Accounting Considerations Related to the New U.S. Tax Legislation
Background
On July 4, 2025, President Trump signed into law the legislation formally titled “An Act to Provide
for Reconciliation Pursuant to Title II of H. Con. Res. 14” (“the Act”) and commonly
referred to as the One Big Beautiful Bill Act. The centerpiece of the bill is the
extension of expiring — and in some cases expired — provisions of the 2017 Tax Cuts
and Jobs Act (“2017 TCJA”). While many of the Act’s provisions focused on tax
changes for individuals, such as extending current individual tax rates originally
put in place in the 2017 TCJA, the Act also adjusted a number of provisions
affecting businesses that were similarly subject to sunsets, phase-outs, or
phase-ins that would have taken effect in the absence of action by Congress or that
have already taken effect. For example, recent years have seen the loss of the
ability to immediately expense R&D costs; a new, more restrictive calculation of
the extent to which net interest expenses are deductible; and a phase-down of bonus
depreciation. Moreover, barring action by Congress, 2026 would have witnessed an
increase in the tax rate applied to the Base Erosion and Anti-Abuse Tax (BEAT) and a
lower deduction for both the Global Intangible Low-Taxed Income (GILTI) and
Foreign-Derived Intangible Income (FDII) regimes.
The Act’s net cost was somewhat reduced by the addition of some revenue-raising
provisions, including phase-outs of and restrictions on several clean energy tax
incentives. Further, the new law makes various broadly applicable changes to the
GILTI and FDII regimes. While many are taxpayer friendly, they are paired with lower
deduction amounts for GILTI and FDII, meaning that the combined impact is very
likely to depend on an individual company’s facts and circumstances.
While most of the changes made by the Act are effective in future tax years, some of
its provisions are effective in the current tax year. In certain cases, the changes
introduced by the Act may also affect prior tax years. For details about specific
provisions of the Act, see Deloitte’s A Closer Look: Inside the New Tax Law.
Financial Statement Considerations Under ASC 740
ASC 7401 requires entities to recognize the effects of new income tax legislation in
the interim and annual reporting periods in which the legislation is enacted.
Accordingly, an entity with an annual or interim reporting period ending before July
4, 2025 (e.g., the second quarter for calendar-year-end entities), should not
recognize the income tax effects of the Act in the financial statements for such
interim or annual periods. However, entities should consider the subsequent-event
guidance in ASC 855 as well as SEC disclosure requirements related to material
events and uncertainties to determine the extent of disclosures required in interim
and annual financial statements issued or available to be issued after July 4, 2025,
as discussed further below.
The income tax effects of the Act should be recognized in interim
and annual periods ending on or after July 4, 2025. The accounting for income tax
effects of the Act depends on an entity’s facts and circumstances and may be
complex. Note also that the provisions of the Act should be evaluated
comprehensively given their many interdependencies, which may affect an entity’s
overall income tax accounting. This publication highlights our current views and
understanding of the business tax provisions of the Act that may have a more
substantive impact on financial statements in the period of enactment. It does not,
however, address every scenario in which an entity’s financial statements could be
affected by the Act and may be subject to change if new information becomes
available.
Current Taxes Payable
As noted above, while many of the Act’s provisions affect future
tax years, some may have an impact on an entity’s current taxes on current-year
ordinary income. The income tax effects of a change in tax law on taxes that are
currently payable or refundable related to current-year ordinary income are
included in the annual effective tax rate (AETR) beginning in the period of
enactment. See Section
7.3.2 of Deloitte’s Roadmap Income Taxes for more
information.
Provisions that could affect an entity’s current payable on current-year ordinary
income may include, but are not necessarily limited to, the following:
- Immediate expensing of domestic research and experimental expenditures (“R&E”) under Internal Revenue Code (IRC) Section 174 for amounts paid or incurred in taxable years beginning after December 31, 2024.
- An election to deduct the remaining unamortized balance of capitalized domestic R&E paid or incurred after December 31, 2021, and before January 1, 2025.
- Reinstatement of full expensing (commonly referred to as “bonus depreciation”) for qualified business property acquired and placed in service after January 19, 2025.
- Modification of the limitation on the business interest deduction under IRC Section 163(j) (i.e., the Act makes permanent the calculation of adjusted taxable income that corresponds with earnings before interest, taxes, depreciation, and amortization for periods beginning after December 31, 2024).
- Termination of the qualified commercial clean vehicle credit for vehicles acquired after September 30, 2025 (IRC Section 45W), and termination of the energy credit for certain energy property for which construction begins on or after June 16, 2025 (IRC Section 48).
