As 2025 financial reporting deadlines approach, companies are assessing the income tax accounting implications of the One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025. For organizations with M&A activity, OBBBA’s retroactive provisions can materially affect acquisition accounting. Given these implications, companies must carefully apply ASC 740’s enactment date rules to ensure the resulting tax effects are recognized appropriately in their financial reporting.

This alert outlines key OBBBA provisions, summarizes relevant ASC 740 guidance, and provides practical examples illustrating implications for 2025 financial reporting. It also previews areas that may influence tax modeling and interim reporting for 2026.

OBBBA Retroactive Provisions

The OBBBA[1] introduced several retroactive business tax provisions that may significantly affect 2025 financial reporting. Key changes include:

• Interest Expense Deduction Limit (§163(j)): Reverts from an EBIT-based limitation to EBITDA-based limitation, broadening deductibility, retroactive to January 1, 2025.
• Research and Experimental (R&E) Costs (§174A): Modifies required capitalization and amortization rules (five years for domestic research; 15 years for foreign research) to allow full expensing of domestic R&E costs, retroactive to January 1, 2025.
• Bonus Depreciation for Qualified Property (§168(k)): Permanently reinstates 100% bonus depreciation for qualified property, replacing the scheduled phase-down. Applies to property acquired on or after January 19, 2025.

ASC 740 Tax Accounting Guidance

Under ASC 740, companies must determine current taxes payable or refundable and measure the future tax effects of enacted legislation, including deferred tax assets (DTAs) and deferred tax liabilities (DTLs). When evaluating OBBBA’s impact on 2025 reporting, particularly for companies involved in M&A, the following aspects of ASC 740 guidance are especially important:

• Effects Recognized on Enactment Date: The effects of changes in tax laws or rates, both current and deferred, are recognized in the financial statements on the enactment date.
• Retroactive Changes Measured Using Enactment Date Information: For retroactive law changes, the tax effects on current taxes and on DTAs and DTLs are measured using temporary differences and currently taxable income that exist as of the enactment date.
• Accounting for Business Combinations: Deferred taxes are initially measured using the tax law in effect on the acquisition date. Any remeasurement of acquired DTAs and DTLs as a result of a subsequent tax law change is recorded in income tax expense in the period of enactment, not as an adjustment to goodwill.
• Predecessor Financial Statements: For predecessor periods ending before the enactment date, changes in the tax law are not reflected in current or deferred tax balances, or valuation allowance assessments. Deferred taxes are measured using the tax law enacted as of the predecessor balance sheet date.
• Successor Financial Statements: For successor periods that include or follow the enactment date, DTAs and DTLs must be remeasured to reflect the new law, with the effect recorded in income tax expense from continuing operations.

A&M Insight:

A key risk is applying the new law to periods before enactment based on hindsight. As teams finalize 2025 provisions and transaction accounting, some may be inclined to apply the new rules to acquisition-date balance sheets before July 4, 2025. However, under ASC 740, tax effects can be recognized only once the law is enacted, even if the reporting period includes the enactment date. Applying the law early can create cascading issues across deferred taxes, purchase accounting, and current taxes. For mid‑year transactions, the enactment date is a firm cutoff for which tax effects can be recorded.

Examples Applying ASC 740

The following examples illustrate how ASC 740’s enactment-date rules apply to certain OBBBA retroactive provisions in both acquisition accounting and predecessor/successor reporting.

Scenario 1 – Acquisition Accounting: On July 1, 2025, a taxpayer acquires a target company, which has a §163(j) interest expense carryforward (DTA) of $10 million.

• Opening Balance Sheet (July 1, 2025): On the date of acquisition, the acquirer must record the assets acquired and liabilities assumed at fair value. For income taxes, this means applying the law as it exists on July 1, 2025.
  • DTA Recognition: The acquirer records a DTA of $2.1 million (assuming a 21% tax rate) for the $10 million carryforward under pre-enactment law.
  • Valuation Allowance: Because the law on July 1 uses the strict EBIT limit, management determines it is "more likely than not" that the DTA will not be realized. A $2.1 million Valuation Allowance is recorded.

• Enactment Date (July 4, 2025): On the date of enactment, because the EBITDA-based limit is now law, the acquirer determines the $10 million carryforward is now fully realizable.
  • The Adjustment: The $2.1 million Valuation Allowance is released.
  • The Accounting Trap: A common misconception is that a retroactive tax law change requires companies to correct the opening balance sheet (e.g., reduce goodwill). ASC 740 prohibits this. Remeasurement of the DTA must occur in the period of enactment, not retroactively.
• P&L Treatment: The effect of a change in tax law is recorded entirely in the period that includes the enactment date (July 4, 2025), resulting in a discrete tax benefit in the income statement (from the release of the Valuation Allowance).

Summary Table

Scenario 2 – Predecessor/Successor Financial Statements: A calendar-year target company, which was acquired on July 1, 2025, spent $1 million on R&E expenses during the first half of 2025.

• Predecessor Period (Ending July 1, 2025): Under US GAAP, the Predecessor must apply tax law as of the balance sheet date.
  • Tax Treatment: Capitalize $1 million and record a DTA of $210,000 for the book-tax difference. For simplicity, this example excludes the pre-acquisition amortization.
  • Note: Under US GAAP, the July 4th enactment cannot be anticipated, even if the bill was "expected" to pass or “substantially enacted.”  Accordingly, the taxes payable in the Predecessor period will be higher than what is ultimately reflected on the pre-acquisition tax return.
• Successor Period (Including July 4, 2025): The opening balance sheet on July 1 includes the $210,000 DTA. Upon enactment, the Successor must adjust its deferred taxes to reflect full expensing under the new law.
  • The Adjustment: The DTA established in the opening balance sheet for R&E costs is remeasured because the $1 million is now deductible.
  • The P&L Impact: The $210,000 DTA recorded in the opening balance sheet is reversed through the Provision for Income Taxes in the period of enactment. The $210,000 current tax impact (income taxes payable) would offset the deferred impact, resulting in no net tax expense.
  • Note: Although not included in this example, the Successor period should also reflect the impact of expensing prior‑year capitalized amounts permitted under OBBBA.

Summary Table

Considerations for 2026

Looking ahead to 2026 financial reporting, companies should assess how OBBBA’s prospective provisions—generally effective January 1, 2026, and recognized in the 2025 enactment period—and forthcoming Treasury/IRS guidance will affect tax models, forecasts, and interim provisions. Key areas to consider include:

• Changes to the business interest expense deduction limit, including modifications to the treatment of capitalized interest and computation of the limit without certain foreign-source income (§163(j)).
• Increased limits for expensing certain depreciable business property (§179).
• Greater limitation on charitable deductions for C corporations (§170).
• Expanded aggregation rule for excess compensation resulting in reduced deduction (§162(m)).
• Various international tax changes,[2] such as those affecting global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and base erosion anti-abuse tax (BEAT), as well as restoring the limitation on downward attribution of stock ownership for determining controlled foreign corporation status.

Beyond OBBBA, companies should continue monitoring developments related to the OECD Pillar Two Side-by-Side System,[3] along with other U.S. federal and state legislative and regulatory changes, to evaluate their potential ASC 740 implications.

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

A&M’s TAS practice specializes in providing comprehensive income tax accounting solutions under US (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. If your business is looking for expert guidance on tax accounting, please do not hesitate to reach out to us.