Income Tax Disclosures: What Public and Private Entities Still Need to Know

The Financial Accounting Standards Board’s (FASB) ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, introduced new requirements clarifying and expanding tax disclosures to increase their transparency and usefulness. It also replaced the term “public entity” with “public business entity.”

CPAs and their clients need to still be aware of many important considerations. The standard can be implemented prospectively or companies may elect to do this retrospectively. This ASU for public business entities is effective for annual periods beginning after Dec. 15, 2024, and all other entities for periods beginning after Dec.15, 2025. In practice, companies need to put a paragraph disclosing if they are adopting retrospectively or prospectively.

Materiality still needs to be evaluated before 65disclosing the items below.

Key provisions of ASU 2023-09 include the following:

1. Income taxes paid: Prior to the issuance of this ASU, companies used to disclose the total amount of taxes paid, but that is changing now. According to new rules, the first taxes paid (net of refunds) need to be disaggregated first by federal, state and foreign governments taxes. Then, with a second layer of disclosure, companies will disclose separately any jurisdiction that contributes to this number by more than 5% in absolute values. If any jurisdiction is less than a 5% threshold, companies can disclose them as “other.” Usually, this disclosure consistently can be made in the statement of cash flow or in the income tax footnote. The company will multiply the U.S. effective tax rate of 21% by 5% and the result is that everything above 1.05% needs to be disclosed separately — by nature and/or category. Example: if a company has income from continued operations of $1 million, then multiply it by 1.05% — everything $10,500 and above needs to be disclosed, unless it’s immaterial.
2. The ASU provides specific rate reconciliation categories and significantly expands them. If any item equals or exceeds the specified threshold (5% mentioned above), then those items need to be presented separately and disaggregated further. The specific rate reconciliation categories are as follows:
• State and local income tax, net of federal income tax effect (except for UTP: All items that relate to state and local taxes are disclosed in this group, including tax credits etc. Also, qualitative disclosure for states that contribute to the majority of the numbers is needed. This category of rate reconciliation may include everything related to states including valuation allowance for states. In practice, we see disclosure as a footnote to name states that constitute 50% or more of the numbers in this group.
• Foreign tax effects: Everything related to foreign jurisdictions needs to be disclosed in this category (e.g., rate changes, changes in valuation allowance tax credits). Disaggregation is also required in this category. Everything related to a foreign country will be presented in this category, disaggregated by major categories. In practice, these numbers get disclosed for each major foreign country separately.
• Tax credits: Included in this category are tax credits received in the country of domicile, including research credits and foreign tax credits. Disaggregation is required for items meeting a 5% threshold.
• Changes in valuation allowance: This includes the federal income tax effect of the initial recognition and changes during the year. Any change in valuation allowance disclosure pre-ASU 2023-09 is still effective.
• Nontaxable or nondeductible items (e.g., penalties, federal income taxes, equity-based compensation). Disaggregation is required here also based on a 5% threshold.
• Changes to Unrecognized Tax Benefits (UTBs): Unlike in other categories, no disaggregation is required. Public business entities (PBEs) still have an annual requirement to disclose the UTB that rolls forward in a tabular format. Entities can include all jurisdictions here (e.g., domestic, foreign).
• Other adjustments: if anything does not fall under any of the categories above, but it does have the 5% threshold, it must be disaggregated by nature and disclosed in this line, such as true-up and excess tax benefits of share-based compensation.

Specifics for Private Companies

Private companies must qualitatively disclose the nature and effect of specific categories, but there is no need to provide a tabular format or quantitative information. Qualitative disclosure for private companies will expand; companies can no longer say that the difference in rates relates to a couple of items. They need to elaborate major components that increased or decreased tax.

As these disclosures provide certain benefits for investors, accounting firms should change their templates and be ready for much more additional work during the tax provision preparation process.

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Elvin Isahan Elvin Isahan is a student at Middletown High School North and a summer intern at VAEE CPA, Accounting, Tax and Consulting LLC.

Salvatore Lubrano-Lavadera Salvatore Lubrano-Lavadera is an accounting and audit partner at RRBB and is a member of the NJCPA.