Understanding the New FASB Tax Disclosure Requirements

The world of financial reporting is witnessing significant changes, with the Financial Accounting Standards Board (FASB) recently deciding to mandate companies to provide greater transparency about their taxes. This change is a response to investor and analyst feedback, emphasizing that current tax disclosures lack adequate clarity on the tax stance of companies functioning across multiple jurisdictions.

When Do Companies Implement Changes?

Understanding the timing of recent changes in tax reporting can help companies prepare for the future. Here’s a breakdown of when companies need to plan for these changes:

• Public Business Entities: Their 10-K annual reports will include additional tax-related information beginning in 2025, and interim reporting will begin in the first quarter of 2026.
• Private Enterprises: These businesses will start incorporating these changes in their annual reports from 2026 and in interim reports in 2027.

Standardizing Tax Reporting

There’s an underlying need to reconcile a company’s statutory tax rate with its effective tax rate. This new guidance brings in a dimension of standardization for public companies. The overarching aim is to foster more granular disclosure by prescribing specific categories, ensuring a consistent tax reporting framework across businesses. The specific categories for rate reconciliations are only required for public companies, but nonpublic companies may likely follow those same categories.  While the groundwork relies on existing reporting structures, the upcoming standards will refine the process, enabling clarity and uniformity from 2025.

Additionally, companies’ annual financial reports must disclose the year-to-date income tax paid, after deducting any refunds, to state, federal, and international tax authorities. Under this new disclosure requirement, all companies (public and nonpublic) are required to specify tax payments to individual jurisdictions that account for 5% or more of the total tax paid (net of refunds).

While some businesses might initially grapple with these changes, the intent is to create a balance that meets both investors’ requirements and corporate feasibility.

Use a Nexus Study to Ensure Compliance

Given these recent changes, companies must avoid potential scrutiny by ensuring compliance across jurisdictions. With these new financial statement disclosures, state auditors can easily review a company’s financials to ascertain where taxes are being paid, noting that if their state isn’t reflected on that list, it could potentially trigger an audit.

A recommended approach to remedy this exposure across jurisdictions is for businesses to liaise with their tax advisor to undertake a nexus study, ensuring that they file appropriately in all necessary jurisdictions. A nexus study is an assessment conducted to determine a business’s tax liability in various jurisdictions, primarily focusing on where the company has a significant presence or connection, often referred to as “nexus.” This study helps businesses understand where they are obligated to collect sales tax or owe income taxes based on their operations and presence in specific states or localities.

This new directive by FASB signals an evolution in tax reporting standards. Businesses, especially those operating internationally or across multiple states, must familiarize themselves with these guidelines to ensure compliance, continuity, and transparency. If these changes seem daunting or you require a deeper understanding, contact your CRI tax advisor. We’re here to demystify these complexities, offering guidance for clear, transparent, and informed decision-making.