Key insights
- The One Big Beautiful Bill Act introduced a broad range of tax reform provisions, including changes to domestic research and experimental expenditures, bonus depreciation, interest limitations, executive compensation, and foreign inclusions.
- Given the complexity of the provisions and their interrelated effects, it’s vital for organizations to approach these changes with a comprehensive strategy.
- Given the provisions generally lower taxable income or result in taxable losses, tax modeling may be warranted to determine if electing in or out of certain provisions is more advantageous.
Get experienced assistance with ASC 740 changes.
The 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, 2025 and required recognition under ASC 740 in interim and/or year-end financial statements.
What changes from the One Big Beautiful Bill Act will ASC 740 have to recognize?
While the One Big Beautiful Bill Act(OBBBA) 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 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 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 over a 15-year period.
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 law permanently reinstates 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.
The 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 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, significant changes to foreign earnings taxes became effective. Most notably, qualified business asset investment (QBAI) was eliminated from calculating net CFC tested income (NCTI formerly known as GILTI), removing the prior deemed tangible income return that historically reduced a U.S. shareholder’s GILTI inclusion.
As a result, U.S. multinational groups previously benefitting from substantial QBAI amounts may experience increased NCTI inclusions and higher effective foreign earnings taxes. In addition, the foreign tax credit (FTC) framework applicable to NCTI has been modified.
The haircut applied to foreign income taxes deemed paid with respect to NCTI has been reduced from 20% to 10%, partially mitigating the increased inclusion’s impact. However, the Section 250 deduction has also been reduced, resulting in a higher effective U.S. tax rate on foreign earnings despite the enhanced foreign tax credit utilization.
Foreign tax credit limitation calculations
The One Big Beautiful Bill Act also revises expense allocation and apportionment rules affecting foreign tax credit limitation calculations.
In particular, the longstanding requirement to allocate and apportion certain domestic expenses — including interest expense and research and experimentation expenditures — against foreign-
These changes may increase foreign tax credit capacity for many taxpayers and reduce the likelihood of foreign tax credits becoming trapped or unusable because of FTC limitation constraints.
Foreign-derived deduction eligible income
The foreign-derived deduction eligible income (FDDEI), formerly referred to as FDII, is also subject to a reduced deduction beginning in 2026.
As a result, the effective U.S. tax rate applicable to qualifying foreign-derived income earned directly by U.S. corporations will increase, reducing a benefit originally designed to encourage the retention and development of intellectual property and other income-producing activities within the United States.
Companies relying on the FDDEI benefit should reassess existing operating, licensing, and supply chain structures to evaluate the impact on future effective tax rates and projected cash taxes.
The tax impact on multinational companies
The two changes to NCTI and FDDEI above result in an ETR of 12.6% – 14% and 14%, respectively. Collectively, these provisions require multinational groups to reassess their:
- Effective tax rate
- Foreign tax credit positions
- Legal entity structures
- Cash repatriation strategies
Companies with operations in high-tax jurisdictions may experience significantly different outcomes from taxpayers operating in low-tax jurisdictions, making detailed modeling essential to understand the overall impact of the new rules.
Base Erosion and Anti-Abuse Tax
The Base Erosion and Anti-Abuse Tax (BEAT) remains in effect, with the permanent rate increasing to 10.5% for most taxpayers and 11.5% for banks and securities dealers beginning in 2026.
Multinational groups with significant deductible payments to foreign related parties should continue to evaluate their exposure to BEAT and monitor how changes in intercompany financing, royalties, service arrangements, and supply chain structures may affect their overall liability.
Explore more: Discover how the ASC 740 rules impact pass-through entity taxes and public business entities and non-PBEs.
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.
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 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 (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 law 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 One Big Beautiful Bill Act
Given the complexity of the 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.
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