ASC 740: Q3 2025 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 third quarter of 2025. Read more about tax law changes in the U.S. and around the globe, updates from the Financial Accounting Standards Board (FASB) and other considerations for the third quarter of 2025 below. 

Income tax provision considerations for Q3 2025

The enactment of the One Big Beautiful Bill Act (OBBBA or the Act) just four days after the end of the second quarter for calendar-year corporations provided companies with time to assess and respond to the provisions included in the Act. Under Accounting Standards Codification (ASC) 740-10-45-15, changes in tax law should be recorded in the period in which the law is enacted and accordingly, the time has come for calendar-year corporations preparing quarterly income tax provisions to reflect the changes under the Act in interim financial statements. This article summarizes some of the key provisions under the OBBBA and related items to consider when preparing income tax provisions for the third quarter of 2025.

Tax reform recap

The three most significant items (the ‘Big 3’) included as part of the final version of the OBBBA were the restoration of deductibility of research and development expenditures under section 174, restoration of bonus depreciation (immediate expensing) for certain qualified assets and restoration of the earnings before interest, taxes, depreciation and amortization (EBITDA) calculation for deductible interest expense under section 163(j).

Other notable items introduced or altered by the OBBBA that affect future tax periods were the 1% floor on charitable contributions made by corporations, exemptions for certain companies related to the disallowance of on-premises employer-provided meals, future phase-outs of many clean energy credits and changes to foreign income inclusions, deductions and tax credits.

The Big 3 will create temporary differences between book and taxable income and will likely reduce the current tax liability and expense with an offsetting effect on deferred taxes, resulting in a net zero impact on the entity’s effective tax rate (ETR). However, there could be secondary impacts on items such as section 250 deductions, the foreign-derived deduction eligible income (FDDEI) deduction and minimum tax regimes such as the base erosion and anti-abuse tax (BEAT) and corporate alternative minimum tax (CAMT), as the calculations of those amounts rely on other aspects of taxable income–meaning they could be significantly impacted by changes to the Big 3 (or other changing provisions) that become effective in 2025. These potential secondary effects would have an ETR impact in the current quarter. Read more about the interaction between the Big 3 and the foreign income inclusion changes in Global taxation reform: What changes to GILTI and FDII mean for multinationals.

Additional consideration should be given to the impact that the OBBBA may have on an entity’s assessment of the need for a valuation allowance, as modeling the reversal of temporary differences could produce unexpected results. Entities have several options when it comes to whether they take bonus depreciation and how they treat their section 174 costs, and there may be trade-offs between taking those deductions now and creating net operating losses (NOLs) or spreading those deductions over several years.

For periods ending after July 4, 2025: Entities should disclose the effects on the financial statements of the enacted change in tax law and describe the specific items that are expected to have a material impact on the entity’s financial statements. For a detailed discussion on the impacts of tax reform on financial reporting, including accounting for these impacts in interim tax provisions, read our article: Accounting for the income tax impacts of the One Big Beautiful Bill Act.

CAMT

On Sept. 30, 2025, the IRS issued Notices 2025-46 and 2025-49 related to CAMT. Notice 2025-46 aims to reduce the administrative burden by aligning CAMT principles more closely with regular corporate tax principles as it relates to transactions between domestic corporations, cancellation of debt and attribute reduction and consolidated groups. Notice 2025-49 outlines changes to specific adjustments made when computing adjusted financial statement income (AFSI) and provides new guidelines for what guidance taxpayers may rely on until final regulations are published. According to the notice, taxpayers may rely on the proposed regulations issued in 2024, modified by notices published thereafter, until final guidance is released. However, once the final regulations are made available, the previous guidance should not be relied upon for any year.

Changes in estimates

The quickly approaching corporate tax return deadline for extended calendar year returns signals that it is time to revisit any changes in estimates from the related income tax provision. Under ASC 250-10-45-17, changes in estimates are accounted for prospectively in the period of change. As entities finalize their calculation of taxable income for tax return purposes, return-to-provision adjustments should be reflected in the period they are known. While entities may have identified return-to-provision adjustments that are appropriate to include as discrete adjustments in the third quarter, there may be other lingering items, such as potential changes to interest expense limitations and state taxes that may support waiting until the fourth quarter to record these changes in estimate.

Updates from the FASB

The FASB issued three accounting standards updates (ASU) during the third quarter of 2025, including ASU 2025-05–Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, ASU 2025-06–Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software, and ASU 2025-07–Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for Share-Based Noncash Consideration from a Customer in a Revenue Contract.

