics.
Segment reporting may be affected. If credit sales have been included in a reporting segment's revenue or operating income under ASC 280, removing them to the tax provision changes segment profitability measures.
For companies with large-scale credit transfer programmes, these presentation changes are not cosmetic. A solar developer that generates $500 million of IRA Section 45X credits per year and sells them at 90 cents on the dollar generates $450 million in proceeds. Under ASC 740, that $450 million flows through the income tax line. Under a grant or revenue approach, it flows above the tax line.
What Changes for Companies That PURCHASE Transferable Credits?
For the purchasers of nonrefundable transferable credits, the ASC 740 direction confirms the most common practice that tax-paying purchasers have already been applying.
Most purchasers, particularly banks and insurers that have been the primary market participants in IRA credit transfers, have been treating purchased transferable credits as income tax credits applied against their income tax liability in the year of transfer. Under ASC 740, the amount paid for the credit reduces the purchaser's income tax expense in the period of purchase.
For a purchaser that pays $90 million for $100 million of face value credits, the $100 million credit reduces income tax expense by $100 million, while the $90 million payment reduces cash. The $10 million difference between the credit's face value and its cost is recognised as an additional income tax benefit. The net effect on income tax expense is a $100 million reduction.
What changes for purchasers is the elimination of the uncertainty about whether their current treatment is consistent with authoritative guidance. Companies that have been treating purchased credits as ASC 740 items are aligned with the board's direction. Companies that have been treating purchased credits as a government grant or a financial instrument need to assess whether their approach will be consistent with the forthcoming standard.
What Is the Valuation Allowance Question FASB Chair Jones Specifically Flagged?
The valuation allowance question is one of the most consequential open issues that the FASB project will need to address, and it was specifically flagged during board deliberations as a key point of stakeholder concern.
Under ASC 740-10-30-5, a valuation allowance must be established against a deferred tax asset when it is more-likely-than-not that some or all of the DTA will not be realised. For a nonrefundable transferable credit that can only be used against income tax liability, the realizability question is: will the entity have sufficient income tax liability to use the credit?
For a clean energy developer with significant tax losses from accelerated depreciation and high initial capital costs, the answer may be that the entity does not have sufficient taxable income to use the credit itself. This would ordinarily require a valuation allowance against the DTA, which would offset the tax benefit of generating the credit.
The transferability feature is the key to realising the credit in that scenario: the entity can sell the credit rather than use it, generating cash proceeds. Under ASC 740, the planned sale of the credit affects the valuation allowance assessment. If the entity intends and is able to sell the credit to a third party, that sale provides the evidence of realisation that supports not establishing a valuation allowance.
The Deloitte Accounting Spotlight confirmed that if an entity plans to transfer a credit, it must make accounting policy elections regarding whether it will consider anticipated sales proceeds when assessing the realizability of the DTA. The FASB project will need to address this specifically. Until guidance is issued, companies should disclose their accounting policy election on this point and apply it consistently.
How Does This Interact With ASU 2025-10 (ASC Topic 832 Government Grants)?
ASU 2025-10, Accounting for Government Grants by Business Entities, provides new guidance on how US GAAP companies should account for government grants. It is effective for annual periods beginning after December 15, 2028.
The interaction is direct: ASU 2025-10 applies to government grants other than those within the scope of ASC 740. Because FASB's May 13 direction places nonrefundable transferable credits within the scope of ASC 740, they are explicitly outside the scope of ASU 2025-10. A company that generates IRA Section 45X credits does not apply ASU 2025-10 to those credits. They apply ASC 740.
What ASU 2025-10 does cover: government grants that are refundable or direct-pay (outside ASC 740), and grants that are not credits against income tax liability, such as grants for facilities construction, workforce training, or research subsidies. A company that receives a DOE loan guarantee or a state economic development grant applies ASU 2025-10. A company that generates IRA nonrefundable transferable credits applies ASC 740.
The risk of confusion is that many companies receive both types of government assistance simultaneously. A manufacturer building an advanced semiconductor facility might receive a state grant for facility construction (ASU 2025-10), a federal CHIPS Act Section 48D credit (ASC 740 per FASB's May 13 direction), and a state infrastructure grant (ASU 2025-10). Each must be assessed independently against its appropriate standard.
What Does Your 10-Q Need to Disclose While the Standard Is Being Drafted?
While the FASB project is underway and a proposed ASU has not yet been issued, companies face a disclosure question for the Q2 2026 10-Q.
