Navigating Q4 2024: Essential Income Tax Accounting Insights

As the 2024 financial reporting season approaches, it is essential for organizations to evaluate developments that could affect income tax accounting under ASC 740 and IAS 12. This year-end update highlights key developments from the second half of the year, including legislative changes, regulatory updates and other noteworthy events affecting the financial reporting of income taxes. While not exhaustive, this summary is designed to provide actionable insights, enabling you to reflect these changes appropriately and with confidence in your financial reporting.

Read on for an analysis of critical updates, practical considerations and strategic guidance to support your year-end close.

UNITED STATES

Legislative Environment

With the new U.S. government taking office in January 2025, all eyes are on Capitol Hill, with tax policy expected to be a key area of focus. Here are some potential areas to monitor:

1. Reduction in Corporate Tax Rate: A reduction in the corporate tax rate would require companies to remeasure their deferred tax assets and liabilities at the new tax rate. This revaluation could result in a one-time adjustment to tax expense in the period of enactment, impacting the effective tax rate and net income.
2. Immediate Expensing of R&D Costs: Allowing immediate expensing for certain R&D costs would accelerate the recognition of tax benefits. Companies may need to reduce their deferred tax assets and current taxes related to capitalized R&D expenditures through the enactment date.
3. Bonus Depreciation: The reinstatement of 100 percent bonus depreciation for certain property would allow companies to immediately expense the cost of qualifying assets. This could lead to a significant reduction in taxable income in the year of acquisition, affecting both current and deferred tax calculations.
4. Interest Expense Deduction Limitation: Changing the limit on the deduction for business interest expense to 30 percent of EBITDA instead of EBIT could increase the amount of interest expense deductible for tax purposes. Companies would need to reassess their deferred tax assets related to interest expense, potentially impacting their current tax position as well.
5. Reduced Enforcement Threat: Taxpayer-favorable changes in enforcement and interpretation of tax laws could affect the assessment and disclosure of uncertain tax positions. Companies may need to decrease reserves or adjust existing ones.

A&M Tax Accounting Services (TAS) Says: Changes in tax law should be reported in the period of enactment. So while not impactful at year-end for 2024 calendar year filers, potential tax law changes should be monitored closely as they can significantly affect how companies recognize and measure their income tax positions under ASC 740 throughout the coming year. If the corporate tax rate changes, companies will need to revalue their deferred tax assets (DTAs) and deferred tax liabilities (DTLs) accordingly in the period in which the change is enacted (i.e., signed into law by the president). In the meantime, with current provisions remaining in place many companies are likely to have significant DTAs related to certain of these items and will need to consider their impact on their valuation allowance assessments. Scheduling of these items can be complex and subject to scrutiny by auditors.

For additional A&M Tax insights on potential tax reform, check out our National Tax Office article, “Republican Tax Reform Part Deux: Tax Cuts and Global Agreements.”[1]

U.S. Federal

New Regulations Under Section 987
On December 10, 2024, the Treasury Department and the Internal Revenue Service (IRS) issued new regulations regarding the application of Section 987 of the Internal Revenue Code. Section 987 provides rules for translating profits and losses of a foreign branch or disregarded entity into U.S. dollars or the functional currency of the owner.

Section 987(3) provides that if a branch or disregarded entity uses a functional currency that is different from its owner, the owner must recognize ordinary gain or loss when there is a remittance of profits to the owner of the branch or disregarded entity. Although Section 987(3) was enacted in 1986, the government has struggled to provide administrable and fair regulations on its application.

Although the new rules can be quite complex and burdensome, they allow taxpayers to make specific elections that reduce the burden. Many taxpayers are expected to make a “current rate election,” which allows them to translate all balance sheet items at the spot rate instead of historic rates, which is similar to the approach generally used for GAAP reporting purposes. Generally, the owner of the branch or disregarded entity will recognize foreign currency gain or loss with respect to remittances received. However, if a current rate election is in effect, any loss will generally be suspended. This suspended loss can be used to offset Section 987 gains in past or future taxable years. Any unused suspended Section 987 loss can be carried forward indefinitely.

