On the Radar
Income Taxes
The accounting for income taxes under ASC 740 can be extremely complex. The amount of
income tax expense an entity must record in each period does not simply equal the amount
of income tax payable in each period. Rather, ASC 740 requires an entity to record
income tax expense in each period as if there were no differences between (1) the timing
of the recognition of events in income before tax for U.S. GAAP purposes and (2) the
timing of the recognition of those events in taxable income.
In accordance with ASC 740-10-10-1, an entity’s overall objectives in
accounting for income taxes are to (1) “recognize the amount of taxes payable or
refundable for the current year” (i.e., current tax expense or benefit) and (2)
“recognize deferred tax liabilities [DTLs] and assets [DTAs] for the future tax
consequences of events that have been recognized in an entity’s financial statements or
tax returns” (resulting in deferred tax expense or benefit). An entity’s total
tax expense is generally the sum of these two components and can be expressed as the
following formula:
To apply the guidance in ASC
740, entities must understand not only the standard’s
accounting requirements but also the tax laws in various
jurisdictions. Accordingly, coordination between the
accounting and tax departments is generally
required.
Legislative and Economic Setting
Multinational entities have been navigating the Organisation for
Economic Co-operation and Development’s (OECD’s) Pillar Two tax regime, which
introduces a global minimum corporate tax rate of 15 percent. To implement the
global minimum tax, individual countries are responsible for establishing laws
and regulations in line with the framework provided by the OECD. Many countries
have enacted legislation that went into effect in 2024 and 2025. Generally, we
expect these new taxes to be accounted for in a manner similar to alternative
minimum taxes (AMTs) for consolidated financial statements, but the accounting
impacts of each new law will need to be separately evaluated in each
jurisdiction.
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 “2025
Act”) and commonly referred to as the One Big Beautiful Bill Act. The
centerpiece of the 2025 Act is the extension of expiring — and in some cases
expired — provisions of the 2017 Tax Cuts and Jobs Act (the “2017 Act”). While
many provisions of the legislation focus on tax changes for individuals, such as
extending current individual tax rates originally put in place under the 2017
Act, the 2025 Act also adjusts certain requirements 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 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 2025 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.
Standard-Setting Activity
In December 2023, the FASB issued ASU 2023-09, which establishes new income
tax disclosure requirements within ASC 740 in addition to modifying and
eliminating certain existing requirements. The ASU’s amendments are intended to
enhance the transparency and decision-usefulness of such disclosures. Under the
new guidance, public business entities (PBEs) must consistently categorize and
provide greater disaggregation of information in the rate reconciliation. The
ASU also includes additional disaggregation requirements related to income taxes
paid. The ASU’s disclosure requirements apply to all entities subject to ASC
740. PBEs must apply the amendments to annual periods beginning after December
15, 2024 (2025 for calendar-year-end PBEs). Entities other than PBEs have an
additional year to adopt the guidance.
Accounting for Investments in Tax Credit Structures
In March 2023, the FASB issued ASU 2023-02,
which expands the use of the proportional amortization method — which
previously applied only to low-income housing tax credit investments — to
other tax equity investments that meet certain revised criteria in ASC
323-740-25-1. The ASU is intended to improve the accounting and disclosures
for investments in tax credit structures.
For additional information about tax credit structures, see
Appendix C of Deloitte’s Roadmap
Equity Method
Investments and Joint Ventures.
For a comprehensive discussion of
the income tax accounting guidance in ASC 740, see
Deloitte’s Roadmap Income
Taxes.
Contacts
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Matt
Himmelman
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 714 436
7277
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James Webb
Audit & Assurance
Partner
Deloitte & Touche LLP
+1 415 783 4586
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For information about Deloitte’s service offerings related to
the accounting for income taxes, please contact:
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Nick
Accordino
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 216 589
5237
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