ASC 740: Q2 2025 provision considerations

ARTICLE | July 09, 2025

Authored by RSM US LLP

Executive summary: Q2 2025 income tax provision considerations

The following article highlights key income tax provision considerations, current issues in corporate tax and updates for companies preparing income tax provisions for the second quarter of 2025. Read more about tax law changes in the U.S. and around the globe, the impact of tariffs, updates from the Financial Accounting Standards Board and other considerations for the second quarter of 2025 below.

Income tax provision considerations for Q2 2025

On Friday, July 4, 2025, the President signed into law the tax reform package that is commonly referred to as the One Big Beautiful Bill Act (OBBBA). The OBBBA extends or makes permanent several of the tax law changes enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA). Importantly, given the date of enactment, the effects of tax reform will not be reflected in interim or annual provisions for the period ended June 30, 2025. However, companies should consider disclosures related to the enactment of the OBBBA in any financial statements issued after July 4, 2025, discussing the key changes and the company’s evaluation of those changes. The discussion herein highlights some of the key changes under the OBBBA. A more in-depth discussion of the tax law changes can be found in the RSM US alert, Congress passes tax bill addressing TCJA extensions and business tax relief. Stay tuned for additional analysis around the financial statement impacts of the OBBBA.

Tax reform highlights

Three key items (the ‘Big 3’) on the wish list of most businesses made it into the final version of the OBBBA and were made permanent, including:

• Restoring the ability for companies to immediately expense domestic research and development costs under section 174. Additionally, companies have an ability to accelerate remaining unamortized domestic section 174 costs for amounts incurred from 2022 to 2025.
• Restoring the definition of adjusted taxable income from earnings before interest and taxes (EBIT) to an earnings before interest, taxes, depreciation, and amortization (EBITDA) type calculation for companies’ calculation of the interest expense limitation under section 163(j).
• Restoring 100% ‘bonus depreciation’ on qualified assets placed in service beginning Jan. 20, 2025 and expanding the types of assets that qualify for bonus depreciation to include manufacturing buildings, but only for buildings placed in service before Jan. 1, 2031.

In addition to addressing the Big 3, the OBBBA introduces a 1% floor on charitable contributions, meaning that corporations will only be allowed a deduction for charitable contributions exceeding 1% of taxable income. The 10% limitation on charitable contributions is retained. Certain businesses will also now be exempt from the disallowance of various expenses related to on-premises employer-provided meals that were enacted as part of the TCJA. There were also a number of modifications made to energy credits that are further outlined in the alert above.

There are several other changes in the OBBBA that will impact multinational corporations for tax years beginning after Dec. 31, 2026. These changes include adjusting rates and modifying certain deductions related to Foreign Tax Credits (FTCs), Global Intangible Low-Taxed Income (GILTI), Foreign-Derived Intangible Income (FDII) and the Base Erosion and Anti-Abuse Tax (BEAT). Further explanation of these changes is included in the alert, International tax reform under the One Big Beautiful Bill Act.

While there were significant discussions about a change to the corporate tax rate, adding a reduced tax rate for domestic producers, or limiting the ability of corporations to deduct state and local taxes, these items did not make it into the OBBBA.

Corporate Alternative Minimum Tax (CAMT)

The IRS issued Notice 2025-27, which makes certain modifications to the simplified safe harbor test provided for determining applicable corporation status under the CAMT rules. Corporations that meet the safe harbor face a reduced compliance burden related to the CAMT. Under the general rules, domestic corporations with average adjusted financial statement income (AFSI) of $1 billion or more are applicable corporations. For U.S. corporations that are members of a foreign parented multinational group (FPMG), the threshold drops to $100 million for the U.S. group, if the FPMG exceeds the $1 billion. The revised simplified safe harbor in Notice 2025-27 provides that domestic corporations with average AFSI of $800 million and members of FPMGs with average AFSI of $80 million qualify for the simplified safe harbor and thus are not applicable corporations.

