FASB’s 2025 income tax disclosure requirements, introduced through ASU 2023-09, mark a significant shift in how companies report their tax positions. If you’re a finance professional, you’re probably already thinking about how to adapt your processes, systems, and disclosures to meet these new standards—without causing unnecessary headaches for your team or confusion for your stakeholders. This guide walks you through the changes, explains what’s expected, and offers practical steps to ensure a smooth transition. Along the way, I’ll share real-world examples, highlight common pitfalls, and give you actionable advice based on years of experience in financial reporting and tax compliance. Whether you’re at a public company racing toward a 2025 deadline or a private entity with a bit more time, this is your roadmap to compliance—and confidence.
Understanding the New Requirements #
Let’s start by clarifying what’s actually changing. ASU 2023-09 focuses on two main areas: the rate reconciliation and the disaggregation of income taxes paid. The goal is to give financial statement users—investors, analysts, regulators—a clearer, more consistent picture of why a company’s effective tax rate differs from the statutory rate, and exactly where those tax dollars are going[1].
For public business entities (PBEs), the new rules are effective for annual periods beginning after December 15, 2024—so, for calendar-year companies, that means the 2025 annual report. Non-PBEs get an extra year[1]. Early adoption is allowed, but given the complexity, most organizations will likely wait until they’re required to comply.
Breaking Down the Rate Reconciliation #
The rate reconciliation has always been a key part of tax disclosures, but FASB is now demanding more granularity. Under the old rules, companies could group reconciling items into broad categories. Now, you’ll need to consistently categorize and further disaggregate these items, especially when they meet a specific quantitative threshold[1][2].
Here’s how it works: if a reconciling item (or a group of items of the same nature) equals or exceeds 5% of the amount computed by multiplying income (or loss) from continuing operations before tax by the applicable statutory rate, you must break it out separately[2]. This isn’t just about hitting a number—you also need to consider the nature of the item. For example, if federal research and development (R&D) credits are significant in two out of three years, you’d disclose them separately for those years, even if they fall below the threshold in the third year[2].
This approach means you’ll need to track reconciling items by nature over time, not just in isolation. It’s a more dynamic, judgment-driven process than before. And because materiality still applies, you don’t have to disclose immaterial items, even if they meet the quantitative threshold—but you’ll need to document your rationale, since FASB hasn’t provided a bright-line test[1].
Disaggregating Income Taxes Paid #
The second major change is around the disclosure of income taxes paid, net of refunds. Previously, companies might lump all taxes paid into a single line. Now, you’ll need to break this out by federal (national), state, and foreign jurisdictions[7]. If any single jurisdiction accounts for 5% or more of total taxes paid, you must disclose the amount paid to that jurisdiction separately[7].
This means your tax team will need to capture and track payments by jurisdiction with much greater precision. For multinationals, this could mean significant changes to internal reporting systems and processes. Even domestic companies with operations in multiple states will feel the impact.
Jurisdictional Breakdown of Income and Tax Expense #
ASU 2023-09 also introduces a new requirement to disaggregate income from continuing operations and the related tax expense by jurisdiction[7]. Specifically, you’ll need to separate domestic and foreign components of income (or loss) before tax, and then break out the corresponding tax expense (or benefit) by federal (national), state, and foreign components[7].
This is a big deal for companies with international operations. It’s not just about where you book revenue—it’s about showing how much tax expense relates to each part of your business. For example, if your U.S. operations are profitable but your foreign subsidiaries are running at a loss, that needs to be clear in your disclosures.
Practical Steps to Implement the New Disclosures #
Now that we’ve covered what’s changing, let’s talk about how to get ready. Here’s a step-by-step approach, with practical tips and examples along the way.
Step 1: Assess Your Current Processes #
Start by mapping out your existing tax disclosure process. Where do you get your data? How is it aggregated? Who reviews it? You’ll likely find that some of your current systems and controls aren’t set up to capture the level of detail now required.
For example, many companies use spreadsheets to track reconciling items. That might have worked in the past, but with the need to track items by nature and over time, you’ll want to consider more robust solutions—perhaps a dedicated tax provision software or enhanced ERP modules.
Step 2: Identify Reconciling Items and Jurisdictions #
Work with your tax and accounting teams to identify all reconciling items that could meet the 5% threshold. Don’t forget to consider items that might be significant in some years but not others. Create a checklist based on your company’s tax profile—common items include state taxes, foreign taxes, credits, and valuation allowances.
Similarly, identify all jurisdictions where you pay taxes. For U.S. companies, this means every state with nexus; for multinationals, every country. You’ll need systems to track payments by jurisdiction, not just in total.