Taxpayers can also make an annual recognition election to take into account Section 987 gain or loss each year. With this election, taxpayers can avoid both determining the amount of annual remittances and the rules regarding suspension of losses.

The Section 987 regulations generally apply to taxable years beginning after December 31, 2024, (that is, post-2024 taxable years). For branches and disregarded entities that existed in prior taxable years, a pretransition translation gain or loss will generally need to be computed. For taxpayers that did not apply an “eligible pretransition method,” the computation will entail an analysis for all taxable years beginning after September 7, 2006, and ending before the transition date. Taxpayers that have used the GAAP approach or that did not apply any Section 987 approach in the past will generally need to prepare this burdensome analysis.

A&M TAS Says: While the rules generally apply to taxable years beginning after December 31, 2024, (i.e., calendar year 2025 and later), the final regulations represent a change in law during the period ended December 31, 2024. Accordingly, the impacts, if any, must be reflected in 2024 financial statements. Careful consideration should be given to the timing and nature of Section 987 gains and losses on deferred tax assets and liabilities and current tax expense, taking into account the outside basis rules and exceptions provided in ASC 740-30.
For additional A&M Tax insights on potential tax reform, check out our National Tax Office article, “Navigating Final Rules on Foreign Currency Translation Gains and Losses.”[2]

Inflation Reduction Act
Final regulations regarding the transferability and direct payment of energy tax credits under the Inflation Reduction Act of 2022 (IRA) were released in 2024. Companies engaging in transactions to purchase or sell such credits will need to consider the financial accounting implications, which depend on a variety of factors including whether the credits are also eligible for direct payment and the kind of credit in question, as different accounting methods and policies may be applicable. Companies that generate credits for their own use are likely to continue accounting for them as they have in the past but should reevaluate this position considering the new guidance.

Later in 2024, the Treasury Department and the IRS released final regulations regarding the Section 48 energy investment tax credit (ITC), including the expanded definition of energy property eligible for the credit under the IRA. Energy property includes, for example, fiber-optic solar energy, electromatic glass properties, geothermal energy, qualified microturbine property, energy storage technology, microgrid controllers and “other property included in Section 48” (to accommodate future legislative changes). Taxpayers must generally begin construction before January 1, 2025, to be eligible for the ITC credit. Beginning in 2025, the ITC and production tax credit (PTC) are replaced by Sections 48E and 45Y, respectively, which will be available for projects beginning construction at least through 2033.

A&M TAS Says: Determining the appropriate financial accounting methods for energy tax credits requires careful examination of the specific facts of projects and credits pursued by taxpayers. The impact of direct payment and transferable credits should be analyzed to determine the proper GAAP treatment (e.g., tax expense vs. above-the-line). It remains crucial for taxpayers to explore and model their options for monetizing the credits and ensure compliance with various reporting and administrative requirements.

Accounting and Reporting

ASU 2023-09
In December 2023, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which seeks to enhance income tax disclosures in financial statements. As discussed in our previous publication on this topic, “FASB Issues Income Tax Disclosure Standard,”[3] the ASU provides greater transparency into entities’ global operations and provides users with crucial information that help investors.

Most significantly, the update introduces new quantitative and qualitative disclosure requirements. Reconciliations of effective tax rates will be required to report both percentages and reporting currency amounts for eight specific categories. Furthermore, some reconciling items would be required to be broken out to the extent the impact is greater than or equal to 5 percent of the amount computed by multiplying income (or loss) by the applicable statutory federal income tax rate. For entities parented in the U.S., this amount is effectively any item with an effect of 1.05 percent (21 percent U.S. federal corporate tax rate x 5 percent) or greater.

