Climate-related tax incentives and deferred tax

Which climate-related tax incentives matter?

In the US, the main ones are the technology-neutral clean electricity credits, the section 45Y production credit and the section 48E investment credit, along with credits for advanced manufacturing (45X), carbon capture (45Q), clean hydrogen (45V) and clean fuels (45Z). The One Big Beautiful Bill Act, signed on 4 July 2025, ended the 45Y and 48E credits for wind and solar facilities placed in service after 2027 unless construction began by 4 July 2026, kept full credits for other technologies that begin construction before 2033, and kept transferability, except to specified foreign entities. Other countries use capital allowances, super-deductions and grants. Carbon taxes and emissions trading costs are based on emissions, not profit, so they are not income taxes; see accounting for carbon credits.

How are clean energy tax credits accounted for under ASC 740?

An investment tax credit can be accounted for by the flow-through method, reducing tax expense in the year the credit arises, or by the deferral method, spreading the benefit over the asset's life, presented as a reduction of the asset's cost or as deferred income. For example, a US$50 million solar project with a 30% credit of US$15 million gives a US$15 million reduction in tax expense in year one under flow-through, or about US$0.5 million a year over a 30-year life under deferral. Claiming the credit also reduces the asset's tax basis by half the credit, here US$7.5 million, creating a temporary difference that ASC 740 treats differently under each method. Production tax credits reduce tax expense as electricity is generated and sold. Investors in tax equity structures can use the proportional amortisation method, extended to more programmes by ASU 2023-02. See deferred taxes under ASC 740.

How are transferable credits accounted for?

Under section 6418, a company can sell eligible credits for cash to an unrelated buyer. For the seller, Deloitte and the FASB staff view keeping the credit within ASC 740 as most appropriate, with the difference between the credit and the sale price recorded in the tax provision; accounting outside ASC 740 is also seen in practice. The buyer recognises the purchased credits only when the more likely than not threshold is met, records them as a deferred tax asset, and records the discount as a deferred credit, which is not a deferred tax liability, released to income tax expense as the credits are used. Amounts paid before the credits can be recognised are a deposit.

Clean energy tax credits in practice: buying transferable credits

A retailer buys US$10.0 million of section 45Y credits from a wind developer for US$9.3 million, 93 cents per dollar, and uses them in its current-year return. All figures are in US$ million.

The credits settle US$10.0 million of tax for US$9.3 million of cash, so the retailer's tax expense falls by the US$0.7 million discount. The second entry shows the net effect: current tax expense falls by US$10.0 million while the deferred tax asset reverses through deferred tax expense. If the credits were used over several years, the deferred credit would be released in proportion. The developer that sold them records the US$10.0 million credit in its tax provision, less a US$0.7 million loss on the sale.

How is elective pay accounted for?

Under section 6417, tax-exempt bodies such as governments and nonprofits, and for a few credits other companies for a limited period, can receive certain credits as a cash payment. Because the cash is paid whatever the entity's tax position, the credit is generally accounted for as government assistance by analogy to IAS 20 or other grant guidance, recognised when there is reasonable assurance that the conditions will be met, rather than as an income tax benefit.

How does IFRS treat climate-related tax incentives?

IAS 12 excludes investment tax credits and government grants from its scope, although it covers the temporary differences they create. Companies therefore set a policy: credits that can be used only against taxable profit are usually treated as tax credits that reduce current tax, while refundable or cash-paid credits are usually treated as grants under IAS 20, deducted from the asset or held as deferred income. Transferable credits have no specific guidance, so practice varies. Under the OECD's Pillar Two rules, qualified refundable and marketable transferable credits are treated as income rather than as a reduction of covered taxes, so they lower the effective tax rate less. See IAS 12 income taxes explained.

How does climate risk affect deferred tax?

Unused credits and losses are deferred tax assets, recognised under IAS 12 to the extent future taxable profit is probable, or under ASC 740 less any valuation allowance. Forecasts used to support them should match those used for impairment tests and the company's transition plan: if climate risk lowers expected profits, the asset may not be recoverable. Shorter useful lives and earlier retirement obligations also change temporary differences. See climate risk in the financial statements and climate in US GAAP financial statements.

This guide is general information. It is not tax or legal advice for your situation.