Once applied, the Act’s provisions may result in additional
effects to current taxes payable. For example, an entity may be subject to a
higher amount of tax under the Corporate Alternative Minimum Tax (CAMT) regime
as a result of a lower amount of regular tax. An entity should consider the
comprehensive effect of the Act on current taxes payable with respect to
ordinary income when estimating the impact of the Act on the AETR in the interim
period of enactment.
In addition, the Act includes provisions that may be retroactive to a prior
taxable year, depending on an entity’s annual period-end. For example, entities
with tax years ending between January 20, 2025, and July 4, 2025, may see bonus
depreciation changes affect the preceding year’s taxes payable. The effect of a
retroactive change in tax law on current taxes payable for a prior tax year
should be recognized discretely as of the date of enactment.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities should be adjusted for the
effect of a change in tax laws or rates. As a result of such change, entities
may also be required to update their assessment of realizability of existing
deferred tax assets. The effect of a change in tax laws or rates on a deferred
tax liability or asset is allocated to continuing operations and not apportioned
among interim periods through an adjustment of the AETR.2 Conversely, the income tax effects of a change in tax law on deferred
taxes arising after the enactment date and related to ordinary income are
included in the AETR. The provisions of the Act have the potential to affect
both. For example:
-
Book-tax differences — The amounts of taxable or deductible temporary differences as of the date of enactment and arising in the current year after the date of enactment could change as a result of immediate expensing of domestic R&E, reinstatement of bonus depreciation, or modification of the limitation on business interest.
-
Measurement — The Act could affect the measurement of a deferred tax asset or liability. For example, for taxpayers that previously elected the GILTI deferred policy, the Act could affect the measurement of those deferred tax assets and liabilities (see Section 3.4.10.4 of Deloitte’s Roadmap Income Taxes). The Act made several modifications to the GILTI tax regime, now referred to as Net Controlled Foreign Corporation (CFC) Tested Income (NCTI), including:
- Removing the reduction to GILTI related to a taxpayer’s qualified business asset investment.
- Increasing the NCTI deduction under IRC Section 250 for taxable years beginning after December 31, 2025, over the amount of the deduction that would have been allowed for such years in the Act’s absence.
- Reducing the haircut for foreign income taxes deemed paid with respect to an NCTI inclusion from 20 percent to 10 percent.
While many of these changes are not effective until a future taxable year, deferred tax assets and liabilities that are expected to reverse after the new tax provisions are effective should be remeasured in the period of enactment. - Exceptions — The Act could affect whether an entity meets an exception to the requirement to comprehensively recognize deferred income taxes. For example, the Act permanently extends the CFC “look-thru rule” under IRC Section 954(c)(6), which generally excludes from U.S. federal income taxation certain dividends, interest, rents, and royalties received or accrued by one CFC of a U.S. multinational enterprise from a related CFC that would otherwise be taxable in accordance with the Subpart F regime. As a result of the extension of the look-thru rule, entities may need to reevaluate whether the exception in ASC 740-30-25-18(a) applies. See Section 3.4.8 of Deloitte’s Roadmap Income Taxes.
- Valuation allowance — The Act may require a
reassessment of a valuation allowance for deferred tax assets. For
example:
- Changes to the GILTI regime may have an impact on the realizability of deferred tax assets. There are two acceptable views regarding how an entity should consider future NCTI inclusions when assessing the realizability of deferred tax assets (see Section 5.7.2 of Deloitte’s Roadmap Income Taxes). Regardless of an entity’s policy choice, the collective changes to GILTI may affect the amount of valuation allowance required.
- The Act changes the computation of the deduction limits for net business interest expense. This may affect the valuation allowance assessment of interest carryforward deferred tax assets under IRC Section 163(j) and other deferred tax assets, including estimates of future taxable income or loss. Two acceptable approaches have developed in practice for the quantification of available sources of future taxable income for assessing the realizability of deferred tax assets when there are (1) reversing deferred tax liabilities, (2) an expectation of future interest expense, and (3) an expectation of future taxable income. See Section 5.7.12 of Deloitte’s Roadmap Income Taxes.
- In certain circumstances, changes as a result of the Act may increase the amount of current-period taxes payable and the CAMT tax credit carryforward. These changes could also affect an entity’s valuation allowance assessment on CAMT tax credit carryforward and other DTAs. See Section 5.7.1 of Deloitte’s Roadmap Income Taxes.
Disclosures
An entity with an annual or interim reporting period that ends before July 4,
2025 (e.g., the second quarter for calendar-year-end entities), should not
recognize the income tax effects of the Act in the financial statements for such
interim or annual period; however, the entity should consider whether
subsequent-event disclosures may be appropriate. ASC 855-10-50 indicates that an
entity must disclose some nonrecognized subsequent events to keep the financial
statements from being misleading. In such cases, the entity should disclose both
“[t]he nature of the event” and “[a]n estimate of its financial effect, or a
statement that such an estimate cannot be made.”
