Income taxes

The basics of income tax accounting

Under ASC 740, the amount of income tax expense an entity must record in each period does not simply equal the amount of income tax payable in each period. Rather, ASC 740 requires an entity to record income tax expense in each period as if there were no differences between (1) the timing of the recognition of events in income before tax for US GAAP purposes and (2) the timing of the recognition of those events in taxable income.

In accordance with ASC 740-10-10-1, an entity’s overall objectives in accounting for income taxes are to (1) “recognize the amount of taxes payable or refundable for the current year” (i.e., current tax expense or benefit) and (2) “recognize deferred tax liabilities [DTLs] and assets [DTAs] for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns” (resulting in deferred tax expense or benefit). An entity’s total tax expense is generally the sum of these two components and can be expressed as the following formula:

Legislative and economic setting

In 2022, two pieces of legislation with significant tax-related provisions were enacted. The CHIPS Act of 2022 (H.R. 4346), signed into law on August 9, 2022, established an advanced manufacturing investment credit under new IRC Section 48D. The Inflation Reduction Act of 2022 (H.R. 5376), signed into law on August 16, 2022, included (1) a 15 percent book minimum tax (corporate alternative minimum tax [AMT]) on the adjusted financial statement income (AFSI) of applicable corporations; (2) a plethora of clean-energy tax incentives in the form of tax credits, some of which have a direct-pay option or transferability provision; and (3) a 1 percent excise tax on certain corporate stock buybacks.

The provisions of the Inflation Reduction Act went into effect for taxable years beginning after December 31, 2022. While the ASC 740 ramifications of the corporate AMT were relatively minor, the direct-pay and transferability provisions of the new tax credits have presented (and continue to present) a host of new challenges.

In addition, multinational entities have been navigating the Organisation for Economic Co-operation and Development’s (OECD’s) Pillar Two tax regime, which introduces a global minimum corporate tax rate of 15 percent. To implement the global minimum tax, individual countries are responsible for establishing laws and regulations in line with the framework provided by the OECD. Many countries have enacted legislation that went into effect in 2024. Generally, we expect these new taxes to be accounted for in a manner similar to AMTs for consolidated financial statements, but the accounting impacts of each new law will need to be separately evaluated in each jurisdiction.

Standard-setting activity

In December 2023, the FASB issued ASU 2023-09, which establishes new income tax disclosure requirements within ASC 740 in addition to modifying and eliminating certain existing requirements. The ASU’s amendments are intended to enhance the transparency and decision-usefulness of such disclosures. Under the new guidance, public business entities (PBEs) must consistently categorize and provide greater disaggregation of information in the rate reconciliation. The ASU also includes additional disaggregation requirements related to income taxes paid. The ASU’s disclosure requirements apply to all entities subject to ASC 740. PBEs must apply the amendments to annual periods beginning after December 15, 2024 (2025 for calendar-year-end PBEs). Entities other than PBEs have an additional year to adopt the guidance.

Accounting for investments in tax credit structures

In March 2023, the FASB issued ASU 2023-02, which expands the use of the proportional amortization method—which previously applied only to low-income housing tax credit investments—to other tax equity investments that meet certain revised criteria in ASC 323-740-25-1. The ASU is intended to improve the accounting and disclosures for investments in tax credit structures.

Continue your income tax learning

For a comprehensive discussion of the income tax accounting guidance in ASC 740, see Deloitte’s Roadmap Income Taxes.