For companies currently applying ASC 740 to nonrefundable transferable credits, the accounting is aligned with FASB's direction and is defensible. The disclosure should describe the accounting policy: that the company accounts for its nonrefundable transferable tax credits under ASC Topic 740, recognises a DTA or current tax benefit when credits are earned, and records any gain or loss on credit transfers as a component of income tax expense or benefit.
For companies currently applying a government grant or financial instrument approach, the May 13 board decision is a signal that their current accounting may not be consistent with the direction of forthcoming authoritative guidance. These companies should assess whether a voluntary change to ASC 740 treatment is appropriate now. A change in accounting principle requires that the new principle be preferable. Given the board's explicit direction, a company that voluntarily changes to ASC 740 treatment has a strong basis for the preferability assertion.
If the company decides not to change its accounting policy before the final standard is issued, it should add a disclosure to the notes describing the FASB project, the board's May 13 direction to specify ASC 740 treatment, and that the company is evaluating the impact of the forthcoming standard on its current accounting policy.
The income statement presentation implications of a change should be quantified if material. For companies where credit sale proceeds have been recorded above the tax line, the reclassification to the tax provision is a material presentation change that will affect EBIT, EBITDA, and operating income metrics used in investor communications and debt covenant calculations.
Frequently Asked Questions
What are nonrefundable transferable tax credits under GAAP?
Nonrefundable transferable tax credits are credits against income tax that (1) can only be used to reduce an income tax liability and (2) can be sold to a third-party taxpayer who applies the credit against their own income tax liability. Common examples include IRA Section 45X advanced manufacturing production tax credits, IRA Section 48E clean electricity investment tax credits, and CHIPS Act Section 48D advanced manufacturing investment tax credits.
Should IRA transferable credits be accounted for under ASC 740 or ASC 832?
Under FASB's May 13, 2026 direction, nonrefundable transferable tax credits should be accounted for under ASC Topic 740, Income Taxes. They are not within the scope of ASC 832. The FASB confirmed this direction when it voted to add a project to its technical agenda to specify ASC 740 treatment.
What did FASB decide about transferable tax credit accounting?
On May 13, 2026, FASB voted to add a project to its technical agenda to specify that nonrefundable transferable tax credits must be accounted for under ASC Topic 740. The board decided not to provide guidance on the derecognition of these credits at the same time, leaving that question for the proposed ASU and comment period.
Does the FASB decision affect how I record clean energy credit sales?
Yes. Under ASC 740, the gain or loss on selling a nonrefundable transferable credit to a third party is recognised as a component of income tax expense or benefit, not as revenue or other income. For companies that have been recording credit sale proceeds above the tax line, this is a material presentation change.
When will FASB issue the new standard on transferable tax credits?
FASB added the project to its technical agenda on May 13, 2026. A proposed ASU will be drafted for board review and public comment. Given a typical comment period and finalisation timeline, a final standard is likely 12 to 24 months from the agenda addition, meaning 2027 at the earliest.
Key Takeaways
- On May 13, 2026, FASB voted to add a project to its technical agenda to specify that nonrefundable transferable tax credits must be accounted for under ASC Topic 740, Income Taxes. FASB board member Fred Cannon stated: "If it's nonrefundable, by definition that's a tax issue. That's going to be in the tax line."
- The three pieces of legislation creating most affected credits: the IRA (Sections 45X, 48E, 45Y), the CHIPS and Science Act (Section 48D), and the OBBBA (which preserved and modified several credit structures).
- FASB decided to specify ASC 740 treatment but did not address derecognition of transferred credits. The derecognition question will be addressed through the proposed ASU and comment period.
- For credit sellers, the ASC 740 direction means gain or loss on credit sales is a component of income tax expense or benefit, removing credit sale proceeds from EBIT and EBITDA.
- For credit purchasers, ASC 740 treatment confirms the most common market practice: purchased credits reduce income tax expense, with the face-to-cost difference recognised as an additional income tax benefit.
- The valuation allowance question, whether anticipated credit sales can be considered when assessing DTA realizability, is an open question the forthcoming proposed ASU will address.
- Nonrefundable transferable credits are outside the scope of ASU 2025-10 (government grants). Companies receiving both transferable credits and other government grants must apply the standards independently.
- Companies using a government grant or financial instrument approach should assess whether a voluntary change to ASC 740 is appropriate now and should add a disclosure describing the FASB project in the Q2 2026 10-Q.
