New Income Tax Disclosure Requirements: What It Means for Your Business

In March 2023, the Financial Accounting Standards Board (FASB) proposed a number of changes to income tax disclosures in the United States. In August, the board voted to finalize those changes—and they are beginning to go into effect. These changes could have a significant impact on business owners this tax season.

So, what exactly do business owners need to know about these changes to tax disclosure requirements, and what can be done to avoid errors in reporting?

More About the Changes

First, business owners need to understand that the changes to tax disclosure requirements make up only a small part of the changes that the FASB proposed and passed.

Specifically, the FASB first met to discuss the potential for more in-depth reporting requirements as a direct result of the investor community petitioning for more disclosure of this information in recent years. In March 2023, the FASB first met to discuss these changes—which included proposals to improve income tax disclosures. In August, the FASB held a vote and these changes unanimously passed.

Furthermore, in December 2023, the FASB issued ASU 2023-09, which included a list of tax-related amendments covering such topics as rate reconciliation, outside basis differences, income taxes paid and more.

There are many nuances to understand when it comes to these recent changes, but one aspect that will most immediately and significantly impact public and non-public entities is changes to tax disclosure requirements— particularly as they relate to income tax.

Effects on Public Business Entities

For public business entities, it will now be necessary to annually disclose a tabular reconciliation on eight specific categories:

• State and local income tax
• Enactment of new tax laws
• Foreign tax effects
• Tax credits
• Effect of cross-border tax laws
• Valuation allowances
• Changes in unrecognized tax benefits
• Nontaxable or nondeductible items

Likewise, these entities are required to disclose any reconciling items separately when the item is equal to or greater than the 5% annual reporting threshold.

Effects on Nonpublic Entities

For nonpublic entities, income tax disclosure requirements are slightly different. Specifically, these entities will now be required to disclose the full nature and effect within the same eight specific categories of reconciling items and individual jurisdictions. The result is that there could be a major difference between the effective tax rate and the statutory tax rate.

Other Things to Know

What is the reasoning for these changes to tax disclosure requirements? For the most part, these changes are a direct result of investors wanting more transparency when it comes to income tax disclosures, both for publicly traded businesses and private organizations.

It is also worth noting that these changes are effective for public businesses beginning Dec. 15, 2024. For non-public entities, these changes are not being implemented until Dec. 15, 2025. This means that businesses have some time to familiarize themselves with these changes and make their own amendments to their reporting strategies. However, businesses are able to adopt these changes prior to the effective date if they wish to do so.

These changes to income tax disclosure for public and non-public businesses may take some time to adjust to. However, adhering to these changes by the effective date is important for ensuring accurate tax reporting and avoiding unwanted fines/penalties.

For businesses, this is also a good time to start thinking about updating standards for reporting and tracking income. Nuanced disclosures might result in businesses being scrutinized and audited, which can affect public perception and competitive standing. Likewise, it is important to understand that meeting these new requirements could result in the need for additional staffing. With this in mind, businesses should not wait until the effective date to start accounting for these changes. In fact, it is never too early to begin making infrastructure adjustments to accommodate for these new requirements.

Time to Consult with a Professional?

Business owners are encouraged to consult with their financial teams for advice and guidance on how to properly handle these changes and make their own internal adjustments. In doing so, they can adapt to new income tax disclosure requirements with confidence.

Learn more about our Taxation Services and how we may help your business.

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