So, What Does ASC 740 Mean for Your Organization?

After the One Big Beautiful Bill Act (OBBBA) was passed in 2025, organizations must address how changes to tax law affect their financial reporting.

ASC 740 is an accounting standard that specifically addresses accounting standards for income taxes under Generally Accepted Accounting Principles (GAAP). It requires companies to recognize and measure current and deferred tax effects of tax law in financial statements.

So, what does your business need to know about the OBBBA’s impact on ASC 740 and how it affects your organization's tax accounting practices? Let's dive in.

Key Tax Law Changes Under ASC 740

While this is not a comprehensive list of all the considerations you should have when determining the requirements of ASC 740, the following will summarize many of the most important tax law changes enacted by the OBBBA that organizations should be aware of (and account for) moving forward.

1. Research and Experimentation (R&E) Deductions

One of the biggest benefits that organizations can take advantage of from the OBBBA is the ability to deduct all domestic R&E expenditures. Additionally, organizations can retroactively deduct these expenses from previous years, provided that they occurred after December 31, 2024.

This could mean significant tax savings, as well as the ability to capitalize and amortize all domestic expenditures over 10 years. From an ASC 740 perspective, companies should evaluate their current tax expense and any deferred tax balances related to previously capitalized R&E costs.

2. 100% Bonus Depreciation for Qualifying Property

Another important outcome of the OBBBA is the permanent reinstatement of 100% bonus depreciation for qualifying property, allowing for a significant acceleration of tax deductions for eligible assets. To claim this tax benefit, the property must have been acquired after January 19, 2025 and before January 1, 2031. Property that qualifies for this tax benefit could include:

• Machinery and equipment used in production or manufacturing
• Office furniture and computer equipment
• Vehicles
• Water utility property

When considering ASC 740, organizations should evaluate any deferred tax changes and any differences between book depreciation and tax depreciation.

3. Changes to Business Interest Expense Limitations

The recent legislation has also modified the calculation for business interest expense limits. Beginning with the 2025 tax year, businesses are now able to add back amortization, depletion and depreciation to their income for the existing 30% deduction limit. Previously, businesses were only able to do this with interest income made after specific adjustments.

As a result, businesses who may face interest expense limitations may be able to deduct that interest in 2025. ASC 740 requires companies to determine if interest expense deductions previously limited are now eligible for deduction, and to assess the impact of deferred tax assets related to disallowed interest carryforwards 

4. Revisions to Executive Compensation Deductions

Updates to the tax code have also brought with it an expansion to what is considered executive compensation. Under the new law, payments to specified covered employees within a controlled group are now aggregated — and if the total amount exceeds $1 million, the amounts exceeding $1 million will be allocated proportionately to each member of the controlled group as a deduction limitation.

It is important to note that this specific change went into effect on December 21, 2025. When considering ASC 740, these changes could affect the calculation of current tax expense or required disclosures related to permanent differences.

5. Tiered Excise Taxes for Colleges and Universities

Finally, some changes to how excise taxes on some colleges and universities are handled have been made. Previously, a flat 1.4% excise tax was applied to private colleges and universities with student-adjusted endowment rates of a certain amount.

However; under the new tax law, that flat excise tax is being replaced with a tiered system that applies to private colleges and universities with 3,000 or more students. Under this new system, excise taxes can range anywhere from 1.4% to 8%, depending on the institution's student-adjustment endowment rate. The higher the rate, the higher the excise tax percentage.

In addition to this tiered system, student loan interest income and federally subsidized royalty income is now considered in an institution's modified net investment income.

What Could This Mean for Your Organization?

ASC 740 requires the effects of enacted tax laws to be reflected in financial statements as of the enactment date. Due to this, organizations should make it a priority to stay up to date with changes in tax law. Many changes have been made a result of the OBBBA, so businesses and organizations need to be proactive to ensure they are meeting the requirements of ASC 740.

This may include taking measures to review existing financial and accounting practices for accuracy, as well as establishing clear guidelines for income tax reporting moving forward. Since additional changes may occur, accountants and other financial professionals are always encouraged to stay on top of the latest GAAP news.

Moving Forward with ASC 740 in Mind

ASC 740 is a complex accounting standard with far-reaching implications for all types of businesses and organizations. Most organizations subject to federal income taxes will likely be affected by the OBBBA in some way. The key is to be proactive and assess how your accounting practices may need to be updated to remain compliant with ASC 740.

If your organization needs assistance in developing a strategy to adapt to ASC 740, it's time to consult with an experienced financial advisor. In doing so, your organization can be better prepared to comply with the OBBBA and ASC 740 to move forward with confidence.

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