So, What Does ASC 740 Mean for Your Organization?

After the One Big Beautiful Bill Act (OBBBA) was passed earlier this year, there was an increasing need for a updated tax code.

To meet that need, a new tax law known as ASC 740 has been enacted to address many of the updates and provisions under OBBBA. This new tax law specifically addresses accounting standards for income taxes under Generally Accepted Accounting Principles (GAAP) and stands to have a major impact on entities that pay income taxes.

So, what does your business need to know about ASC 740, and how could its key provisions affect your organization's tax accounting practices? Let's dive in.

Important Tax Law Changes Under ASC 740

While this is not a comprehensive list of all the changes that will occur under ASC 740, the following will summarize many of the most important tax law changes 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 and businesses stand to gain from ASC 740 is the ability to deduct all domestic R&E expenditures moving forward. In fact, businesses even have the ability to retroactively deduct these expenses from previous years' returns, 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.

2. 100% Bonus Depreciation for Qualifying Property

Another important outcome of the new tax law is that a 100% bonus depreciation for qualifying property has been reinstated, allowing for major tax savings for real estate investors and similar entities. In order to claim this tax benefit, the property must have been acquired after January 19, 2025, and must be used for such qualifying activities as:

• Production
• Manufacturing
• Machinery
• Water and/or utilities

For properties not yet in service, the cutoff for a property to be put into service is January 1, 2031.

3. Changes to Business Interest Expense Limitations

Another major change coming with the enactment of ASC 740 is that, beginning with the 2025 tax year, businesses are now able to add back amortization, depletion and depreciation in their income calculations for the existing 30% deduction limit pertaining to interest expense. Previously, businesses were only able to do this on interest income made after specific adjustments. As a result, businesses who may face such limitations may be able to reduce their tax burdens for 2025 and moving forward.

4. Revisions to Executive Compensation Deductions

In less advantageous news, ASC 740 has also brought with it an expansion on what's considered executive compensation. Under the new law, payments to specified covered employees are aggregated — and if the total amount exceeds $1 million, the amounts exceeding $1 million will be allocated proportionately to each member as a deduction limitation. It is important to note that this specific change goes into effect on December 21, 2025.

5. Tiered Excise Taxes for Colleges and Universities

Finally, ASC 740 has brought some changes to how excise taxes on some colleges and universities are handled. Previously, a flat 1.4% excise tax was applied to private colleges and universities with student-adjusted endowment rates of a certain amount.

Under ASC 740, however, 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, ASC 740 also includes student loan interest income and federally subsidized royalty income in an institution's modified net investment income.

What Could This Mean for Your Organization?

With so many changes being brought forth as a result of ASC 740, businesses and organizations need to start taking measures now to ensure they are up-to-speed with accounting best practices. 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. And because 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 tax law with far-reaching implications for organizations and private entities alike. In fact, any business or organization that is subject to federal income taxes is likely to be affected by this tax law in some way. The key, is to begin making preparations sooner rather than later for how your own accounting practices may need to be updated in order to remain compliant.

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 ASC 740 and move forward with confidence.

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