A&M TAS Says: Companies should start evaluating their reporting processes to ensure that proper systems are in place to gather the required information in preparation for the first applicable reporting year. Additionally, companies must decide whether to early-adopt the new standard or whether to provide for the optional retroactive application of the rules. While private companies have more runway for adoption, public companies will be required to adopt the new standard for reporting periods beginning after December 15, 2024.

State

Legislation Enacted in the Fourth Quarter
During the fourth quarter of 2024, certain states implemented legislative changes impacting corporate income taxes. Key updates include:

Louisiana: Corporate Income Tax Reform: On December 4, 2024, Governor Jeff Landry signed a law establishing a flat corporate income tax rate of 5.5 percent, replacing the previous graduated rates of 3.5 percent to 7.5 percent. This change, effective for tax periods starting on or after January 1, 2025, also introduces a $20,000 standard deduction from corporate taxable income. Additionally, the corporate franchise tax will be repealed for tax years beginning on or after January 1, 2026.

In addition to corporate tax changes, the legislation caps the available funding for the research and development credit at $12 million for each fiscal year beginning July 1, 2025, and allowing credit claims on a first-come, first-served basis.

Massachusetts: Apportionment Formula Adjustment: On December 4, 2024, Governor Maura Healey signed Bill House No. 5077, which changes the state’s apportionment formula for corporate income tax. Massachusetts will move to a single sales factor apportionment, replacing the previous three-factor, double-weighted sales apportionment, effective for tax years beginning on or after January 1, 2025.

A&M TAS Says: Companies should carefully assess how recently enacted state tax law changes, even if not yet effective, could impact their deferred tax assets and liabilities. Under ASC 740, these changes must be accounted for in the period of enactment, requiring a remeasurement of deferred balances to reflect the new tax provisions.

Legislation Effective in 2024
Tax Rates: The current trend in corporate income taxation is focused on expanding the tax base while reducing tax rates. Several jurisdictions have implemented reductions in their corporate income tax rates for tax years beginning on or after January 1, 2024. Arkansas reduced its top marginal tax rate from 5.1 percent to 4.3 percent. In Colorado, the tax rate decreased from 4.4 percent to 4.25 percent, with potential future reductions contingent on surplus tax revenue exceeding $300 million. Georgia lowered its tax rate from 5.75 percent to 5.39 percent and plans to reduce the rate annually by 0.1 percent starting January 1, 2025, until it reaches 4.99 percent. Iowa’s top marginal tax rate was cut from 8.4 percent to 7.1 percent. Idaho reduced its tax rate from 5.8 percent to 5.695 percent, and Indiana’s current rate of 3.05 percent will decrease to 3.0 percent on January 1, 2025.

Additionally, several other states have recently adjusted their corporate income tax rates as part of ongoing tax reforms. Kansas reduced its tax rate from 4 percent to 3.5 percent, while maintaining a 3 percent surtax on income over $50,000. Nebraska decreased its top marginal tax rate from 7.25 percent to 5.84 percent on income over $100,000 and is progressing toward a flat tax rate of 3.99 percent by 2027. New Jersey eliminated its 2.5 percent surtax for the 2024 tax year but introduced a 2.5 percent Corporate Transit Fee for state-allocated income exceeding $10 million. North Carolina continues to reduce its corporate tax rate from 2.5 percent to 2.25 percent starting January 1, 2025, as part of a phased reduction leading to a complete phaseout by 2030. Pennsylvania’s tax rate dropped from 8.99 percent to 8.49 percent, with further reductions scheduled to reach 4.99 percent by 2031. Lastly, Utah decreased its tax rate from 4.65 percent to 4.55 percent.

