Forthcoming income tax disclosure rules to take effect three years after issuance for private companies

FASB Chair Richard Jones may have assuaged narrow concerns held by private companies about coming income tax disclosure rules, stressing that requirements on domestic and international operations will simply highlight information that already goes into the computation of the income tax provisions.

The standard will be issued later this year but will take effect in 2026 for private companies that are calendar year-end filers – a year after public companies. The rules should not be overly challenging from the norm as they will not apply to immaterial items and companies with domestic and international operations are already making a determination of income that is attributable to domestic and international, according to Private Company Council (PCC) discussions on Sept. 12, 2023.

“We didn’t change the accounting for income taxes,” said Jones. “And I note that if it’s good enough for your provision – while I understand that people may want to sharpen the pencil – it should be good enough for the disclosure and there is an apportionment that’s going on there, so I would encourage people to take a look at that - there’s something they’re doing today to apportion that income otherwise I don’t know how they’re computing their tax provision and that’s really what we’re talking about,” he said. “I think we’ll have some wording around that that get those people comfortable, and I’d also note there’s different ways that people allocate that pre-tax income. In other words, if you add them up they don’t necessarily equal the total pre-tax income.”

His remarks were in response to a concern raised by a PCC member who said it would be challenging for some companies to figure out what the pre-tax income is between domestic and foreign under the coming provisions. The PCC is a panel that works with the FASB to develop rules for privately held companies.

“If they were basing it on a tax provision where they are determining taxable income by jurisdiction and figuring out foreign that’s one thing, but this is looking at from GAAP ‘what’s my pre-tax income,’” Jeremy Dillard, partner with SingerLewak LLP, said. “And I agree it’s an estimate and materiality comes into play here but I’m concerned about a lot of these entities the preparers and practitioners involved where they’re going to spend a lot of effort trying to figure out disaggregation,” he said.

“And I would just encourage them to go back to their tax provision calculation ‘cause they already had to identify their permanent differences to do their tax provision and they had to identify their temporary differences so if they have something that gives rise to that number all we’re talking about is a disclosure based on the number that’s computed,” Jones replied.

In August, the FASB voted to finalize proposed rules aimed at providing users of financial statements with more transparency about income taxes companies pay both in the U.S. and in foreign jurisdictions. The disclosures address the disaggregation of information in the rate reconciliation table and around income taxes paid.

Main disclosures for private companies

For private companies the rules will be written to “take effect for fiscal years beginning after Dec. 15, 2025, and interim periods within fiscal years beginning after Dec. 15, 2026.” Public companies will need to adopt a year earlier.

The guidance would be applied on a prospective basis but there is a retrospective option. Early adoption will be permitted.

The most important rate reconciliation disclosure for private companies is that they provide:

• the nature and effect of specific categories, reconciling items and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rate. A numerical reconciliation will not be required. Currently, private companies are required to disclose the nature of significant reconciling items but may omit a numerical reconciliation.

For income taxes paid, the most important disclosures will be for:

• the amount of income taxes paid that is net of refunds, disaggregated by federal, state and foreign;
• the amount of income taxes paid disaggregated by individual jurisdictions in which income taxes paid is equal to a greater than 5% of the total income taxes paid (net of refunds);
• income taxes paid disaggregated by federal, state and foreign and by individual jurisdiction on an annual basis only, as opposed to both annual and interim as was proposed.

Other requirements will be that all entities will need to disclose pre-tax income or loss, disaggregated between domestic and foreign; and income tax expense or benefit disaggregated by federal, state and foreign.

Generally operable

Generally, the disclosure rules will be operable and areas that are the most important for private companies – such as trying to determine taxes paid by jurisdiction – will be fairly straight forward, the discussions indicated.

Other PCC observations were the importance of making it clear that the 5% disclosure rules do not apply if the figure is immaterial; the lack of relevance of the guidance for pass through entities; and the potential for users of financial statements to read too much in disclosures around income tax expense which is an estimate between federal, state and foreign.

“I think anytime you get more disaggregated on an estimate it has the connotation that’s more precise when it’s probably not so,” PCC Chair Candace Wright said. “I just wonder if users are going to place more credibility in the disaggregated presentation than they really should because it’s still an estimate, so I wonder about that.”

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