Step 3: Establish New Data Collection and Reporting Procedures #
This is where the rubber meets the road. You’ll need to:
- Enhance data collection: Ensure your systems can capture the necessary detail for both reconciling items and tax payments by jurisdiction.
- Document judgments: Because materiality is subjective, document your process for determining which items are material and why. This will be important for audits and reviews.
- Train your team: Make sure everyone involved understands the new requirements and their roles in the process. Cross-functional collaboration between tax, accounting, and IT is crucial.
Step 4: Prepare Comparative Disclosures #
The new rules require comparative disclosures, so you’ll need to present the current year and prior year(s) in a consistent format. If an item was significant last year but not this year, you’ll need to decide whether to continue disclosing it—the guidance isn’t entirely clear, but best practice is to maintain consistency unless there’s a compelling reason not to[2].
Step 5: Review and Validate #
Before finalizing your disclosures, conduct a thorough review. Involve internal audit, external auditors, and possibly even a dry run with a sample of your disclosures. Look for inconsistencies, gaps, and areas where additional explanation might be needed.
Step 6: Communicate with Stakeholders #
Don’t wait until your 10-K is filed to talk about these changes. Engage with investors, analysts, and audit committees early. Explain why disclosures are changing and what new information they’ll see. Transparency now can prevent confusion later.
Common Challenges and How to Overcome Them #
Implementing these new requirements won’t be without bumps. Here are some challenges you’re likely to face, along with practical advice for addressing them.
Data Quality and Systems #
Many companies lack systems that can easily disaggregate tax data by jurisdiction or reconciling item. Upgrading systems takes time and money, so start early. If a full system overhaul isn’t feasible, consider interim solutions like enhanced spreadsheets with clear controls and documentation.
Judgment Calls #
The rules leave a lot to professional judgment, especially around materiality and the nature of reconciling items. Create a framework for making these calls, document your rationale, and ensure consistency from period to period. If in doubt, err on the side of more disclosure—it’s easier to explain why you included something than why you left it out.
Comparative Periods #
The guidance isn’t explicit about how to handle items that fall below the threshold in some years. My advice? Disclose consistently unless there’s a clear reason not to. This approach is more transparent and easier for users to follow[2].
Cross-Functional Collaboration #
Tax disclosures aren’t just a tax department issue anymore. You’ll need input from accounting, IT, legal, and sometimes operations. Set up regular check-ins and clear lines of responsibility to keep everyone aligned.
Real-World Examples #
Let’s look at a couple of hypothetical scenarios to bring this to life.
Example 1: Tech Company with R&D Credits #
Imagine a U.S.-based technology company that claims significant federal R&D tax credits. In 2024 and 2025, these credits reduce the company’s effective tax rate by more than 5% when compared to the statutory rate. Under the new rules, the company must disclose the amount and percentage impact of these credits separately in the rate reconciliation for those years[2]. Even if the credits are less significant in 2023, the company should consider whether to include them for comparability.
Example 2: Multinational Manufacturer #
A global manufacturer operates in the U.S., Germany, and China. In 2025, taxes paid in China exceed 5% of total taxes paid. The company must now disclose the exact amount paid to China separately, along with payments to the U.S. and Germany if they also meet the threshold[7]. The company also needs to break out income and tax expense by jurisdiction, so stakeholders can see how much profit (or loss) and tax expense is attributable to each country.
Actionable Advice from the Trenches #
Based on years of working through accounting changes, here’s my best advice for finance teams:
- Start early. Don’t wait until year-end. Begin assessing your processes and systems now.
- Document everything. Judgment calls will be scrutinized. Keep a clear audit trail of your decisions.
- Leverage technology. If your current systems can’t handle the new requirements, explore upgrades or add-ons.
- Train and communicate. Make sure your team understands the changes, and keep stakeholders in the loop.
- Test your disclosures. Do a mock disclosure to identify gaps or confusion before you go live.
The Bigger Picture #
These changes aren’t just about compliance—they’re about transparency. Investors and other stakeholders are demanding more detailed, consistent information about companies’ tax positions. By embracing these new requirements, you’re not just checking a box; you’re building trust and providing clearer insight into your company’s financial health.
Final Thoughts #
FASB’s 2025 income tax disclosure requirements are a meaningful evolution in financial reporting. They’ll require more work upfront, but they also offer an opportunity to improve your processes, enhance transparency, and build stronger relationships with stakeholders. Approach this as a chance to modernize your tax reporting—not just as another regulatory hurdle. With careful planning, cross-functional collaboration, and a focus on clarity, you can turn these new rules into a competitive advantage.
If you take away one thing from this guide, let it be this: start now, stay organized, and keep the lines of communication open. The companies that navigate this transition smoothly will be those that see it not as a burden, but as a step forward in financial reporting excellence.