Updates from the Financial Accounting Standards Board (FASB)

The FASB issued two accounting standards updates (ASU) during the second quarter of 2025, including ASU 2025-03–Business Combinations (Topic 805) and Consolidation (Topic 810): Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity and ASU 2025-04–Compensation–Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Clarifications to Share-Based Consideration Payable to a Customer.

ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, released in December 2023, is now effective for calendar year public business entities (periods beginning after Dec. 15, 2024). The ASU focuses on income tax disclosures around effective tax rates and cash income taxes paid. The ASU is effective one year later for entities other than public business entities.

Now that the U.S. has also passed tax reform, companies will need to work through the effects of tax reform in combination with preparing to adopt the required disclosures under ASU 2023-09. Find additional information on the required disclosures in RSM’s whitepaper, ASU 2023-09-Expanded Income Tax Disclosure Requirements.

Read about how technology can help entities comply with the coming disclosure requirements in our article with Bloomberg: Technology Solutions for FASB ASU 2023-09 Compliance.

State tax

Read more about state and local tax law changes, including changes in tax rates and Internal Revenue Code conformity in our companion alert, State income tax law changes for the second quarter of 2025.

For more insight on how tax reform could impact state income taxes, read RSM’s alert, SALT considerations from the One Big Beautiful Bill Act.

International tax

Status of Pillar Two

As part of earlier versions of the One Big Beautiful Bill, Congress had proposed a retaliatory tax regime in section 899. On June 28, 2025, prior to finalizing the OBBBA, the G7 agreement was finalized among seven countries including the U.S., Canada, France, Germany, Italy, Japan and the U.K. Under the terms of the proposed agreement, U.S.-parented multinational groups would be exempt from the application of the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR), in recognition of existing U.S. minimum tax regimes such as the Global Intangible Low-Taxed Income (GILTI) and the Corporate Alternative Minimum Tax (CAMT). As a result, the U.S. agreed to fully withdraw its proposed section 899 provisions (retaliatory taxes used to combat ‘unfair foreign taxes’) from the OBBBA. In exchange, the G7 countries will support the U.S.’s position in negotiations with the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework.

While the G7 statement is a significant development, it does not alter the legal status of tax legislation currently enacted in any jurisdiction. Under U.S. generally accepted accounting principles (GAAP), Accounting Standards Codification (ASC) 740 requires that the effects of changes in tax laws or rates be recognized in the financial statements as of the date of enactment—that is, when all legislative steps necessary for a bill to become law have been completed. Accordingly, companies preparing financial statements under U.S. GAAP must continue to evaluate and reflect the financial reporting implications of Pillar Two legislation based on the laws as enacted in each applicable jurisdiction during the second quarter of 2025.

Australia

Although no material tax-related legislation was enacted in Australia during the second quarter of 2025, taxpayers should be aware of the following judicial development with implications for U.S. multinationals. In Charles Apartments Pty Limited v Commissioner of Taxation [2025] FCA 46, the court clarified that for an expense, interest in this case, to be deductible under Australian tax law, it must be directly connected to an income-producing activity. The court emphasized that the true substance of a transaction matters more than its label. In this scenario, the interest expense was generated from a loan ‘refinancing’ while the loan was used for restructuring within the group as opposed to being used to support income-producing activities. This decision tightens the rules around deductions, especially for intra-group financing.

As of July 1, 2025, interest paid to the Australian Taxation Office will no longer be deductible for income tax purposes, and remissions will not be assessable. This change may significantly affect taxpayers' tax debt management strategies, particularly since interest costs incurred with other financiers remain deductible for income tax purposes.

Separately, U.S. multinationals with a connection to or substantive presence in Australia should be aware that the federal government has announced a major economic roundtable scheduled for August 2025, with tax reform being a main agenda point.

Brazil

Provisional Measure No. 1,303/2025 published on June 11, 2025, introduced relevant changes to the taxation of financial investments, effective beginning January 2026. The capital gain tax on net gains from stock exchanges will have a new rate of 17.5% for general transactions and 20% for day trading, potentially affecting investments held by both individuals and corporations. There is also a provision for a new 5% withholding tax that will be applied to income from financial investments related to real estate and agribusiness, which were previously exempt.

