Financial Statement Implications of The "One Big Beautiful Bill:" What CFOs Should Know

Key Takeaways

• The "One Big Beautiful Bill" Act has now been signed into law and will have financial statement implications for corporations as early as the third quarter.
• While much attention has been paid to the income tax implications of the bill, corporations need to consider the accounting impacts as well.
• New legislation must be accounted for in the period in which it is enacted and will require corporations to re-measure deferred tax assets (DTAs) and deferred tax liabilities (DTLs), as well as the Estimated Annual Effective Tax Rate.
• Changes to interest expense limitations under 163(j), research and development expense treatment under 174A, bonus depreciation, and international tax will impact 2025 financial statements.

The "One Big Beautiful Bill" Act (OBBBA), signed into law on July 4, 2025, introduces significant tax changes that require immediate attention from corporate financial executives. This alert examines the critical financial statement implications under ASC 740-10, "Income Taxes," focusing on provisions most likely to impact corporations, including interest expense limitations, research and development (R&D) expense treatment, bonus depreciation, and international tax reforms.

Accounting for Impacts of New Tax Legislation

Under ASC 740-10, the financial statement impacts of new tax legislation must be accounted for in the period that includes the enactment date. For U.S. federal tax purposes, the enactment date is the date the President signs the bill into law. Given the July 4, 2025, enactment, companies with a calendar fiscal year will recognize the effects in their third-quarter 2025 financial statements. However, given the differing effective dates for some provisions (some of them delayed until 2026), only some of the financial reporting implications discussed herein will affect 2025 financial statements.

ASC 740-10-45-15 explicitly states that the effect of a change in tax laws or rates on deferred tax assets and liabilities must be recognized in the period that includes the enactment date. This means that as of July 4, 2025, all deferred tax assets (DTAs) and deferred tax liabilities (DTLs) must be re-measured using the newly enacted tax rates and provisions expected to apply when the temporary differences reverse or carryforwards are realized.

The income tax effect of remeasuring deferred taxes due to a change in tax law is recognized as a discrete component of income tax expense (or benefit) from continuing operations in the period of enactment. The effects of law changes on deferred taxes must not be apportioned across interim periods through adjustments to the estimated annual effective tax rate. This discrete adjustment could result in a noticeable impact on the income statement in the third quarter of 2025.

Assessing Impacts of Law Changes on Valuation Allowances

The "more likely than not" (MLTN) threshold for realizing deferred tax assets is a critical area of reassessment. Changes in tax law, such as new limitations on deductions or changes in carryforward periods, can significantly alter the estimated future taxable income available to utilize DTAs.

Companies must diligently re-evaluate all sources of taxable income (e.g., reversals of taxable temporary differences, future taxable income exclusive of reversing temporary differences, and tax-planning strategies) in light of the new legislation to determine if existing valuation allowances need to be adjusted or if new ones are required. Conversely, previously unrecognized DTAs might become realizable. The OBBBA changes described below could have dramatic impacts on some companies’ valuation allowance assessments.

Recalculating the Estimated Annual Effective Tax Rate

Unlike changes to deferred taxes, any change to income taxes payable or refundable for the current year requires the estimated annual effective tax rate (EAETR) to be revised in the period that includes the enactment date. The impact of any such revision to the EAETR will be spread to the remaining quarters of the law change year.

OBBBA Impacts to Corporations

The OBBBA introduces several provisions that will require particular attention under ASC 740-10.

Interest Limitation Changes

Beginning in 2018, IRC Sec. 163(j) limited interest expense to 30% of Adjusted Taxable Income (ATI) plus any interest income. The Tax Cuts and Jobs Act (TCJA) originally calculated ATI based on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). However, for tax years beginning on or after January 1, 2022, ATI became based on EBIT. This EBIT based limitation was more restrictive for companies with significant depreciation or amortization. The OBBBA reverts the 30% ATI limitation back to an EBITDA basis and makes the change both permanent and retroactive to taxable years beginning on or after January 1, 2025.

The shift in the interest limitation calculation from an ATI based on EBIT to EBITDA could have significant ripple effects on a corporation’s tax accounting. For example:

• For many companies, the change to an EBITDA-based ATI generally provides a larger base, potentially increasing the amount of deductible interest compared to an EBIT-based calculation. This could reduce current-period disallowed interest and decrease taxable income.
• Prior disallowed interest expense carryforwards (which have an indefinite life) will now also be subject to the new 30% EBITDA limitation in future years. Companies must re-evaluate the realizability of deferred tax assets arising from these interest carryovers. This could lead to a change in valuation allowance assessments, as the ability to utilize these DTAs depends heavily on future taxable income as defined under the new rules.
• Interest limitations create an indefinite-lived DTA that could have significant impacts on companies with "naked credits." Naked credit DTLs typically arise from indefinite-lived assets (e.g., goodwill) where the DTL is not expected to reverse in a foreseeable future period or in a manner that creates future taxable income to absorb definite-lived DTAs. When assessing the need for a valuation allowance on indefinite-lived DTAs (such as interest carryforwards or net operating losses), special consideration needs to be made about how such "naked credits" are considered in supporting the realization of indefinite-lived DTAs. For more on this very complex area, see our article published in the Tax Adviser that addressed the implications of IRC Sec. 163(j) on valuation allowance assessments when there are indefinite-lived intangibles (i.e., naked credits) in the entity’s deferred inventory.