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) and is effective one year later for entities other than public business entities (periods beginning after Dec. 15, 2025). The final version of the ASU did not include any requirements for interim disclosures, but public business entities may want to consider working through their anticipated year-end disclosures with their auditor before year-end. Entities should consider what additional internal controls and processes will be necessary to facilitate compliance with the requirements of the ASU at year-end 2025.

Find additional information on the required disclosures in RSM US’ 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 (IRC) conformity, in our companion alert, State income tax law changes for the third 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.

Status of Pillar Two

As of the third quarter of 2025, negotiations continue among G7 and Organisation for Economic Co-operation and Development (OECD) Inclusive Framework members on a proposed ‘side-by-side’ agreement that would exempt U.S.- parented multinational groups from the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) under Pillar Two. Although the June 28 announcement signaled a potential diplomatic alignment among the G7 countries, the agreement remains a political proposal and has not been enacted into law.

Consequently, U.S. multinationals remain subject to Pillar Two rules and must continue to evaluate and reflect the financial reporting implications of legislation as enacted in each applicable jurisdiction. As global implementation of Pillar Two continues to expand, companies should closely monitor legislative developments and evolving OECD guidance to ensure ongoing compliance.

Australia

On Aug. 13, 2025, the High Court of Australia (HCA) delivered a landmark decision in Commissioner of Taxation v. PepsiCo Inc. [2025] HCA 30 (PepsiCo), with a 4/3 majority narrowly finding in favor of the taxpayer in resolution of its long-standing embedded royalty dispute with the Commissioner of Taxation.

The HCA’s decision in PepsiCo is significant for multinational enterprises with a connection to or presence in Australia for several reasons, primarily because it provides clarity regarding the appropriate construction of relevant arrangements and it represents the first decision by an apex court on the operation of Australia’s Diverted Profits Tax (DPT) provisions. Notably, those DPT provisions were regarded as a ‘discriminatory tax’ by the proposed section 899 in the United States, which would have placed Australia within the crosshairs of retaliatory taxes proposed but not enacted as part of U.S. tax reform under the OBBBA.

Although the breadth and depth of consequential amendments to the Australian Taxation Office’s (ATO) controversial drafting tax ruling on embedded royalties (TR 2024/D1), with which the U.S. Department of Treasury previously took issue, may be constrained by the fact that the relevant scheme was the product of arm’s-length dealing between unrelated parties, certain inconsistencies are observable between the court decision and TR 2024/D1, including the relevant meaning of ‘consideration’ and the priority of the objective terms of legal agreements in determining the existence of embedded royalties.

Practically, upcoming proceedings in Australia separately involving Coca-Cola and Oracle are likely to provide greater clarity on the issue of embedded royalties, including the tenability of the views espoused by the ATO in TR 2024/D1.

Canada

In response to the United States temporarily pausing trade talks and proposing retaliatory action for extraterritorial taxes, Canada has announced it will cancel the Digital Services Tax Act and agreed to a side-by-side solution excluding U.S.-parented companies from the UPR and the IIR of the Global Minimum Tax Act. The UPR has not yet been implemented, but legislative amendments will need to be made for the changes to the IIR in the interim. While conversations between the U.S. and Canada occurred in late June, Canada has not yet enacted legislation to implement these proposed changes. Therefore, these changes cannot be considered when preparing a third quarter 2025 tax provision.

The Voluntary Disclosure Program permits taxpayers to proactively disclose historical non-compliance in exchange for penalty and interest relief. The Canada Revenue Agency had previously indicated the program would be phased out, as its non-compliance detection tools improved. In September, it seemingly reversed course on this direction, announcing a revised program that increases the available relief and lowers the barriers to qualify. This program will be more taxpayer-friendly and will apply to applications received after Sept. 30, 2025. 

Canada has released draft legislation proposing changes to several areas, including expanding audit powers and research and development credits. With the federal budget scheduled to be presented on Nov. 4, 2025, further tax legislation announcements are expected.

France

Under French domestic tax law, dividend distributions to non-resident entities are generally subject to withholding tax at a rate of 25% (or 12.8% for non-resident individuals). The France–U.S. tax treaty provides relief by reducing this rate to 15% in most cases, and to 5% when the U.S. recipient entity holds at least 10% of the French distributing entity. In certain situations, the treaty even allows for full exemption.

In practice, difficulties in applying the treaty provisions to dividend distributions have been observed. While these reduced rates may appear relatively clear in principle, the practical application can be far more complex, particularly when the dividend recipient is a U.S. partnership or limited liability company (LLC) treated as a pass-through entity for U.S. tax purposes. Because France generally recognizes the transparency of such entities, only the portion of dividends attributable to partners who are themselves U.S. residents (and subject to U.S. tax on those dividends) can qualify for treaty benefits. This requires a detailed review of the ownership chain, the residence of each investor, and whether those investors meet the treaty’s limitation-on-benefits (LOB) requirements.