Non-resident investors will face increased withholding tax rates, with those from low-tax jurisdictions subject to a 25% rate on income and gains, while those from other ‘regular’ jurisdictions will be taxed at 17.5%. These increases may affect cross-border investment decisions.

The Provisional Measure must be voted on by the National Congress and converted into law within 120 days to remain effective, otherwise it will expire.

Canada

Over the last quarter, Canada has been navigating a shifting relationship with the U.S. and changes in federal Canadian leadership. The new Canadian federal government has since proposed several tax changes, including cancelling plans to increase to the capital gains inclusion rate from 50% to 66.67%.

Canada has also imposed 25% tariffs on U.S. goods, including certain steel and aluminum products, non-Canada-U.S.-Mexico Agreement compliant vehicles and non-Canadian and non-Mexican content of Canada-U.S.-Mexico Agreement compliant vehicles. Remission programs are available to provide relief from the tariffs for goods that meet the programs’ criteria.

The trade landscape for U.S. multinationals continues to rapidly evolve in response to trade negotiations globally. Find relevant, up-to-date information from RSM teams that are monitoring tariffs and the impacts to businesses at our Supply Chain insights page.

India

The Central Board of Direct Taxes (CBDT), via Notification No. 38/2025, effective April 23, 2025, has specified that expenses incurred to settle proceedings related to non-compliance with the following laws shall not be allowed as a business deduction under section 37 of the Income-tax Act:

• Securities and Exchange Board of India (SEBI) Act, 1992.
• Securities Contracts (Regulation) Act, 1956.
• Depositories Act, 1996.
• Competition Act, 2002.

The CBDT also issued FAQs clarifying that any ‘expenditure’ incurred by a taxpayer for settlement of proceedings initiated in relation to non-compliance or defaults cannot be claimed as a deduction or allowance under the Act. The CBDT further states that Form 3CD has been amended to capture details pertaining to such expenses. This Amendment applies to assessment year 2025-26 and onward.

Italy

Employee bonuses must be taxed based on the vesting period

In Ruling No. 81, issued March 25, 2025, the Italian Tax Authorities clarified that cash bonuses related to cross-border employment, although considered deferred compensation, are taxable in Italy on a cash basis—that is, when the payment is received by the employee.

Foreign tax credit to be granted in proportion to the Italian taxable base

In accordance with the ruling response No. 101, issued April 15, 2025, the principle outlined in Article 165(10) of the TUIR (Italian Tax Code) applies. This principle states that when foreign income is partially taxed in Italy, the foreign tax credit that can be offset against Italian taxes must also be proportionally reduced. This applies to capital gains on investments that are taxable both abroad and in Italy (where they are taxed only on 5% of the total amount).

The location of an intangible asset affects how related royalties are taxed

In ruling No. 112 of April 17, 2025, the Italian tax authorities analyzed the taxation of royalties paid by a non-resident company to a non-resident taxpayer. According to the Italian Tax Authorities, the location of the relevant intangible asset plays a key role in determining the territoriality and tax treatment of the royalties. This is because, for such income, the territoriality rules are set out in Article 23(1)(f) of theTUIR, which considers income derived from activities conducted in Italy and from assets located in Italy as taxable in the hands of non-residents.

Implementation of the Directive on Administration Cooperation (DAC) 9 Directive

The new Directive 2025/872, known as ‘DAC 9,’ concerning the automatic exchange of information on supplementary tax filings (known as GloBE Information Returns (GIR)), has been published in the Official Gazette of the European Union. This Directive has been introduced by the Member States in response to the significant Pillar Two legislation.

The Directive establishes a standardized and centralized system for reporting tax information, referred to as the TTIR (Top-up Tax Information Return). This system enables a single group entity to submit the GIR filing, instead of requiring separate filings in each individual state.

By Dec. 31, 2025, Member States are required to adopt and publish the necessary laws, regulations and administrative provisions for the transposition of the Directive. The first filing under this system is scheduled for June 30, 2026.

