ASC 740: The New Tax Law’s Income Tax Accounting Considerations

The new tax law known as the One Big Beautiful Bill Act ushered in many changes to the U.S. tax code, including implications for corporate financial reporting, particularly under ASC 740. Tax and financial professionals need to know how to account for the ASC 740 changes, which are both immediate and complex.

Key provisions related to ASC 740 include changes to bonus depreciation, interest limitations, research and experimental (R&E) expenditures, foreign inclusions, and executive compensation limitations. The changes went into effect with the bill’s signing on July 4 and may require recognition under ASC 740 in interim and/or year-end financial statements.

What new tax law changes will ASC 740 have to recognize?

While the new tax law made many tax code changes, new rules that will likely have to be recognized under ASC 740 include:

Full expensing of domestic R&E expenditures

The new tax law permanently allows for the immediate deduction of domestic R&E expenditures paid or incurred after December 31, 2024. For tax periods beginning after December 31, 2024, entities may change their tax accounting method to deduct domestic R&E expenditures paid or incurred or may continue to capitalize and amortize domestic R&E expenditures over the life of the research (no less than 60 months). For those that choose to continue to capitalize the R&E expenditures, amortization will not begin until benefit is first realized.

For taxpayers with historical unamortized domestic R&E expenditures paid or incurred after December 31, 2021 and before January 1, 2025, there’s a transition rule allowing entities to elect to:

• Accelerate the deduction of all unamortized domestic R&E in the first tax year following December 31, 2024, or
• Accelerate the deduction of all unamortized domestic R&E split equally over the first two tax years following December 31, 2024.

The new tax law also reinstated the rule allowing entities to elect to capitalize and amortize domestic R&E expenditures over 10 years. The changes apply to domestic R&E expenditures only, as foreign R&E expenditures are still required to be capitalized and amortized.

Small business taxpayers with average gross receipts under $31 million for the three proceeding years can also opt to amend prior year tax returns to deduct previously capitalized domestic R&E.

Business interest expense limitation

Businesses can generally deduct net interest up to 30% of business income after certain adjustments. Starting in 2025, businesses can add back depreciation, amortization, and depletion when calculating income for the 30% deduction limit.

For tax years beginning after December 31, 2025, the business interest expense limitation is calculated before any interest capitalization other than interest capitalized under Section 263A(f) and Section 263(g) and disallows including NCTI (formerly GILTI), Subpart F inclusions, and Section 78 gross-ups from adjusted taxable income calculations.

Bonus depreciation

The new law permanently reinstates 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.

The new law also created a 100% deduction for qualified production property (QPP), which includes nonresidential real property used an integral part of a qualified production activity. Such activity involves manufacturing, production, or refining tangible personal property, and it must result in a substantial transformation of the property comprising the product.

QPP construction must begin between January 19, 2025 and January 1, 2029, and the property must be placed in service before January 1, 2031.

Executive compensation deductions

The limitation on executive compensation deductions was expanded to add new entity aggregation rules based on the “single employer” controlled group definitions for tax years beginning after December 31, 2025. Now payments to “specified covered employees” made by any member of the controlled group are aggregated. If the aggregate amount exceeds $1 million, the deduction limitation for any amount paid in excess of $1 million will be allocated pro rata to each member of the controlled group.

Excise tax on investment income of certain colleges and universities

The 1.4% excise tax on net investment income of certain private colleges and universities has been replaced with a tiered system ranging from a 1.4% to 8% excise tax for institutions with at least 3,000 students.

The excise tax remains within the scope of ASC 740. The new law also modified net investment income to include student loan interest income and federally subsidized royalty income, which were previously exempt.

The new student-adjusted endowment ranges applicable for tax years after December 31, 2025 are:

• Student adjusted endowment of $500,000 to $749,999.99 = 1.4% excise tax rate
• Student adjusted endowment of $750,000 to $2 million = 4%
• Student adjusted endowment of greater than $2 million = 8%

Foreign inclusions and BEAT

For tax years beginning after December 31, 2025, qualified business asset investment has been removed from the calculation of net CFC tested income (NCTI, formerly named GILTI) and foreign-derived deduction eligible income (FDDEI, formerly name FDII). Additionally, the NCTI haircut for foreign taxes paid is reduced from 20% to 10% and the Section 250 deduction for NCTI and FDDEI are reduced to 40% and 33.34%, respectively.

These changes will result in effective tax rates for NCTI and FDDEI of 12.6% - 14% and 14%, respectively. For tax years beginning after December 31, 2025, the base erosion and anti-abuse tax (BEAT) rate will be 10.5% for most entities and 11.5% for banks/securities dealers.

Tax accounting considerations under ASC 740

Under ASC 740, entities are required to recognize the effects of changes in tax legislation in the interim and annual reporting periods when the legislation is enacted. The enactment date for the One Big Beautiful Bill Act under U.S. GAAP is July 4, 2025.

The tax effects of a change in tax law on existing current or deferred tax balances — including changes in valuation allowances — are recorded as a component of the income tax provision within continuing operations and are recognized in interim and annual reporting periods ending on or after July 4, 2025.

In situations where the law’s enactment happened after period-end, but before the release of the related financial statements, entities should disclose the impact of enactment consistent with the non-recognized subsequent events guidance in ASC 855 – Subsequent Events. This guidance requires entities to disclose the nature of the event and an estimate of its financial impact, if possible, or a statement that an estimate cannot be made.

Additionally, since many state and local jurisdictions decouple from certain provisions of the Internal Revenue Code, entities must assess each jurisdiction where they operate to confirm compliance with the new law.

Tax planning strategies to weigh

Many of these provisions may result in recording additional taxable temporary differences, and entities should assess each provision’s impacts. Because the provisions generally lower taxable income or result in taxable losses (including full expensing of domestic R&E and bonus depreciation), additional tax modeling may be warranted to determine if electing in or out of certain provisions is more advantageous, taking into account the interplay with other tax laws such as business interest disallowance.

In addition to recognizing the effects of the new law on an entity’s taxable temporary differences, analysis should be performed to determine their realizability. Considering the availability to accelerate tax deductions, potentially resulting in more carryforward tax attributes, entities should model the various elections and closely review their deferred tax assets to determine their realizability under the various scenarios.

If an entity is relying on the reversals of deferred tax liabilities to support realization of all or certain deferred tax assets, additional consideration could be made for including amortization, depreciation, and depletion within the calculation of ATI for business interest expenses post enactment of the new law (but without creating originating temporary differences) in a scheduling exercise.

This approach may provide additional positive evidence to support realization of existing interest carryforward attributes, potentially allowing companies to reduce or fully release historical valuation allowances.

For most entities, FDII, GILTI, and BEAT are accounted for as period costs and any changes to these calculations under the new law will generally impact tax years beginning after December 31, 2025. However, if an entity has made a policy election to record taxable temporary differences for NCTI (formerly GILTI) — as opposed to as a period cost — the tax effects should be accounted for in the reporting period of enactment.

How CLA can help with ASC 740 changes from the new tax law

Given the complexity of the new tax law’s provisions and their interrelated effects, organizations should approach these changes with a comprehensive strategy.

For tailored guidance and to navigate the nuanced modeling and technical questions that may arise, reach out to CLA for help assessing the implications for your financial statements and disclosures.

Contact us

Get experienced assistance with the new ASC 740 changes. Complete the form below to connect with CLA.