Accounting for the income tax impacts of the One Big Beautiful Bill Act

Posted August 7, 2025

Executive summary: OBBBA implications for accounting for income taxes

The One Big Beautiful Bill Act (OBBBA or the Act), enacted on July 4, 2025, includes several changes for corporations that may affect income tax provisions, including items related to income taxes on the face of the financial statements and in the disclosures, for periods that include the enactment date.

Key changes to bonus depreciation, interest expense limitations and domestic research and development (R&D) expenses will likely reduce current taxable income in 2025. Additionally, modifications to meal cost deductibility and international tax rules are generally effective for tax years beginning after Dec. 31, 2025. Due to the date of the enactment, these tax law changes will not be reflected until third quarter income tax provisions for calendar year entities.

Tax law changes under Accounting Standards Codification (ASC) 740

The OBBBA includes various provisions with effective dates in 2025 and beyond, and for some small business taxpayers, certain provisions may have retroactive effects. Under ASC 740, entities should account for the changes in tax law in the period that includes the enactment date, including considering the effects of provisions that have future effective dates. Additionally, the effects of changes in tax law are reflected as part of income tax expense (benefit) from continuing operations.

For entities preparing interim financial statements, the effects of the OBBBA should be included in the interim period that includes the enactment date, and the changes in tax law may affect an entity’s estimated annual effective tax rate or be included as discrete items in that period. Considerations for determining whether the changes in tax law should be discrete or included in the estimated annual effective tax rate are as follows:

Impacts on the current payable or receivable: ASC 740-270-25-5 indicates that the effect of tax law changes on the current income tax payable or receivable should be reflected in the estimated annual effective tax rate no earlier than the period of enactment.
Impacts on deferred taxes: Entities should record the effect on beginning deferred taxes as of the enactment date as a discrete item in the period of enactment. Given the OBBBA’s mid-year enactment date for calendar year entities, entities should make a reasonable effort to calculate the effects on opening deferred taxes as of that date to determine the discrete impact. Originating deferred tax balances after the enactment date would be reflected within the revised estimated annual effective tax rate.
Adjustments to prior-year taxes: For small business taxpayers, given the ability to amend prior-year tax returns to deduct research and experimental expenditures, entities should reflect the effect of retroactive changes in tax law as a discrete item in the period of enactment. Certain fiscal year entities may also have a retroactive effect as a result of the changes to bonus depreciation.
Valuation allowance adjustments: Entities with a valuation allowance should further consider the guidance under ASC 740-270-25-7 that indicates that a change in judgement regarding sources of income related to future years should be reflected as a discrete item.

The Big Three

Three key items, commonly referred to as the Big Three, on the wish list of most businesses made it into the final version of the OBBBA. Historically, the Big Three have been subject to adjustments or phaseouts over time; however, the Act makes permanent most of the following changes. The changes to the Big Three include:

R&D costs: Restoring the ability for entities to immediately expense domestic R&D costs under section 174. Additionally, entities have an ability to accelerate remaining unamortized domestic section 174 costs for amounts incurred from 2022 to 2024.

Business interest expense deductions: Restoring the definition of adjusted taxable income from an earnings before interest and taxes (EBIT) to an earnings before interest, taxes, depreciation, and amortization (EBITDA) type of calculation for entities’ determination of the interest expense limitation under section 163(j).

Read more about the changes to the business interest expense deduction and the impacts on businesses in: OBBBA restores higher business interest expense limit: How businesses can benefit.

Bonus depreciation: Restoring 100% ‘bonus depreciation’ on qualified assets acquired on or after Jan. 20, 2025, and expanding the types of assets that qualify for bonus depreciation to include manufacturing buildings, but only for buildings placed in service before Jan. 1, 2031.

Read more about the changes to bonus depreciation in: The OBBBA restores and expands bonus depreciation: What it means for businesses.

For many entities, the effects of these temporary items may be straightforward for 2025. For example, an entity without a valuation allowance may have relatively lower taxable income, resulting in a reduction of current taxes payable and current tax expense. This would be accompanied by either a related reduction to deferred tax assets or an increase to deferred tax liabilities, resulting in an offsetting increase to deferred tax expense. Consequently, for entities without a valuation allowance, the OBBBA would not be expected to have a significant impact on the entity’s effective tax rate.

Assessing the need for a valuation allowance

For entities with a valuation allowance, the OBBBA could have a significant effect on the tax provision for the period that includes the enactment date.

For entities that have a current tax payable without an offsetting deferred tax benefit due to the entity requiring a valuation allowance against its deferred tax assets, the changes to the Big Three discussed above could have a significant effect on both current-year taxes and the amount of valuation allowance required.

This result is particularly common for entities in the life sciences and technology industries as a result of the impact of section 174 (R&D expenses). In addition to reflecting the benefit of any reduction in current taxes, these entities should consider how the changes to the Big Three impact the amount of valuation allowance required.