Tennessee Net Operating Losses: In Letter Ruling #24-09 (November 5, 2024), the Tennessee Department of Revenue (TN DOR) addressed a taxpayer’s ability to apply Tennessee Net Operating Losses (NOLs) and tax credits against future franchise and excise tax liabilities following an IRC Section 368(a)(1)(F) reorganization. The TN DOR clarified that typically, after a merger or similar transaction, the successor entity cannot use the NOLs and tax credits of the predecessor. However, an exception exists under the Tennessee Carryover Exception, which allows these tax benefits to be transferred if the predecessor merges into a successor entity with no prior financial activity (i.e., a shell company). In this case, since the predecessor merged into a shell company, the TN DOR concluded that the Tennessee Carryover Exception applies, permitting the successor to utilize the NOLs and tax credits.

A&M TAS Says: When state tax legislation becomes effective within a year, companies must reflect the impact on their tax provision  in the period in which it becomes effective. This requires adjusting the tax provision to account for the new rates or rules for taxable income generated post-effective date. Companies should ensure that their systems and processes capture these changes promptly and that financial statement disclosures clearly explain the impact on current period tax expense and overall tax positions.

Developments to Watch
By January 31, 2025, all states, with the exception of West Virginia, Nevada, Oklahoma, Alabama, Florida and Louisiana, will have commenced their regular legislative sessions. Furthermore, all states, except for New Jersey and Virginia, adhere to an “even/odd” biennium schedule. Consequently, several states have already initiated prefiling for the 2025 sessions, potentially impacting the financial interests of certain corporate taxpayers.

New York Proposed Bill: New York has issued a legislative proposal to nearly cut in half corporate taxpayers’ available GILTI (Global Intangible Low-Taxed Income) exemptions, and at the same time almost double the top corporate franchise tax rate from 7.25 percent to 14 percent. Senate Bill 953 (SB953), prefiled in the state senate on January 8, 2025, has the potential to significantly increase New York franchise tax exposure for corporations doing business in the state, particularly those with substantial taxable income and sizeable GILTI inclusions.

Virginia Tax Changes: Virginia Governor Glenn Youngkin’s amendments to the biennial budget announced on December 18, 2024, includes a shift to market-based sourcing for corporate income tax apportionment. This change would allocate income from services to the location where customers receive the benefit, rather than where the service is performed.

California Proposed Changes to Financial Institutions: In the draft budget plan for fiscal year 2025–2026, released on January 10, 2025, California Governor Gavin Newsom proposed aligning financial institutions with most other corporate taxpayers in terms of apportioning multistate income. Currently, banks and “financial corporations” use a three-factor apportionment formula based on property, payroll and sales. For California, a financial corporation is defined as one that primarily deals in money or capital, competing significantly with national banks, excluding corporations whose main business is leasing tangible personal property (18 Cal. Code Regs. § 23183(a)). The governor’s proposal aims to replace this three-factor formula with the single sales factor formula used by most other multistate corporations.

A&M TAS Says: For anticipated tax law changes that are neither yet enacted nor effective, companies should monitor developments closely but refrain from reflecting any impact in their current ASC 740 calculations. Proactive scenario planning and open communication with stakeholders can help ensure readiness for potential adjustments while maintaining compliance with reporting standards.

GLOBAL

Pillar Two

Starting in 2024, certain large multinational enterprises can be subject to foreign taxes if they are not subject to a minimum tax of at least 15 percent in the United States on their U.S. book profits. This tax is referred to by many as Pillar Two. The introduction of Pillar Two across the world continued to gather pace through 2024, with more jurisdictions either implementing Pillar Two legislation or announcing their intention to do so. However, significant jurisdictions such as China and the U.S. have yet to announce their intention to implement Pillar Two legislation.

Pillar Two taxes will generally apply only if the annual consolidated revenue of a multinational enterprise equals or exceeds €750 million in at least two of the four preceding fiscal years. There is a de minimis exemption that could apply if (i) revenue in the U.S. is less than €10 million and (ii) U.S. profits or losses are less than €1 million. The de minimis rule amounts are determined based on the average for the current and two preceding fiscal years.