In addition, SEC Regulation S-K, Item 303(a),3 requires SEC registered entities to provide certain forward-looking
information in Forms 10-Q and 10-K outside of the financial statements related
to “material events and uncertainties known to management that would cause
reported financial information not to be necessarily indicative of future
operating results or of future financial condition.” Accordingly, entities with
periods ending both before and after the enactment date should consider
disclosing, when material, the anticipated future impact of the income tax
effects of the Act on their results of operations, financial position,
liquidity, and capital resources.
An entity with an interim reporting period ending after July 4, 2025 (e.g., the
third quarter for a calendar-year-end entity), should consider the impact of the
enactment on its disclosures for the interim reporting periods ending on or
after July 4, 2025. ASC 740-270-50-1 notes that the application of the
interim-period requirements for reporting income taxes may result in
“significant variations in the customary relationship between income tax expense
and pretax accounting income.” Entities must disclose the reasons behind such
variations in their interim-period financial statements if the differences are
not readily apparent from the financial statements themselves or from the nature
of the business entity.
In addition, for entities that are subject to SEC reporting
requirements, management should consider the requirements in SEC Regulation S-X,
Rule 10-01(a)(5),4 which states, in part:
The interim financial information shall include disclosures either on the
face of the financial statements or in accompanying footnotes sufficient so
as to make the interim information presented not misleading. Registrants may
presume that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year and
that the adequacy of additional disclosure needed for a fair presentation
may be determined in that context.
Accordingly, if any annual disclosures have significantly changed since the most
recently completed fiscal year, management should update them in a manner
sufficient to ensure that the interim information presented is not misleading.
Entities that have adopted ASU 2023-095 must, in accordance with ASC 740-10-50-12A, separately disclose, within
the rate reconciliation, the effect of adjustments to deferred tax assets and
liabilities for enacted changes in federal or national tax laws or rates in the
jurisdiction of domicile. In addition, there may be related impacts for other
jurisdictions that would be presented in a separate line of the rate
reconciliation (e.g., state or local conformity). Irrespective of whether the
entity has adopted ASU 2023-09, disclosure may be appropriate in certain
circumstances. For example, ASC 740-10-50-14 requires entities to disclose “the
nature and effect of any other significant matters affecting comparability of
information for all periods” if not evident from the disclosures otherwise
required.
State Tax Considerations
An entity should carefully consider the state tax effects of the
Act given the differences in state tax conformity to the federal tax law. An
entity should evaluate its tax accounting consequences on the basis of the
enacted tax law in each state in which the entity has a tax filing
obligation.
Other Related Matters
The accelerated phase-out of certain clean energy credits may
affect an entity’s ability to apply the proportional amortization method (PAM)
as a result of a reduction in tax credits that it expects to receive related to
a clean energy investment. As a result, an entity may no longer believe that
substantially all of the projected benefits of its investment will come from
income tax credits and other income tax benefits or that the entity’s projected
yield that is based solely on cash flows from the income tax credits and other
income tax benefits will be positive. Accordingly, entities may need to reassess
any tax equity investments affected by the Act and, if warranted, discontinue
the use of PAM and apply the applicable provisions of ASC 323 or ASC 321,
prospectively, to such investment. See Section 12.7 of Deloitte’s Roadmap
Income
Taxes and Section D.6.4 of Deloitte’s Roadmap Equity Method Investments and Joint
Ventures. In addition, the phase-out of certain clean energy
credits may result in an impairment if such phase-out is an indicator that it is
more likely than not that the carrying amount of the investment will not be
realized. See Section
D.6.5 of Deloitte’s Roadmap Equity Method Investments and Joint
Ventures.
Contacts
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Christina Edwall
Partner
Deloitte Tax LLP
+1 408 704 2086
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Matt Himmelman
Audit &
Assurance
Partner
Deloitte & Touche
LLP
+1 714 436 7277
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Patrice Mano
Partner
Deloitte Tax LLP
Washington National
Tax
+1 415 783 6079
|
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Alice Loo
Managing Director
Deloitte Tax LLP
Washington National
Tax
+1 415 783 6118
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Footnotes
1
For titles of FASB Accounting Standards Codification
(ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB
Accounting Standards Codification.”
2
A retrospective change in tax law that only affects the
timing of a deduction may, in some cases, not have a tax effect under
ASC 740-270 since the total income tax expense (or benefit) for the
period contemplated by ASC 740-270-25-1 is unchanged as of the date of
enactment.
3
SEC Regulation S-K, Item 303, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
4
SEC Regulation S-X, Rule 10-01(a), “Interim Financial Statements:
Condensed Statements.”
5
FASB Accounting Standards Update (ASU) No. 2023-09,
Improvements to Income Tax Disclosures.