4.10 Treatment of Tax Adjustments
In certain circumstances, a registrant may reflect a non-GAAP measure after taxes and therefore show
the tax adjustments when reconciling a non-GAAP measure to the appropriate GAAP measure. C&DI
Question 102.11 indicates that the tax expense impact for a performance measure should be consistent
with the amount of non-GAAP income since adjusting revenue or income before income tax could affect
the tax expense or benefits assumed in the calculation of the tax provision. For example, suppose that
a registrant has a $200 million GAAP loss for the most recent fiscal year, which resulted in a 3 percent effective
tax rate. After making various reconciling adjustments, if the registrant presents a non-GAAP adjusted
income measure of $400 million, the SEC staff may comment if the registrant uses the same 3 percent
effective tax rate to compute the tax provision.
If a non-GAAP measure is a liquidity measure, adjusting the GAAP tax amount to present taxes paid in
cash may be acceptable.
A registrant should present its reconciling adjustments gross of tax and should disclose how the tax adjustments were determined. If other tax adjustments are included in the reconciliation (e.g., the removal of discrete tax adjustments), a registrant should separately disclose the income tax effects of the non-GAAP adjustments from such other adjustments.
C&DIs — Non-GAAP Financial Measures
Question: How should
income tax effects related to adjustments to arrive at a
non-GAAP measure be calculated and presented?
Answer: A registrant
should provide income tax effects on its non-GAAP measures
depending on the nature of the measures. If a measure is a
liquidity measure that includes income taxes, it might be
acceptable to adjust GAAP taxes to show taxes paid in cash.
If a measure is a performance measure, the registrant should
include current and deferred income tax expense commensurate
with the non-GAAP measure of profitability. In addition,
adjustments to arrive at a non-GAAP measure should not be
presented “net of tax.” Rather, income taxes should be shown
as a separate adjustment and clearly explained. [May 17,
2016]
Example 4-3
To illustrate the discrete effect of taxes on individual adjustments in the reconciliation, the registrant may
present the tax effect of all adjustments as a single line in the reconciliation as follows:
The registrant should clearly disclose how it determined the tax effect. Other alternative presentations may be
appropriate as long as the gross amount of adjustments are disclosed. For example, a registrant could disclose
the relevant information about the gross amount of the adjustment and the tax amount in parentheses (e.g.,
stock-based compensation $10 million less the amount of taxes $3 million) to arrive at the net amount (e.g., $7
million) and could provide similar disclosure for the restructuring charges.
When calculating a non-GAAP measure, a registrant should be mindful of how the adjustments made to a GAAP measure affect total income tax expense. As indicated above, a registrant’s adjustment of revenue or income before tax expense could affect the tax expense or benefits assumed in the calculation of the tax provision and therefore could have an impact on the tax computation in the reconciliation.
4.10.1 Non-GAAP Financial Measures Related to the Impact of Changes in Tax Law
Registrants have started to implement requirements related to changes in tax law
resulting from the Organisation for Economic Co-operation and Development’s
(OECD’s) Pillar Two tax regime, which is intended to establish, among other
things, a global minimum corporate tax rate of 15 percent. To impose the global
minimum tax, individual countries are responsible for establishing tax laws and
regulations in line with the Pillar Two framework. Certain countries began
enacting such tax laws and regulations in January 2024.
On July 4, 2025, President Trump signed into law a budget and reconciliation
package known as the “One Big Beautiful Bill Act.” Key aspects of the
legislation include the permanent extension of certain temporary changes made by
the Tax Cuts and Jobs Act of 2017, such as the provision that permits an entity
to deduct 100 percent of the cost of certain business property in the year it
was acquired and placed in service.
A registrant may choose to make non-GAAP adjustments related to discrete amounts
that affect income as a result of the recognition of the effects of changes in
tax law, such as an adjustment to deferred taxes upon a change in tax rates.
When accompanied by the disclosures required by the Rules, these adjustments may
be permissible if they are not misleading, depending on the registrant’s
specific facts and circumstances. A registrant that includes an adjustment for
the impact of changes in tax law in its non-GAAP measures should ensure that the
adjustment is for the total impact of all related changes and not just for
select provisions (i.e., it should not engage in cherry picking [see Section 4.3]). See
Section 3.6.2
for further discussion of the consistent presentation of non-GAAP measures.
To enhance the comparability of the periods before a tax rate change, some
registrants may also consider adjustments that would depict a “normalized” tax
rate between such periods (i.e., adjustments in which the new tax rate is
applied to periods before enactment). However, these non-GAAP measures may be
considered misleading as well as individually tailored accounting principles
since they may not reflect different tax strategies, tax assertions, or other
actions a registrant may have taken if the lower tax rate had applied to all
periods presented (e.g., increased compensation, increased research and
development). See Section
4.3.3 for further discussion of individually tailored accounting
measures.
For additional information about the effect of Pillar Two on financial
reporting, see Deloitte’s March 5, 2024 (updated November 8, 2024), Financial Reporting
Alert. For accounting considerations related to the One Big
Beautiful Bill Act, see Deloitte’s July 15, 2025, Heads Up.