The global landscape of income tax has become increasingly complex, with multinational corporations facing a growing web of tax regulations across different jurisdictions. For investors, this complexity translates into a need for more transparency, making it difficult to assess a company’s tax risks and exposures. The need for more detailed income tax disclosures has become critical, prompting regulatory bodies to take action.
In response to these challenges, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-09 on December 14, 2023. This update aims to enhance the clarity and usefulness of income tax disclosures, ensuring that investors have the information necessary to make informed decisions. The key changes introduced include more rigorous requirements for effective tax rate reconciliation, disclosure of income taxes paid across various jurisdictions, replacing Public Entities with Public Business Entities (PBEs) throughout the ASU, and the removal of certain disclosure requirements.
Complying with these new disclosure requirements is essential to ensure transparent financial reporting and avoid potential penalties from regulatory bodies or auditors for inadequate or misleading disclosures. Adhering to ASU 2023-09 helps maintain compliance and minimizes the risk of legal or financial challenges due to insufficient disclosure.
What are the key changes to income tax disclosures?
The new income tax disclosure requirements affect the presentation and disclosure of a financial statement’s income tax information. These include changes in the effective rate reconciliation in the notes, accompanied by certain additional disclosure requirements, and an entity’s income taxes paid information
Effective Rate Reconciliation
Under ASU 2023-09, PBEs are now required to provide a more comprehensive reconciliation of the effective tax rate. This includes:
- Detailed Reconciliation: Entities must provide a tabular reconciliation of the effective tax rate, requiring the presentation of reconciling items in both amounts and percentages. Reconciling items must be separately presented and disclosed if they equal or exceed 5% of the product of pre-tax income (loss) from continuing operations and the statutory tax rate.
- Categories of Reconciliation: The reconciliation must be broken down into specific categories, such as state and local income tax effects, foreign tax effects, tax credits, and changes in tax laws or rates. Each category must be detailed by nature and, in the case of foreign tax effects, by jurisdiction.
Comparison with Existing Disclosure:
- Before ASU 2023-09: Previously, entities were required to disclose reconciling items either in amounts or percentages, with a general guideline to disclose items affecting the effective tax rate. The disclosure was less detailed, and there was no specific guidance on disaggregation thresholds or categories.
- After ASU 2023-09: The new requirements mandate a more granular approach. For instance, entities must now:
- Include a tabular presentation of reconciling items in both percentages and amounts.
- Disclose reconciling items impacting the rate by 1.05% or more (assuming a statutory tax rate of 21%) with detailed categories and disaggregation.
Reconciling items means equal to or more than 5% of the amount computed by multiplying the pre-tax income by the statutory tax rate.
A tabular reconciliation must be between the following amounts and related rates for each annual reporting period.
Pre-tax income (loss) from
continuing operations
(Amount)
X
Statutory tax rate
(Percentage)
=
Expected income tax
expense (benefit)
Reported income tax
expense (benefit) (Amount)
/
Pre-tax income (loss)
from continuing
operations (Amount)
=
Effective tax rate
(Percentage)
Illustrative Examples of Income Tax Reconciliation Disclosure:
Before ASU 2023-09:
Income tax expense attributable to income from continuing operations was $4,200 and $3,350 for the years ended December 31, 2024 and 2023, respectively. It differed from the amounts computed by applying the statutory U.S. federal income tax rate of 21% to pre-tax income from continuing operations as a result of the following:
Year 2
Year 3
Computed expected tax expense
$ 4,032
$ 3,045
Increase (reduction) in income taxes resulting from:
Change in the beginning-of-the-year balance of the valuation
allowance for deferred tax assets allocated to income tax expense.
85
(100)
Change in recognition and measurement of tax positions
20
35
Adjustment to deferred tax assets and liabilities for enacted
changes in tax laws and rates
(50)
—
Equity in earnings of affiliates subject to reduced taxation because
of dividends received deduction for tax purposes
(25)
(15)
State and local income taxes, net of federal income tax benefit
130
120
Foreign tax rate differential
40
30
Other, net
(32)
325
Total income tax expense
$ 4,200
$ 3,350
After ASU 2023-09:
Income tax expense attributable to income from continuing operations was $4,200 and $3,350 for
the years ended December 31, 2024 and 2023, respectively. It differed from the amounts
computed by applying the statutory U.S. federal income tax rate of 21% to pre-tax income from
continuing operations as a result of the following:
Year 2
Year 3
US federal statutory income tax rate
Domestic federal
$ 4,032 — 21%
3,045 — 21%
Tax credits
Research credits
(300) — (1.6%)
(95) — (0.7%)
Other
(80) — (0.4%)
(40) — (0.3%)
Nontaxable and non-deductible items
120 — 0.6%
(60) — 0.4%
Cross-border tax laws
Global intangible low-taxed income
260 — 1.4%
400 — 1.2%
Other
45 — 0.2%
20 — 0.1%
Excess tax benefits on share-based payments
(480) — (2.5%)
(210) — (1.4%)
State and local income taxes, net of federal effect
Domestic state and local income taxes
588 — 3.1%
420 — 2.8%
Foreign tax effects
United Kingdom
Enactment of new tax laws
(200) — (1.0%)
(150) — (1.0%)
Nondeductible legal expenses
150 — 0.8%
100 — 0.7%
Ireland
Rate differential
(420) — (2.2%)
(300) — (2.1%)
Japan
Changes in valuation allowances
85 — (0.4%)
(100) — (0.7%)
Other foreign jurisdictions
300 — 1.6%
250 — 1.7%
Worldwide changes in prior year unrecognized tax benefits
100 — 0.5%
70 — 0.5%
Total
$ 4,200 — 21.1%
$ 3,350 — 22.2%
Scrubbed can help
Handling tax, accounting, and finance issues for a cleantech organization can be challenging.
Scrubbed works with diverse clients from solar to biomass and across clean tech. We understand the importance of staying up-to-date with regulations that govern everything from Special Purpose Vehicles (SPVs) to climate change mitigation efforts. We can help you maximize investment and production credits to support your growth. By partnering with Scrubbed, you gain a team with the depth, insight, and experience to scale as your needs grow.
Contact us for a free consultation today.