The LOB article (Article 30 of the treaty) introduces strict anti-abuse provisions designed to prevent treaty shopping through intermediary holding structures. Meeting these tests can be challenging, especially for funds, private equity structures or entities with diverse investor bases. Failure to satisfy these conditions could result in the denial of the 5% or 0% withholding tax rates, leaving only the reduced 15% rate available or, in some cases, even the full domestic rate.

In practice, companies considering dividend distributions from France to U.S. shareholders should not assume that treaty relief automatically applies. Proper documentation, including U.S. residence certificates and treaty forms, must be prepared, and the eligibility of each partner or shareholder must be assessed.

Italy

Implementing provisions for the transfer of intra-group losses

The Italian Ministry of Economy's decree (June 27, 2025) implements new rules for ‘Intra-group loss relief.” It allows the free circulation of losses within a qualifying group, distinguishing between losses incurred while in the group (‘intra-group losses’) and pre-acquisition losses that pass vitality tests (‘approved losses’). The rules define group membership, set the order for utilizing different loss types, and establish specific criteria for mergers, demergers and contributions to determine a company's ‘seniority’ within the group.

Revisions to Controlled Foreign Companies (CFC) Framework and Anti-Hybrid Penalty Safeguards Introduced by Italy’s Decree-Law No. 84/2025

On June 17, 2025, Italy enacted Decree-Law No. 84, which brings notable changes to the country's tax legislation, particularly concerning the CFC regime and the penalty protection mechanism for hybrid mismatches.

Article 4 of the decree modifies the provisions under Article 167 of the Italian Income Tax Code (TUIR), focusing on two key areas:

• Qualified Domestic Minimum Top-up Tax (QDMTT) Allocation Criteria: The methodology for assigning QDMTT to entities in foreign jurisdictions has been revised. These changes affect how the ETR is calculated for determining CFC status.
• Optional Substitute Tax Regime: The alternative regime allowing Italian controlling individuals to opt for a 15% substitute tax on the net accounting profits of potential CFCs has also been updated.

These amendments will apply starting from the 2024 fiscal year.

Article 5 of the same decree revises the transitional provisions related to the penalty protection regime introduced by Legislative Decree No. 209/2023. The updated rule aligns the deadline for preparing documentation on hybrid mismatches with the filing deadline for the 2024 corporate income tax return—typically Oct. 31, 2025, for calendar-year taxpayers. This alignment provides taxpayers with additional time to compile compliant documentation and potentially revise prior submissions, thereby enhancing protection against penalties for mismatches under the anti-hybrid rules.

Clarification on the Maximum Labor Cost Tax Deduction for Corporate Groups

The Ministerial Decree of June 27, 2025, issued by the Ministry of Economy and Finance and published in the Official Gazette of July 11, 2025, clarifies the calculation of the maximum tax deduction for labor costs for corporate groups. To prevent abuse, the benefit for companies increasing hires is now reduced by a correction factor based on the net employment change of the entire group, not just the individual company.

The implementing decree of the IRES (imposta sul reddito sulle società)premiale

The Italian Ministry of Economy has issued a decree (Aug. 8, 2025) implementing the ‘IRES premiale’ scheme, a reduced corporate income tax rate for virtuous companies. This measure, introduced in the 2025 Budget Law, grants a 4% reduction from the standard IRES rate (from 24% to 20%) for companies that meet specific conditions. To qualify, companies must reinforce their capital, make ‘relevant investments,’ increase their workforce and must not have used certain social safety net measures.

At the moment, the benefit applies only to the tax period following the one in progress as of Dec. 31, 2024 (i.e., for 2025 calendar-year companies). The decree outlines the detailed rules for applying this preferential rate and how it coordinates with other parts of the tax system.

Ruling on revaluation reserve to cover losses carried forward

In its ruling No. 219 of Aug. 21, 2025, the Italian Revenue Agency clarified that using a tax-suspended revaluation reserve to cover carried-forward losses does not trigger immediate taxation. Tax-suspended revaluation reserves occur when a taxpayer increases the value of assets for book purposes and the increase in value is not immediately taxed. However, shareholders can formally vote to reduce the reserve and lift the tax suspension, deeming the amount fully taxed and allowing its future use without further tax consequences. No current tax liability is triggered unless the entity distributes the reserve to its shareholders.