Alert

The budget reconciliation package PL 119-21, commonly referred to as the One Big Beautiful Bill Act (OBBBA) was signed into law by President Donald Trump on July 4, 2025. The law introduced significant changes to the US tax code that affect corporate tax accounting and financial reporting.

The OBBBA represents a substantial development in corporate tax law with immediate implications for tax accounting under the Financial Accounting Standards Board Accounting Standards Codification® (ASC) Topic 740.

Companies must carefully analyze and incorporate the provisions of OBBBA into their Q3 2025 interim financial statements to ensure compliance with GAAP and provide transparent reporting to stakeholders.

Background

ASC 740-10 mandates that the effects of new tax legislation be recognized in the financial statements during the period of enactment.

This includes remeasurement of deferred tax assets and liabilities based on the new tax laws, as well as disclosure of the nature and financial impact of the changes. This means that for calendar-year companies, the impacts of OBBBA must be reflected in the Q3 interim financial statements for the period ended September 30, 2025, as reported in Form 10-Q.

These tax law changes could result in a reduction of income taxes payable, an adjustment to deferred tax modeling, or a change in judgement about the realizability of deferred tax assets.  Changes in judgment for amounts related to prior tax years are reflected as discrete items in the quarter.

Key Tax Provisions Affecting Corporations

The OBBBA introduces several important tax changes. Companies that model the reversal of deferred income taxes to determine the realizability of deferred tax assets could have material impacts on the Q3 provision, specifically the period of enactment. We have highlighted them below:

Business Interest Expense Limits

The OBBBA permanently reverts the calculation of the 30% adjusted taxable income (ATI) limitation on business interest expense deductions back to using earnings before interest, taxes, depreciation, and amortization (EBITDA), rather than earnings before interest and taxes (EBIT).

Generally, this limitation applies before other elective capitalization limitations except for interest capitalized under sections 263(g) (straddles) and 263A(f) (designated property) thus eliminating planning strategies under sections 263(a) and 266. This change generally increases the amount of interest expense deductible by corporations, potentially reducing taxable income and deferred tax liabilities.

Bonus Depreciation

Prior to the OBBBA, bonus depreciation was scheduled to phase down to 40% in 2025 and continue decreasing in subsequent years. The OBBBA reinstates 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025—and adds a new definition for qualified production property for construction that begins after January 19, 2025, and before January 1, 2029. The 100% bonus only applies if there is not a written binding contract in place prior to January 19, 2025. The reinstatement of 100% bonus depreciation provides accelerated tax deductions and could materially impact deferred tax asset/liability calculations.

International Tax Provisions

Within the OBBBA, for tax years beginning after 2025 there are several changes to international provisions:

• Global intangible low-taxed income (GILTI) renamed to net CFC tested income (NCTI)
• Reduces the section 250 deduction to 40%
• Foreign-derived intangible income (FDII) renamed to foreign-derived deductible eligible income (FDDEI)
• Decreases the FDDEI deduction from 37.5% to 33.34%

There are also certain changes to the foreign tax credit limitation. Companies should evaluate these changes to the extent any deferred tax amounts should be adjusted—if the company has elected historically to compute GILTI deferreds.

Section 174 R&D Capitalization

Before the OBBBA, businesses were required to capitalize and amortize research and experimental (R&E) expenditures over five years for domestic expenses and 15 years for foreign expenses. Starting in 2025, the OBBBA allows domestic R&E expenses to be deducted as incurred, aligning with prior rules before the Tax Cuts and Jobs Act (TCJA).

Additionally, unamortized balances from prior years can be fully deducted in 2025 or partially deducted over 2025 and 2026. This change could impact deferred tax assets related to R&E capitalization and amortization.

Note also if a company has been accruing R&D credits without the section 280C reduction they should evaluate whether to apply the reduced credit under section 280C for 2025 credits given the OBBBA change.

