Beyond the Balance Sheet: The Latest Trends in Income Tax Accounting

by Michael Noreman, CPA, MST, MAcc, Alvarez & Marsal Tax, LLC | December 12, 2023

With a rapidly changing tax landscape, an area of focus for internal tax departments, preparers and auditors continues to be financial reporting of income taxes under Accounting Standards Codification Topic 740, Income Taxes (ASC 740). Here are the crucial trends impacting income tax reporting in today’s dynamic environment.

Changing Tax Legislation

Tax legislation that will affect companies’ income tax disclosures in the near future, adding additional complexities to the financial reporting process, include the following:

  • OECD Pillar II: The Organization for Economic Cooperation and Development (OECD) has developed a framework to address tax challenges arising from the digitalization of the economy. The European Union Member States formally adopted Pillar II of this framework in late 2022, which enacts a global minimum tax (GMT) of 15% on large multinational enterprises, setting the stage for expansive changes in the global tax landscape. While the United States has not adopted Pillar II, this development still impacts financial statement disclosures for companies that operate in the jurisdictions that adopt it. With Pillar II expected to be effective in 2024, companies will need to begin setting up processes to calculate the GMT and prepare for financials statement audits and potential governmental review.
  • Corporate minimum tax (CMT): Beginning in 2023, large U.S. multinationals will also be subject to a minimum tax of 15% of adjusted financial statement income. While this seemingly aligns U.S. tax policy with the Pillar II, upon closer examination the new CMT contains more differences than similarities. The broad applicability of tax credits, along with accelerated depreciation and other carve-outs, causes the CMT to diverge from the Pillar II provisions, which significantly limits these benefits. Large multinationals may nonetheless ultimately find themselves subject to both Pillar II and CMT provisions.
  • TCJA provisions: The implementation of the Tax Cuts and Jobs Act (TJCA) of 2017 substantially altered the U.S tax system, and its provisions continue to impact companies years later. For example, the TCJA allowed companies to fully deduct the cost of certain capital expenditures through bonus depreciation. However, starting in 2023, the 100% allowance generally decreases by 20% per year before fully sunsetting in 2027. Outside of financial reporting implications, this presents planning opportunities to accelerate capital purchases. Congress is currently considering legislation that would modify certain unfavorable TCJA provisions. Potential changes include extending bonus depreciation, repealing rules requiring capitalization and amortization of R&D costs rather than immediate deduction, and restoring more favorable provisions, such as interest expense limitations. Additionally, state and local jurisdictions are continuously enacting and effecting legislation related to conformity of these TCJA conformity provisions and others such as inclusion of foreign subsidiary earnings into U.S. taxable income under Global Intangible Low-Taxed Income (GILTI) rules.

FASB Finalizes Income Tax Disclosure Update

The Financial Accounting Standards Board (FASB) has finalized an update that expands tax disclosure requirements for both public and non-public business entities. These changes include broadening of the effective tax rate disclosure and requiring specific categories of line items, with disaggregation based on the taxing jurisdiction being mandated. In addition, the income taxes paid disclosure in the statement of cash flows will now need to be disaggregated between federal, state and foreign taxes on an annual basis. The update is effective for annual reporting periods after Dec. 15, 2024, and interim periods within fiscal years beginning after Dec. 15, 2025, for public companies. The updates will take effect for all other entities after Dec. 15, 2025, with interim periods after Dec. 15, 2026.

Looking Forward

The dynamic nature of the ever-changing tax landscape demands constant vigilance and adaptability. As ASC 740 evolves to address the latest business trends and challenges, staying informed and proactive on income tax reporting remains paramount for companies striving to effectively navigate the rapidly shifting terrain.

Michael  Noreman

Michael Noreman

Michael Noreman, CPA, MST, MAcc, is a senior director at Alvarez & Marsal Tax, LLC. He is a member of several NJCPA interest groups.

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