On July 4, 2025, President Donald Trump signed into law the reconciliation tax bill widely known as the One Big Beautiful Bill Act (OBBBA). Under U.S. Generally Accepted Accounting Principles (GAAP), this is the enactment date. The legislation introduces extensive changes to income tax accounting under Accounting Standards Codification (ASC) 740, Income Taxes. Notable corporate provisions include the restoration of 100% bonus depreciation, the creation of Section 174A (reinstating expensing for domestic research and experimental (R&E) expenditures), modifications to Section 163(j) interest limitations, updates to global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII), amendments to energy credits, and expanded Section 162(m) aggregation requirements. These changes may affect current and deferred tax calculations, valuation allowances, and financial statement disclosures. Because the bill was signed after June 30, only certain provisions will impact current-year financial reporting, while others take effect in later tax years.

Changes in Tax Laws Under ASC 740

ASC 740 requires companies to reflect the impact of tax law changes in the period that includes the enactment date:

• Adjustments to current-year taxes payable or receivable are reflected in the estimated annual effective tax rate (AETR).
• Effects on temporary differences and related deferred taxes existing on the enactment date are recognized as discrete items in income tax expense from continuing operations.
• For temporary differences arising after enactment within the current year, the impact is incorporated into the AETR beginning in the first period that includes the enactment date.

Calendar-year filers should also consider Q2 disclosure requirements, particularly where valuation allowance assessments or other estimates may change.

Valuation Allowance Considerations

Provisions such as the permanent restoration of 100% bonus depreciation, R&E expensing, and changes to GILTI/FDII may affect projections of future taxable income and, therefore, the assessment of valuation allowances for deferred tax assets (DTAs). The more favorable calculation for interest deductions under Section 163(j)—reinstating an EBITDA-based limit for tax years beginning after December 31, 2024—may require a reassessment of DTAs related to disallowed interest and Section 163(j) carryforwards. If tax law changes occur after a reporting period but before financial statements are issued, changes to valuation allowances are recognized in the period that includes the enactment date, though disclosure may still be required.

International Provisions

The OBBBA renames FDII and GILTI in the statute but, for clarity, this post uses the familiar terms. Key changes include:

• FDII: Effective tax rate increases from 13.125% to 14% via a permanent reduction of the Section 250 deduction (37.5% to 33.34%). The FDII calculation is made more favorable by eliminating the QBAI reduction and specifying that interest and R&E costs are not allocated to eligible income. Most changes are effective for tax years beginning after 2025.
• GILTI: Section 250 deduction decreases from 50% to 40%, increasing the pre-foreign tax credit (FTC) effective rate from 10.5% to 12.6%; the FTC haircut is reduced from 20% to 10%. The QBAI deemed return is repealed and expense allocations for FTC purposes are narrowed. Changes are effective for tax years beginning after 2025.
• BEAT: The rate increases from 10% to 10.5% for tax years beginning after 2025, and a scheduled 2026 change that would have increased BEAT liability by the sum of all income tax credits is repealed.

For accounting purposes, FDII and BEAT are treated as period costs, and many companies also treat GILTI as a period cost. Because most international provisions are effective for tax years beginning after December 31, 2025, immediate accounting effects at enactment may arise primarily through valuation allowance assessments and, for companies that recognize deferred taxes on GILTI-related basis differences, through remeasurement of those deferred balances.

Energy Credit Provisions

The OBBBA modifies and phases out multiple Inflation Reduction Act energy incentives, adds domestic content and foreign entity restrictions, and curtails several credits over time. Changes effective in 2025 may affect interim AETR calculations if companies anticipated specific credits in their 2025 estimates.

Retroactive Changes and Interim Reporting

If a provision is retroactive, the accounting treatment depends on whether the impact relates to prior periods or the current year. Prior-period impacts are recognized discretely in the period of enactment. If the retroactive change affects current-year taxes payable or receivable (where the effective date precedes enactment but remains within the current year), the impact is recognized through an adjustment to the AETR and applied to year-to-date ordinary income, creating a catch-up effect. Companies should consider this framework for provisions like R&E expensing, Section 163(j) interest limitations, and 100% bonus depreciation (for property acquired and placed in service after January 19, 2025).

Accounting for Uncertainty in Income Taxes

Companies must evaluate the technical merits of positions taken under the new law. If a position is not more likely than not to be sustained, it should be assessed under ASC 740’s recognition and measurement guidance to determine the appropriate benefit to recognize.

State Income Tax Considerations

The state and local tax effects of the OBBBA will depend on each jurisdiction’s conformity to the Internal Revenue Code. Impacts may be significant for bonus depreciation, R&E expensing, FDII, GILTI, and interest deductibility. Companies should review conformity rules and adjust state current and deferred tax balances where necessary.

Financial Statement Disclosures

Companies should consider disclosing expected effects of the new law in the notes, MD&A, and risk factors. If enacted after an interim balance sheet date but before issuance, the change is generally a Type II nonrecognized subsequent event under ASC 855, requiring disclosure of the nature of the event and either an estimate of its effect (if material) or a statement that the estimate cannot be made. For annual reporting, ASC 740-10-50-9(g) requires disclosure of the tax effects of adjustments to deferred tax balances from enacted changes in laws or rates; U.S. public business entities should separately present the impact in the annual effective tax rate reconciliation.

Next Steps

Businesses should assess the OBBBA’s impact on current and deferred tax balances, AETR, valuation allowances, and disclosures. Because provisions intersect across areas (e.g., interest limits, international rules, and credits), modeling and scenario analysis are essential to understand full financial reporting effects under ASC 740.

Work with a Trusted Sarasota CPA Firm

Navigating these changes requires deep ASC 740 and tax planning experience. Cavanaugh & Co, LLP’s team of certified public accountants helps businesses evaluate the OBBBA’s impact, update provision models, and plan proactively. If you’re searching for a CPA near me, exploring Sarasota CPA firms, or need a seasoned Sarasota accountant, our accountants in Sarasota are ready to help. Contact Cavanaugh & Co today to review how these tax law updates may affect your financial statements and tax position.