For example, if a company accrued the benefit of gross R&D credits in Q1 and Q2, with the enactment of OBBBA switching to the reduced credit for 2025 should result in this item being taken into account for purposes of computing the annual effective tax rate.

Small Business Taxpayers

Under Revenue Procedure 2025-28, small business taxpayers who meet the eligibility criteria are afforded additional relief. Specifically, these taxpayers can amend their 2022 through 2024 tax returns to reflect the new deduction treatment under OBBBA. This amendment opportunity provides flexibility for small businesses to accelerate deductions and potentially realize tax refunds or reduce tax liabilities for prior years.

For Q3 2025 interim financial reporting purposes, companies must reflect their actual filing status rather than merely their intent to amend prior returns. This means that if a small business has filed or plans to file amended returns for 2022-2024 to take advantage of the revised Section 174 deduction rules, the tax provision and deferred tax calculations in the Q3 financials should incorporate the effects of these amended filings. Conversely, if the company has not yet filed amended returns or does not intend to do so, the interim tax provision should be based on the original filings. Note any impacts identified may result in a disclosure for changes in tax law as they will be disclosed in the new disclosure standard under ASU 2023-09.

Annual Effective Tax Rate Impact vs Discrete Items

Under ASC 740, the tax effects of OBBBA provisions are recognized either through adjustments to the annual effective tax rate (AETR) or as discrete items.

AETR Impact

OBBBA provisions effective at the start of 2025 that affect the current year’s tax expense, such as bonus depreciation, are incorporated into the AETR. These changes affect the ongoing tax expense recognized in the income statement throughout the year. If a company has historically recorded a current and deferred AETR for purposes of rolling current and deferred tax balance sheet accounts, for example, the effects of any bonus depreciation catch-up for Q1 and Q2 should be considered in estimating the balances of the current and deferred tax accounts at the end of Q3.

Discrete Items

Deferred tax remeasurement resulting from changes like a valuation allowance release resulting from an increase to the interest expense limitation adjustment are treated as discrete items. These prior year adjustments and valuation allowance changes are recognized in the period of enactment and reported separately from the ongoing tax expense determined using the estimated annual effective tax rate method.

Additional Considerations

Valuation Allowance Scheduling

Companies must reassess their valuation allowances in light of the OBBBA provisions. Changes in deferred tax assets and liabilities due to the new rules may require adjustments to valuation allowances, which can significantly impact net deferred tax assets and income tax expense.

Other Tax Law Changes Effective After December 31, 2025

While not impacting the 2025 financials directly, companies should monitor upcoming changes that take effect after 2025.

Base Erosion and Anti-Abuse Tax (BEAT) Rate Decrease

The BEAT tax rate reduction lowers the minimum tax imposed on large corporations making deductible payments to foreign related parties, influencing tax expense and deferred tax calculations.

Section 162(m) Aggregation Rules

Changes to aggregation rules under Section 162(m) affect the deductibility of executive compensation, which may impact tax provisions and disclosures. Be aware of the potential haircut of stock-based compensation deferred tax assets as a result of the change to the executive compensation limitation rules.

Limits on Charitable Contributions

New limits, including the 1% floor, on charitable contribution deductions may affect taxable income and deferred tax assets related to charitable giving.

SALT Considerations

It is also important to consider the impact that state conformity may have on any of the items above that impact the income tax provision.

Financial Statement Disclosures

In accordance with ASC 740-10, companies must provide clear disclosures in their Q3 Form 10-Q filings regarding the impact of OBBBA, which may include:

• A description of the nature of the tax law changes and their effect on the company’s tax provision
• The amount of the deferred tax asset and liability remeasurement recognized during the period
• The impact on the effective tax rate and income tax expense
• Any changes to valuation allowances and uncertain tax positions related to the new law
• Disclosure of any significant estimates or judgments made in applying the new tax provisions

We’re Here to Help

To learn more about the impacts of OBBBA and how to prepare for changes, contact your firm professional.

Additional Resources

• Tax Practice
• Accounting for Income Tax Services (ASC 740)