A detailed analysis of the Pillar Two rules as they relate to U.S. taxation can be found at “2024 Limitations on Corporate Tax Attributes: An Analysis of Section 382 And Related Provisions.”[4]

Disclosures Required for Pillar Two Top-Up Taxes:
Where the Pillar Two tax law has been enacted but before the law is effective:

• Companies must disclose information that is known or can be reasonably estimated to help users of financial statements understand the exposure to Pillar Two top-up taxes. This may include qualitative information (e.g., where the top-up tax is triggered and where it will be paid) and quantitative information (e.g., the proportion of profits that may be taxed under Pillar Two and how this impacts the effective tax rate).

Once the Pillar Two tax law is effective:

• Only the current tax expense for Pillar Two top-up taxes needs to be disclosed.

If a jurisdiction has announced its intention to implement Pillar Two rules:

• Companies may consider disclosing the potential exposure.

U.S. GAAP: The taxes imposed by Pillar Two are considered alternative minimum taxes under ASC 740 and thus reporting entities do not recognize DTAs or DTLs related to these taxes. Any applicable alternative minimum taxes should be estimated as a part of interim and annual financial reporting and included with income tax footnote disclosures. Several policy choices may need to be made in areas such as interim reporting and valuation allowances. Once chosen, these methods should be consistently applied prospectively.

IAS Reporting Relief: In 2023, the International Accounting Standards Board (IASB) announced a mandatory relief from accounting for any deferred tax that arises from the Pillar Two rules. Under the relief, companies reporting under IAS must disclose that they have applied the relief, which effectively exempts them from providing for and disclosing deferred tax related to Pillar Two top-up taxes. The relief continues to apply until the IASB either removes it or decides to make it permanent.

A&M TAS Says: Given the complexity of the Pillar Two rules, management should consult with tax specialists to evaluate their impact and keep track of the rules’ implementation in the jurisdictions where their group operates.  As the rules are implemented, it will be necessary to ensure that the appropriate level of information can be gathered to enable accurate assessment of the impact, both for tax accounting and tax compliance purposes. Management should assess how the use of technology could relieve some of the reporting and compliance burden imposed by Pillar Two.

Australia

BEPS Pillar Two
Australia’s primary legislation for BEPS Pillar Two received royal assent on December 10, 2024. Subsequently, on December 23, 2024, the treasurer registered the legislative instrument containing the substantive rules.

As a result, the BEPS Pillar Two legislation is now considered “substantively enacted” for the purposes of reporting for the December 31, 2024, year end.

The legislation introduces top-up taxes, including the Australian Domestic Minimum Tax (DMT) and the Australian Income Inclusion Rule (IIR) tax, effective for income years beginning on or after January 1, 2024. Additionally, the Australian Undertaxed Profits Rule (UTPR) tax will apply to income years commencing on or after January 1, 2025.

A&M TAS Says: While many multinational enterprises intend to apply the Transitional CbCr Report Safe Harbor in the first three year of the rules coming into effect, a significant amount of work is still required for financial reporting purposes. Specifically, multinational enterprises will need to prepare the requisite evidence and support prior to relying on the safe harbor and include disclosures in the financial report.

Thin Capitalization
On March 27, 2024, the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 was passed, bringing significant changes to Australia’s thin capitalization rules. The key updates introduced by this bill include:

1. New Thin Capitalization Regime:
   The legislation establishes a new thin capitalization framework for most taxpayers (excluding authorized deposit-taking institutions (ADI) or entities that meet the narrowed definition of “financial entities”), applicable from income years beginning on or after July 1, 2023, (with certain provisions, such as the debt deduction creation rules, effective from July 1, 2024). The changes consolidate the previous inward and outward investor categories into a new term, “general class investors,” which includes foreign-controlled Australian entities, foreign entities with Australian permanent establishments and Australian controllers of foreign entities. Importantly, the definition of “debt deduction” has expanded beyond “debt interest” costs to include interest-like costs and costs that are economically equivalent to interest, and the cost is not required to be in relation to a “debt interest.”
2. Interest Limitation Rules:
   A new set of interest limitation rules applies to general class investors, with three key tests:

