The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2023-09 (the “Update”) to enhance the transparency and decision usefulness of income tax disclosures.  The amendments in this Update address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information.  This Update also includes certain other amendments to improve the effectiveness of income tax disclosures.

Effective Date

For public business entities, the Update is effective for annual periods beginning after December 15, 2024.  For all others, the Update is effective for annual periods beginning after December 15, 2025.  Early adoption is permitted, and the Update shall be applied on a prospective basis.  Retrospective application is permitted.

Rate Reconciliation

Public business entities must disclose a tabular reconciliation using both percentages and amounts, broken out into specific categories with certain reconciling items at or above 5% of the expected tax further broken out by nature and/or jurisdiction.

All other entities must provide qualitatively disclosure of the nature and effect of significant reconciling items by specific categories and individual jurisdictions.

Income Taxes Paid

Both public business entities and all other entities must disclose income taxes paid (net of refunds received), broken out between federal (national), state/local and foreign. Disclose the income taxes paid (net of refunds received) to an individual jurisdiction when 5% or more of the total income taxes paid (net of refunds received).

Other Disaggregated Disclosures

Both public business entities and all other entities must provide Income (or loss) from continuing operations before income taxes, broken out between domestic and foreign, and Income tax expense (or benefit) from continuing operations, broken out between federal (national), state/local and foreign.

Removed Disclosures

The Update removes disclosure requirements for all entities related to: reasonably possible significant changes in the total amount of unrecognized tax benefits within 12 months of the reporting date; and the cumulative amount of each type of temporary difference for which a deferred tax liability has not been recognized (due to the exception to recognizing deferred taxes related to subsidiaries and corporate joint ventures).

Detail of the Update can be found in the attached ASU 2023-09.

ASU 2023-09

The U.S. Supreme Court has granted certiorari for the case of Moore v. United States, in which the petitioner seeks to challenge the constitutionality of the Section 965 transition tax, commonly referred to as the "Toll Tax." The petitioner argues that the Toll Tax, enacted as part of the Tax Cuts and Jobs Act of 2017, violates the 16th Amendment by being a direct tax on unrealized income. Despite previous rejections of their case in lower courts, the Supreme Court's decision to hear it has raised significant questions about the potential impact on tax law.

The Section 965 transition tax required U.S. shareholders to pay a one-time tax on certain untaxed foreign earnings of specified foreign corporations, with the option to pay it in eight yearly installments. If the Supreme Court rules in favor of the petitioner and invalidates this tax, taxpayers might be eligible for refunds, but only if they filed protective refund claims before their applicable refund statute of limitations expired.

For many taxpayers who paid the Section 965 tax in full, their statute of limitations may have already closed, making it administratively impossible to seek refunds. However, taxpayers who elected to pay over eight years, filed late returns, or have open years due to audits may want to consider protective refund claims to keep their statute of limitations open in case the Supreme Court's ruling favors the plaintiffs. Despite lower courts generally upholding the tax's constitutionality, the potential ramifications of a Supreme Court decision in the opposite direction make this a noteworthy issue for taxpayers with open statute of limitations.

Affected taxpayers should consult with their tax advisors regarding the pros and cons and understand the legal ramifications before making protective refund claims.