Accounting for Purchased Transferable Tax Credits Under ASC 740

For a C corporation, the books matter as much as the return. US GAAP has no specific standard for buying transferable credits, so practice has developed from ASC 740 and guidance from the large accounting firms. This page summarizes the published views; your auditors set the policy.

Where the guidance stands

Deloitte's Accounting Spotlight (June 27, 2025) and PwC's income taxes guide (chapter 18.4) both describe purchased credits that can only reduce the buyer's own income tax as being in the scope of ASC 740. Under that view, the buyer recognizes a deferred tax asset at the credit's face (notional) amount, subject to a realizability assessment, and records the purchase discount as a deferred credit that is released as the credit is used.

Recognition and the discount

• Face amount versus price. If you pay 92 cents for a $1.00 credit, the 8-cent difference is generally not recorded as day-one income. It is deferred and flows through income tax expense as the credit reduces tax.
• Realizability. Whether you can use the credit depends on the §38(c) limit, other credits and carryforward periods. See the §38(c) limit and carryforward rules.
• Transaction costs. PwC describes expensing them in pretax income. Deloitte describes either capitalizing them as part of purchase consideration or expensing them. Pick one policy and apply it consistently.
• Timing. Recognition generally follows when control of the credit transfers. A prepayment before control passes is a prepaid asset or deposit.

The FASB project

FASB lists a current project, "Accounting for Nonrefundable Transferable Tax Credits." Search results indicate the Board added it to its agenda at a May 2026 meeting. Watch for an exposure draft. PwC's guide discusses how its guidance reads after adopting ASU 2025-10 (government grants). Until the Board acts, document your accounting policy election and disclose it.

Questions to settle before closing

1. Which model will your auditor accept for the credit and the discount?
2. How will the effective tax rate reconciliation show the benefit?
3. What is your policy for recapture exposure on investment tax credits (see recapture risk)?
4. How will estimated tax savings be reflected in interim periods?

Illustrative entries (published approach)

This is a simplified illustration of the approach described in the Big Four guidance, not a recommendation. A company pays $920 for a $1,000 credit.

Event	Entry
Control of the credit transfers	Dr. Deferred tax asset (credit) 1,000 / Cr. Cash 920 / Cr. Deferred credit 80
Credit reduces current tax	Dr. Income taxes payable 1,000 / Cr. Deferred tax asset 1,000
Discount released	Dr. Deferred credit 80 / Cr. Income tax expense 80

The effect is that the discount reduces income tax expense over the period the credit is used, rather than appearing as immediate gain. If the credit is not realizable (for example, tax capacity is insufficient), a valuation allowance analysis applies.

Disclosure and controls

• Describe the policy election in the income tax footnote.
• Document how you assess realizability against the §38(c) limit.
• Keep the diligence file for the auditor's support of the credit's existence.

This page summarizes published accounting views and is not accounting advice. We read the Deloitte and PwC summaries as published; we did not independently interpret the Codification, and we could not open the FASB project page directly.