R&D Expense Treatment

The OBBBA provisions regarding R&D expense treatment could significantly alter companies' tax profiles. New IRC Sec. 174A permanently allows businesses to fully expense domestic research and development expenditures, retroactive to January 1, 2025. The bill also allows small businesses (those with average gross receipts in 2025 of under $31 million based on an average of the prior three years' gross receipts) to amend their returns to deduct R&D costs that were capitalized in tax years 2022–2024. Alternatively, all taxpayers, regardless of size, may elect to accelerate the remaining amortization of previously capitalized domestic R&D costs in tax year 2025, using a one- or two-year period instead of the remaining portion of the five-year schedule.

Since the bill will allow more immediate tax deductions for R&D, it could turn profitable companies into loss companies for tax purposes or significantly increase existing tax losses. This immediate shift would necessitate a robust re-evaluation of valuation allowances against deferred tax assets, particularly net operating loss (NOL) carryforwards.

Bonus Depreciation

Bonus depreciation is now permanently restored at 100% for qualifying property. This means businesses can immediately deduct the full cost of eligible “short-lived” investments, such as machinery, equipment, and certain improvements, in the year the asset is placed in service, rather than depreciating the cost over several years. The bill reverses the phase-down schedule created by the TCJA that had reduced bonus depreciation from 100% to 40% in 2025. Instead, it reinstates and makes permanent the ability for businesses to fully expense qualifying property acquired and placed in service after January 19, 2025.

Extending accelerated tax deductions relative to book depreciation can create taxable temporary differences and corresponding DTLs. These DTLs are also a source of future taxable income for valuation allowance purposes. Bonus depreciation can also create a taxable loss for some companies which were previously expected to be taxable, thus any new net operating loss DTA will need to be assessed for realizability.

Charitable Contributions

The corporate charitable contribution rules were changed so that they must now exceed a 1% floor. Charitable contributions are only deductible if they exceed 1% of the taxpayer’s taxable income. They also cannot exceed 10% of a taxpayer’s taxable income (this is the limit which previously applied). Any disallowed charitable contributions can be carried forward for up to five years. This change can impact valuation allowance analyses as new DTAs may be created.

International Tax Changes

Changes to GILTI (Net CFC Tested Income)

The OBBBA eliminates the Qualified Business Asset Investment (QBAI) component from the calculation of the Global Intangible Low-Taxed Income (GILTI), now renamed as Net CFC Tested Income (NCTI). Under the previous law, QBAI allowed U.S. multinationals to exclude a deemed return (10% of tangible assets) from GILTI, effectively taxing only the “supernormal” or intangible profits of foreign subsidiaries.

Without the QBAI exclusion, NCTI will apply to all tested income of controlled foreign corporations, not just income above a 10% return on tangible assets. This means both tangible and intangible returns will be subject to NCTI. Accordingly, companies with significant tangible assets abroad could see an increase in their taxable NCTI.

In addition to the above, the OBBBA reduces the IRC Sec. 250 deduction currently allowed to domestic corporations for NCTI from 50% to 40%. Reducing this deduction will increase the amount of NCTI subject to U.S. tax for domestic corporations. Finally, changes to the calculation of foreign tax credits related to NCTI were also included in the OBBBA and should be examined for possible impacts.

NCTI creates a permanent book/tax difference for the majority of companies that account for it as a period cost, which can therefore impact the effective tax rate for these companies. Companies who have elected to account for NCTI as part of the deferred taxes will need to consider the impacts of these changes as part of their deferred tax remeasurement. These new rules are effective for years beginning on or after January 1, 2026. Thus, companies’ 2025 tax provisions should not be impacted by the changes to GILTI/NCTI.

Changes to FDII (FDDEI)

The calculation will no longer include the 10% deemed tangible income return on Qualified Business Asset Investment (QBAI). This means the FDII deduction will now be based on all foreign-derived deduction eligible income (FDDEI), rather than only the portion exceeding a return on tangible assets. However, the IRC Sec. 250 deduction for FDDEI is reduced from 37.5% to 33.34%, which would reduce the potential tax benefit from FDDEI.

There are contrary effects between the deduction percentage reduction (which increases a corporation’s effective tax rate) and the elimination of QBAI (which decreases the effective tax rate for many taxpayers).  Therefore, companies will need to closely examine the impact of the law changes to FDDEI to determine whether there is a net increase or net decrease to their effective tax rate. Like NCTI, FDDEI is also effective for years beginning on or after January 1, 2026, and impacts will create permanent differences between book and taxable income.

State Tax Impacts

Companies should always consider the state tax impacts of any transaction or federal law change. The threshold question is whether the states where a company files will conform to the new federal tax law changes. Several states do not follow the federal bonus depreciation, interest limitation, or R&D expensing rules. FDDEI and NCTI could also have different treatments in various states.

Conclusion

The "One Big Beautiful Bill" Act represents transformative tax legislation requiring an immediate and comprehensive response from corporate tax departments. The July 4, 2025, enactment date creates Q3 2025 reporting obligations that demand swift action. Companies should engage their tax advisors promptly to ensure compliant and optimized implementation of these significant changes.

The interplay between various provisions—particularly regarding valuation allowances, effective tax rates, and international taxation—requires sophisticated analysis and careful documentation. Early engagement with tax advisors and auditors will be critical to navigating these complex requirements successfully. If you have questions about how the OBBBA will impact your organization, contact us below.