For any entity that relies on the reversal of existing taxable temporary differences to support the realization of deferred tax assets, the changes to the Big Three could impact the amount and timing of the reversals of temporary differences and the utilization of carryforwards. Entities should model the effect of changes in their forecasted 2025 temporary differences (as a result of the OBBBA) on its schedule of reversing temporary differences to identify any changes in the amount of valuation allowance required as a result of the OBBBA.

Entities that rely on future taxable income to support the realization of existing deferred tax assets will also need to evaluate the impacts of the OBBBA on the amount of valuation allowance required, particularly for those entities with significant business interest limitation carryforwards. The more favorable rules under the OBBBA to determine the business interest expense limitation may increase the amount of the interest expense carryforwards that an entity is more-likely-than-not able to realize.

Adjustments to other items for tax years beginning after Dec. 15, 2025

The OBBBA introduces a 1% floor on charitable contributions, meaning that corporations will be allowed a deduction for charitable contributions only exceeding 1% of taxable income starting in tax years beginning after Dec. 15, 2025. The 10% ceiling on deductible charitable contributions is retained. Entities that exceed the 10% ceiling are allowed to carry forward disallowed amounts for five years. In any year that a corporation generates a carryforward, the amount disallowed pursuant to the 1% floor will be added to the carryforward. If the corporation does not generate a carryforward, the disallowed amount is permanently lost.

Also applicable for tax years beginning after Dec. 15, 2025, certain businesses will be exempt from the disallowance of various expenses related to on-premises employer-provided meals that was enacted as part of the Tax Cuts and Jobs Act (TCJA).

Changes to the taxation of multinationals

There are several other changes in the OBBBA that will impact multinational corporations for tax years beginning after Dec. 31, 2025. These changes include adjusting rates and modifying certain deductions related to foreign tax credits (FTCs); global intangible low-taxed income (GILTI) which becomes net CFC-tested income (NCTI); foreign-derived intangible income (FDII) which now becomes foreign-derived deduction eligible income (FDDEI); and the base erosion and anti-abuse Tax (BEAT). Under the TCJA, many of these items were scheduled to have rate changes take effect in 2026, before being modified by the OBBBA.

These changes are explained in detail in the article: International tax reform under the One Big Beautiful Bill Act.

Most entities account for the above items as period items (i.e., the item affects current taxes only). Since many of the changes are not effective until years beginning after Dec. 31, 2025, there may not be a significant impact on income tax provisions in financial statements for the year ending Dec. 31, 2025; however, entities that account for GILTI under a methodology that includes deferred taxes need to consider the effect of the change in tax law on the GILTI-related deferred taxes.

Additionally, in the assessment of the need for a valuation allowance, entities relying on future taxable income as support for their conclusion related to valuation allowances should evaluate how these changes affect their forecasts.

Pillar Two

As part of preliminary drafts of the One Big Beautiful Bill Act, Congress proposed a retaliatory tax regime in section 899.

On June 28, 2025, prior to finalizing the OBBBA, the G7 agreement was finalized among seven countries, including the U.S., Canada, France, Germany, Italy, Japan and the U.K. Under the terms of the proposed agreement, U.S.-parented multinational groups would be exempt from the application of the income inclusion rule (IIR) and the undertaxed profits rule (UTPR), in recognition of existing U.S. minimum tax regimes such as the GILTI and the corporate alternative minimum tax (CAMT).

As a result, the U.S. Congress agreed to fully withdraw its proposed section 899 provisions (retaliatory taxes used to combat “unfair foreign taxes”) and, accordingly, section 899 was not included in the final Act. In exchange, the G7 countries will support the United States’ position in negotiations with the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework.

While the G7 statement is a significant development, it does not alter the legal status of tax legislation currently enacted in any jurisdiction, and it may take some time for countries to enact changes to conform to the G7 agreement.

Under U.S. generally accepted accounting principles (GAAP), ASC 740 requires that the effects of changes in tax laws or rates be recognized in the financial statements as of the date of enactment—that is, when all legislative steps necessary for a bill to become law have been completed. Accordingly, the G7 statement does not have a significant impact on entities preparing financial statements under U.S. GAAP. Entities must continue to evaluate and reflect the financial reporting implications of Pillar Two legislation based on the laws as enacted in each applicable jurisdiction during the second quarter of 2025.

Compensation-related items

The OBBBA expands the applicability of section 162(m), the limitation on executive compensation, by applying controlled group rules. These changes may be particularly relevant to public entities with partnerships in their structure, including Up-C structures.

These changes are effective for tax years beginning after Dec. 31, 2025. However, entities should consider the impacts of these changes on compensation that was expensed for book purposes that is expected to be deducted for tax purposes, and they should assess whether the future deductible amounts recognized in 2025 as a deferred tax asset will be limited under section 162(m), given the future expanded applicability.

