Accuracy and transparency are the foundation of trust between a company and the people who rely on its financial statements. Income tax disclosures provide investors with insight into a company’s tax position, potential risks, and overall governance practices.
In response to growing requests from investors for more detailed income tax disclosures, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-09. This update is intended to give investors a clearer picture of how a public business entity manages its tax position. These disclosure requirements are now a standard part of corporate financial reporting for most entities, and the remaining entities are set to follow over the next reporting cycle.
Why Do Investors Want Better Income Tax Disclosures?
FASB established these rules because traditional reconciliation tables lacked the depth investors need to assess a company’s global operations, long-term tax positions, and risk and opportunity management. Investors have specifically asked for disclosures that let them:
- Understand a company’s exposure to changes in tax legislation and the related risks and opportunities.
- Evaluate income tax information that affects cash flow forecasts and capital allocation decisions.
- Identify opportunities that could improve future cash flows.
What Does the Rate Reconciliation Disclosure Require?
Public business entities must annually disclose a tabular reconciliation using both percentages and reporting currency amounts across these categories:
- State and local income tax, net of the federal income tax effect, along with a description of the jurisdictions that make up the majority of this impact
- Foreign tax effects
- Effects of enacted tax legislation
- Effects of cross-border tax laws
- Tax credits
- Valuation allowances
- Nontaxable or nondeductible items
- Changes in unrecognized tax benefits
Separate disclosure is required for any reconciling item that reaches 5% or more of the amount calculated by multiplying pretax income or loss from continuing operations by the statutory federal income tax rate. These items must be broken out as follows:
- Disaggregated by Nature – If the item falls under cross-border tax laws, tax credits, or nontaxable/nondeductible categories.
- Disaggregated by Jurisdiction (Country) & Nature – If the item falls under foreign tax effects.
- Disaggregated by Nature – If it does not fall within any of the eight specified rate reconciliation categories.
Because these disclosure rules sit within ASC 740, questions about your rate reconciliation often connect to broader reporting considerations as well.
What Are the Income Taxes Paid Disclosure Requirements?
All entities subject to income taxes must annually disclose total income taxes paid (net of refunds received) broken out by federal, state, and foreign levels. Additionally, separate disclosure is required for any specific jurisdiction where the net amount equals or exceeds 5% of total income taxes paid.
To provide complete context, entities must also disclose:
- Income or loss from continuing operations before income tax expense or benefit, split between domestic and foreign.
- Income tax expense or benefit from continuing operations, split between federal, state, and foreign.
What Disclosure Requirements Does ASU 2023-09 Remove?
ASU 2023-09 replaces the term “public entity” with “public business entity” throughout the disclosure guidance.
The update also removes two disclosure requirements. Entities no longer need to disclose the nature and estimated range of change in unrecognized tax benefits expected over the next 12 months, or state that this range can’t be estimated. Entities also no longer need to disclose the accumulated amount of each type of temporary difference when a deferred tax liability isn’t recognized because of specific exceptions related to subsidiaries and corporate joint ventures.
When Does ASU 2023-09 Take Effect?
The new rules follow a phased rollout based on organization type.
Public Business Entities
These requirements apply to fiscal years beginning after December 15, 2024. For public business entities with a calendar fiscal year, that means the requirements have applied since fiscal year 2025. Entities with a different fiscal year start should confirm exactly when their first reporting period under the new rules begins.
Private Companies and Non-Public Entities
If your organization is not a public business entity, these requirements apply to fiscal years beginning after December 15, 2025. For entities with a calendar fiscal year, that means the requirements are now in effect for fiscal year 2026. Private companies are subject to many of the same disclosure categories, but the rate reconciliation requirement is less extensive. Rather than the detailed tabular reconciliation with dollar amounts and percentages required of public business entities, private companies can provide a qualitative description of the nature and effect of the same reconciling items. Because these requirements apply to the current reporting cycle for many private companies, maintaining consistent data tracking now can help support this year’s annual disclosures.
Nonprofits
Nonprofit organizations are generally exempt from income tax, but that exemption doesn’t cover every dollar of revenue. If a nonprofit generates income from activities outside its core mission, that income can be subject to unrelated business income tax (UBIT) and reported on Form 990-T.
Because ASU 2023-09 applies to any entity subject to income taxes, a nonprofit with unrelated business income can fall within its scope for the portion of activity tied to UBIT. This includes rate reconciliation and income taxes paid disclosures connected to that unrelated business activity.
Nonprofit leaders sometimes assume income tax disclosure standards don’t apply to their organization at all. That’s often correct for exempt activities, but any unrelated business income brings its own reporting considerations under this standard.
How Can Businesses Prepare for ASU 2023-09?
A short internal review now may help ease the year-end timeline later. Consider gathering the following ahead of year-end:
- Historical income tax payments broken out by jurisdiction.
- Current and historical rate reconciliation data along with supporting documentation.
- Documentation supporting tax adjustments across each category.
- UBIT calculations and supporting documentation for nonprofits with unrelated business income.
- A clear picture of how tax data moves between your accounting and tax teams, and who is responsible for assembling each disclosure.
Many organizations find that the data they need already exists; it just isn’t organized in a format that supports these disclosure requirements. Addressing that gap early tends to make the year-end close more manageable.
What Questions Should You Ask Your CPA About ASU 2023-09?
- Does ASU 2023-09 change what our rate reconciliation table needs to include?
- Do we have any gaps in how we track income taxes paid by jurisdiction?
- How should our year-end timeline change to accommodate these disclosures?
- Are there other accounting or tax law updates that could affect our reporting alongside this one?
- For nonprofits, how does unrelated business income affect our disclosure requirements?
How Does ASU 2023-09 Relate to Other Accounting Changes?
These disclosure rules sit alongside several other active accounting and tax developments that teams may need to track at the same time. A few are worth keeping on your radar.
- The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, made a number of changes to the U.S. tax code, including provisions affecting bonus depreciation, research cost treatment, and international tax rules. Because these changes can affect the same rate reconciliation and cash tax figures that ASU 2023-09 requires companies to disclose, many organizations are evaluating the two together as part of this year’s reporting.
- ASU 2024-01 clarifies how entities determine whether profits interest and similar awards should be accounted for under stock compensation guidance. This can affect closely held businesses and multi-entity organizations that use these ownership structures.
- SAS 149 changes the approach auditors take to group audits, including how components and component auditors are identified within a group of entities. This applies to organizations with multiple entities or subsidiaries included in a single audit.
Not every standard will apply to every organization, but reviewing them together, rather than one at a time, can help simplify your conversations about each one.
How Can a CPA Help With ASU 2023-09 Compliance?
Auditors, like our team at MBE CPAs, provide independent, objective assessments of financial statements to help you evaluate whether your reporting aligns with the updated guidance. We work alongside your team to review how ASU 2023-09 affects your organization, offering perspective on where your current disclosures may need adjustments to meet these requirements. Our team has followed this standard since it was first proposed and is available to support your preparation ahead of year-end.