Japan

Special Defense Corporate Tax to secure funding for national defense capabilities

To fundamentally strengthen Japan’s domestic defense capabilities and secure a stable funding base, the government has introduced a new 4% surtax on corporate income tax, tentatively called the “Special Defense Corporate Tax.” The principal features are as follows:

1. The tax applies to corporations liable for corporate income tax on their taxable income in each fiscal year.
2. Special Defense Corporate Tax Amount = {(Standard Corporate Tax Amount - JPY 5 million) × 4%} - Applicable Tax Credits
   1. Standard Corporate Tax Amount’ denotes the corporate income tax liability before application of any tax credits (e.g., general tax credits, foreign tax credits).
   2. For corporations filing on a consolidated basis, the JPY 5 million threshold is apportioned among each group member in proportion to its Standard Corporate Tax Amount.
   3. Applicable tax credits include the foreign tax credit, the deduction for foreign tax equivalents adjusted upon dividend distribution and deductions of the Special Defense Corporate Tax amount in cases of inflated filings due to fictitious accounting, among others.
3. The tax applies to fiscal years beginning on or after April 1, 2026.

Special provisions for reduced corporate income tax rates applicable to Small and Medium-sized Enterprises (SMEs)

The preferential 15% tax rate applicable to the first JPY 8 million of taxable income for SMEs was originally introduced as a time-limited measure under the economic stimulus package following the global financial crisis. In view of the current challenges—rising wage costs and persistent inflation—this regime has been revised and its application period extended by two years as follows:

1. For any fiscal year in which an SME’s taxable income exceeds JPY 1 billion, the rate applicable to the first JPY 8 million of income will be increased from 15% to 17%.
2. Corporations filing on a consolidated basis will no longer qualify for this reduced rate.

Revision of lease taxation following implementation of the New Lease Accounting Standards

In light of the ‘Accounting Standards for Lease Transactions’ and related pronouncements (the ‘New Lease Accounting Standards’) released on Sept. 13, 2024, the following amendments to Japan’s lease-related tax regime have been enacted and are effective for fiscal years beginning on or after April 1, 2025:

1. When a corporation enters an operating lease and incurs payment obligations under the lease contract, the portion of those obligations that is fixed as of a given date may be recognized as an expense (deductible in computing taxable income) in the fiscal year to which that date belongs.
   1. Operating lease’ refers to any lease other than a finance lease.
   2. Payments excluded from this treatment are (i) amounts treated as cost of goods sold, percentage-of-completion construction costs or similar production costs; (ii) expenditures that must be capitalized as acquisition costs of fixed assets; and (iii) expenditures capitalized as deferred assets.
2. To align tax treatment with the New Lease Accounting Standards, the ‘deferred-payment basis’ formerly permitted for lessors has been abolished. Therefore, lessors must generally recognize both revenue and related expenses in full at the time of the asset transfer.

Transitional measures:

1. Lease transfers executed before April 1, 2025, may continue—until the fiscal year beginning on or before March 31, 2027—to apply the old deferred-payment basis (subject to certain restrictions).
2. If a lessor elects, between April 1, 2025, and March 31, 2027, to discontinue use of the deferred-payment basis, any unrecognized (deferred) lease profit shall be amortized on a straight-line basis over five years.

Netherlands

In April 2025, key case law assessed Dutch anti-abuse measures within foreign taxpayer rules and the Dutch dividend withholding act. The Dutch Supreme Court ruled that these rules should be interpreted as an 'open norm,’ considering all facts and circumstances rather than considering the rules in a narrow technical sense. In this case, such a ruling benefited the taxpayer by preventing their situation from being classified as abuse.

On the other hand, this could imply that cases not initially subject to the anti-abuse rule of, for example, the Dutch dividend withholding tax (WHT) under the specific technical rules, might ultimately fall under the anti-abuse rule through the application of the 'open norm' approach.

U.S.-based taxpayers that have a Dutch subsidiary should consider whether dividend repatriation towards the U.S. shareholder would be impacted by this case law-based ‘open norm’ approach. The participation exemption status of subsidiaries held by the Dutch entity should also be evaluated, considering recent rulings by the European Court of Justice in the Lithuanian 'Nordcurrent' case.

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