Financial Statement Considerations of the OBBBA

The OBBBA brings numerous tax changes for business entities. It extends certain provisions from the Tax Cuts and Jobs Act of 2017 (TCJA), which were set to expire in 2025. It also accelerates the termination of most clean energy tax credits enacted by the Inflation Reduction Act and modifies various international tax provisions, including global intangible low-taxed income (GILTI), now net CFC-tested income (NCTI) under the OBBBA.

Depending on the business, some of these changes could significantly impact current and deferred tax balances including valuation allowances.

Background

ASC 740-10-25-47 requires that companies recognize changes in tax laws or rates on the date of enactment. For U.S. federal income taxes, the enactment date is the date the president signs the bill into law, which in the case of the OBBBA is July 4, 2025.

For interim reporting purposes, the effect of new legislation is recognized in the interim period in which the legislation is enacted even if the change in tax law is retroactive. For calendar year companies, the effects of the OBBBA are recognized in third quarter 2025 interim financial statements.

Companies need to consider whether the effects of the tax law changes require adjusting beginning-of-year deferred tax or valuation allowance balances while preparing interim period financial statements that include the July 4, 2025, OBBBA enactment date. This could entail preparing or updating deferred tax scheduling. If these updates are made to deferred tax balances, the effect should be treated as a discrete event. Any changes impacting income taxes payable or refundable for the current year are reflected in the annual effective tax rate.

Additionally, for public businesses, enhanced income tax disclosure requirements under ASU 2023-09 are required for annual reporting periods beginning after Dec. 15, 2024. Nonpublic businesses are required to adopt the ASU 2023-09 changes for annual periods beginning after Dec. 15, 2025.

Highlights of OBBBA ASC 740 considerations

• Permanent reinstatement of 100% bonus depreciation for qualifying property placed in service after Jan. 19, 2025. Companies taking advantage of 100% bonus depreciation and other enhanced tax depreciation deductions for 2025 will have a significant increase in tax depreciation deductions in 2025, which will increase fixed asset deferred tax liabilities due to a reduction in net tax value of fixed assets. In addition, there could be increases in net operating loss deferred tax assets if the company’s depreciation deduction is large enough to create a taxable loss.
• Reinstatement of full deduction for domestic research & experimental (R&E) costs for costs paid or incurred after Dec. 31, 2024, under Section 174A and elective catch-up deductions for capitalized domestic R&E costs in prior years. Deductions for companies with significant domestic R&E activities will increase dramatically in 2025, reducing previous capitalized R&E deferred tax assets. These deductions, if combined with the electable catch-up deductions, could result in the creation of net operating loss deferred tax assets in 2025 and 2026.
• Section 163(j) interest expense disallowance formula returning to earnings before interest, taxes, depreciation, and amortization (EBITDA) for tax years beginning after Dec. 31, 2024. The OBBBA permanently returns the calculation of adjusted taxable income on the basis of EBITDA for tax years beginning after Dec. 31, 2024. As such, companies might be allowed to deduct significantly more interest expense, resulting in reductions to Section 163(j) deferred tax assets.

Crowe observation

If the Section 163(j) deferred tax asset was subject to a valuation allowance, the OBBBA changes could impact the future realization of the asset.

• International tax and energy tax credit changes. International tax and energy tax credit changes largely go into effect for tax years beginning after Dec. 31, 2025. The international tax provisions largely include adjustments to certain deduction and rate percentages for the calculations but do not significantly overhaul the nature of the calculations. Energy tax credit changes include accelerated termination and modified requirements for claiming certain credits.
  
  Given that these changes largely will not take effect until 2026, proactive steps with respect to ASC 740 include the following:
  • Analyze how the changes will affect the company’s future expected realization of deferred tax assets and any related valuation allowance impact.
  • If a company is recording deferred taxes for basis differences that will reverse as GILTI/NCTI, the company will need to remeasure GILTI-deferred tax balances as of the enactment date.

Looking ahead

Integrating the OBBBA corporate tax provisions with ASC 740 processes alongside the implementation of ASU 2023-09 could be a challenge for public businesses. All businesses also could have material deferred tax and valuation allowance changes to consider as soon as the third quarter of 2025. Proactive and early planning between tax and accounting teams are essential to navigate the transition of the tax law changes effectively.