• Fixed Ratio Test: Limits net debt deductions to 30 percent of an entity’s tax EBITDA, allowing the carry-forward of disallowed deductions for up to 15 years.
• Group Ratio Test: Allows deductions based on the worldwide group’s interest expense as a proportion of earnings, with no carry-forward of disallowed deductions.
• Third-Party Debt Test: Limits deductions to genuine third-party debt and excludes related-party debt, with no carry-forward of disallowed deductions.
  Please refer to our in-depth guide on this test, “Australia’s new thin capitalisation guidance – some roses, but many more thorns.”[5]

3. Debt Deduction Creation Rules:
   New rules were introduced to disallow debt deductions arising from certain related-party debt arrangements that lack commercial justification. These rules apply to both new and existing arrangements and are designed to prevent tax avoidance. They include:

• Type 1: Related-party debt used to acquire capital assets or obligations from an associate.
• Type 2: Debt used to fund distributions or payments like dividends, capital returns and royalties to associates.

These rules do not apply to ADIs or qualifying securitization entities.

4. Amendments to Division 815 Transfer Pricing Rules:
   The bill also amends the Division 815 transfer pricing rules, removing the exclusion of arm’s-length conditions concerning the quantum of debt interest, which previously applied under the existing thin capitalization rules. Under the new rules, before applying the earnings-based thin capitalization tests (i.e., the fixed ratio or group ratio tests), the arm’s-length conditions must first be assessed from a transfer pricing perspective. As a result, the fixed ratio and group ratio tests do not automatically allow net debt deductions up to the calculated threshold. Instead, these tests now represent a ceiling, not a safe harbor.

A&M TAS Says: For many entities, this will be the first year applying the new thin capitalization rules. In the event that some or all of the deductions are denied under these provisions, careful attention should be given to the potential recognition of a deferred tax asset for these amounts (noting that denied deductions may be carried forward for up to 15 years under the Fixed Ratio Test).

About A&M’s Tax Accounting Services (TAS)

A&M’s TAS practice specializes in providing comprehensive income tax accounting solutions under U.S. (GAAP – ASC 740) and international (IFRS – IAS 12) standards. Our team combines deep technical expertise with innovative tools to deliver efficient, tailored solutions to meet client needs.

[1] Kevin M. Jacobs, Emily L. Foster, “Republican Tax Reform Part Deux: Tax Cuts and Global Agreements,” Alvarez & Marsal, November 19, 2024, https://www.alvarezandmarsal.com/insights/republican-tax-reform-part-deux-tax-cuts-and-global-agreements

[2] Kevin M. Jacobs et al., “Navigating Final Rules on Foreign Currency Translation Gains and Losses,” Alvarez & Marsal, January 6, 2025, https://www.alvarezandmarsal.com/insights/navigating-final-rules-foreign-currency-translation-gains-and-losses

[3] Michael Noreman, et al., “FASB Issues Income Tax Disclosure Standard,” Alvarez & Marsal, December 21, 2023, https://www.alvarezandmarsal.com/insights/fasb-issues-
income-tax-disclosure-standard

[4] Lee G. Zimet “2024 Limitations on Corporate Tax Attributes: An Analysis of Section 382 and Related Provisions,” Alvarez & Marsal, May 27, 2024, https://www.alvarezandmarsal.com/sites/default/files/2024-07/445428-38969_TAX-US_Section%20382%20Paper%202024%20Edition.pdf

[5] Shahzeb Panhwar et al., “Australia’s new thin capitalisation guidance – Some roses, but many more thorns,” Alvarez & Marsal, December 6, 2024, https://www.alvarezandmarsal.com/insights/australias-new-thin-capitalisation-guidance-some-roses-many-more-thorns