Notably, the applicability of the controlled group rules will also apply to the expansion of the limitation under section 162(m) as amended by the American Rescue Plan Act. For taxable years beginning after 2026, the definition of a specified covered employee is expanded to also include any employee who is among the five highest compensated employees for the taxable year in addition to the current covered employees, potentially adding five additional employees to the number of individuals whose compensation is limited to $1 million.

While not accounted for under ASC 740, it is worth noting that the OBBBA also includes several compensation-related changes that may impact payroll and W-2 reporting.

Read more about the changes to compensation and benefits items in: How the OBBBA affects tax treatment of compensation and benefits.

Energy credits

There were a number of modifications made to energy credits under the OBBBA, including extending the section 45Z clean fuel production credit, gradually phasing out other credits and placing restrictions on certain foreign entities constructing and owning clean energy facilities.

Accounting for some of the energy tax credits can be complex, and given the refundability and transferability provisions for certain credits, the accounting for these credits may fall outside the scope of ASC 740.

Read more about the changes to energy credits in: Tax bill significantly changes clean energy credits and incentives.

Business combinations

Business combination accounting should reflect the law as enacted as of the date of the transaction. Accordingly, entities should carefully evaluate the appropriate accounting for entities acquired prior to July 4, 2025. Beyond the accounting considerations, there may be changes under the OBBBA that should be considered in structuring acquisitions and drafting purchase agreements. Entities should work closely with their mergers and acquisitions (M&A) tax advisor to ensure appropriate consideration of the provisions of the OBBBA.

State and local considerations

Increasing the complexity of the analysis of any estimated impact of the OBBBA is the complex state and local tax landscape. Whether and how states adopt the changes of the OBBBA depends on how each state conforms to or decouples from provisions of the Internal Revenue Code (IRC).

While some states conform to the IRC on a rolling basis, other states have fixed-date conformity or selectively decouple from the federal treatment of some of the Big Three items or cross-border taxation items discussed above. Assessing the state tax consequences will take additional time, requiring entities to carefully track enactment dates and the evolving state legislative landscape.

Under the TCJA, many of the changes to individual taxation were temporary in nature and set to expire, including a limitation on state and local tax deductions. In response to the limitation on the deduction of state and local taxes for individuals, many states enacted pass-through entity tax payment regimes with the goal of generating a deduction for pass-through entities for state taxes. Some of these regimes were set to expire with the original individual limitation on state and local tax deductions (SALT cap).

While the OBBBA increases the limitation on state and local tax deductions along with certain other modifications, there may still be situations in which pass-through entities continue to avail themselves of the state pass-through entity tax (PTET) payment regimes. Entities should continue to consider whether these entity-level payments meet the definition of a tax under ASC 740 or are more akin to withholding or composite payments, which are accounted for as a transaction with shareholders.

Learn more about how the OBBBA addressed the SALT cap and PTET regimes: SALT cap receives modest and temporary update in the One Big Beautiful Bill Act

Disclosures in the notes to the financial statements

For periods ending before July 4, 2025: Entities should disclose the estimated impact of the change in tax law describing the specific items that are expected to have a material impact on the entity’s financial statements or indicate that an estimate cannot be made in their financial statements. Such financial statements appropriately would not reflect any changes in tax law.

For periods ending after July 4, 2025: Entities should disclose the effects on the financial statements of the enacted change in tax law and describe the specific items that are expected to have a material impact on the entity’s financial statements. Such financial statements will reflect the changes due to the impact of the OBBBA. Annual financial statements for periods including the enactment date should also report both the tax effects of adjustments to deferred tax assets or liabilities resulting from the change in law and the effect on the effective tax rate reconciliation.

Other disclosures

Disclosures should be included by public entities in their Management’s Discussion and Analysis (MD&A) and other sections of their public filings to the extent they are necessary to meet those disclosure requirements.

Final thoughts

This article is a high-level overview of the various provisions of the OBBBA that may affect corporations when accounting for income taxes under ASC 740. There are many additional intricacies and details that are not explicitly discussed here that may need to be considered by corporations.

While accounting for all the changing tax laws under the OBBBA may seem overwhelming, it is important to remember that most entities will not be affected by every change outlined above. There are entities, however, that will be impacted by several of the changes at the same time, while some of those provisions may interact with one another or affect multiple areas of an entity’s income tax provision.

Entities should discuss the ASC 740 implications of the OBBBA with their tax advisors to ensure that amounts recorded in their financial statements are materially accurate and that they have considered all relevant information when calculating these amounts.

Entities should also keep in mind that some items discussed above provide options for addressing them on a tax return. Entities therefore may want to consider a longer-term cash tax flow model given the potential interaction of certain items, particularly those entities affected by the business interest limitation and changes to the treatment of domestic R&D costs. We encourage consultation and planning with your tax advisor in advance of the next financial reporting date to provide additional confidence in accounting for these items correctly.

Please connect with your advisor if you have any questions about this article.

This article was written by Cassie Conley, Kayla Thompson, Darian A. Harnish, Amy Letourneau and originally appeared on 2025-08-07. Reprinted with permission from RSM US LLP.
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