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Accounting for US tax reform - One Big Beautiful Bill Act and more · PwC's accounting podcast

0:00
SPEAKER_00: Thought leadership from PWC's national office.
0:07
SPEAKER_03: Hello, and welcome to PWC's Accounting Podcast.
0:10
SPEAKER_03: I'm Heather Horn.
0:12
SPEAKER_03: Today we're bringing you a special episode on tax reform.
0:16
SPEAKER_03: It's been a few months since the president signed the One Big Beautiful Bill Act, which includes a broad range of provisions impacting businesses.
0:24
SPEAKER_03: These changes include extending and modifying certain key tax cuts and jobs act provisions and expanding some Inflation Reduction Act incentives while accelerating the phase out of others.
0:36
SPEAKER_03: In today's episode, we provide an overview of the key corporate provisions and dive into the related accounting and financial reporting implications.
0:47
SPEAKER_03: Back today as our guest host, I'm happy to welcome Diana Stoltzfiss, a partner in PWC's National Office.
0:54
SPEAKER_03: In joining her today as our guests are Pat Brown, PWC's National Tax Office Co-leader, and Jennifer Spang, PWC National Office Income Tax Accounting Leader.
1:04
SPEAKER_03: With that, let's get started.
1:07
SPEAKER_02: Hello, Pat and Jen.
1:08
SPEAKER_02: Thanks so much for joining me today.
1:10
SPEAKER_02: We're here to discuss U.S.
1:12
SPEAKER_02: tax reform and the related developments, as well as the accounting considerations that go along with them.
1:17
SPEAKER_02: Pat, before we get into the details, can you set the stage with a quick overview of the landscape, what's driving the changes, and why now?
1:26
SPEAKER_01: Yeah.
1:26
SPEAKER_01: So uh thanks, Diana.
1:28
SPEAKER_01: So um we're not going to talk at all today uh on this podcast, at least I don't think so, uh, about individual tax issues.
1:37
SPEAKER_01: Um, but the reality is that's what drove the bill that got signed by President Trump on July the 4th.
1:42
SPEAKER_01: Uh last time President Trump was in office in in 2017, his first full year in office in his first term, uh the Republicans and President Trump adopted major tax reform.
1:52
SPEAKER_01: And they did it through this process called budget reconciliation, uh, which is a pretty commonly used process, at least in recent years, for doing tax legislation.
2:01
SPEAKER_01: Um, but it brings with it a lot of kind of headaches.
2:03
SPEAKER_01: It brings with it one huge advantage, which is you don't need to clear a 60-vote hurdle in the Senate.
2:08
SPEAKER_01: And that's why it's so commonly used when one party has control in Washington.
2:12
SPEAKER_01: Um, but it brings with it a lot of headaches as well, a lot of procedural headaches.
2:15
SPEAKER_01: And among the things that it brings with it is a requirement for the tax provisions and the overall bill to sort of balance over the 10-year budget window.
2:24
SPEAKER_01: Um, that doesn't mean the deficits won't go up, it means they're not supposed to go up outside the 10-year budget window.
2:29
SPEAKER_01: And so when Republicans did tax reform in 2017, they build in, frankly, a lot of phase-outs, sunsets, caps, and things like that, particularly with respect to with respect to individual tax cuts.
2:40
SPEAKER_01: Okay.
2:40
SPEAKER_01: So it's unusual for us in the tax world to be able to see from sort of miles off.
2:45
SPEAKER_01: I mean, we knew we were gonna have a major tax bill in 2025, long before last year's presidential election.
2:52
SPEAKER_01: So we knew this was coming.
2:53
SPEAKER_01: We knew what was driving it was if the um Congress and whoever was in the White House didn't act, basically every single American individual was gonna see a tax increase.
3:02
SPEAKER_01: That's what drove it.
3:03
SPEAKER_01: But of course, once you have major tax legislation, we're gonna get into the things that we're gonna talk about today, which is changes in the corporate space, changes with respect to green energy incentives and things like that.
3:14
SPEAKER_01: A lot of things that happened in this bill, they weren't really the driving force behind it.
3:18
SPEAKER_01: But once there was a bill in motion, these other provisions became a part of that discussion.
3:23
SPEAKER_02: Okay.
3:23
SPEAKER_02: Okay, that makes sense.
3:24
SPEAKER_02: Well, maybe now should we get into the details on the tax reform?
3:28
SPEAKER_02: So maybe we'll start with the domestic side.
3:30
SPEAKER_02: So, Pat, do you want to walk us through the main corporate provisions that were impacted?
3:34
SPEAKER_01: Yeah, so I'm really gonna focus on three things.
3:37
SPEAKER_01: Um, and I started off talking about 2017, Diana, deliberately, uh, because the three things that I'm gonna talk about were all things that were affected by the 2017 legislation, but were sunset, effectively.
3:51
SPEAKER_01: Sunsets were built into these provisions in the 2017 such as uh legislation, sunsets or caps, however you want to describe it.
3:57
SPEAKER_01: Right.
3:57
SPEAKER_01: I'll start by talking about bonus depreciation.
3:59
SPEAKER_01: So bonus depreciation, essentially being able to deduct the entire cost of new investment in the year in which you make that investment, um, is beloved by politicians in both parties.
4:12
SPEAKER_01: It's frankly beloved by economists, whether left-leaning or right-leaning, because it essentially creates an incentive for new capital investment.
4:18
SPEAKER_01: It's a spur to the economy, to economic growth.
4:22
SPEAKER_01: So the Republicans included bonus depreciation in uh in the 2017 legislation, but they included it with a phase down that started to kick in in 2022.
4:32
SPEAKER_01: Uh, and so we've been talking since 2022 about the desirability of restoring bonus depreciation, going back to this ability to deduct the full cost of the investment in the year in which you make it.
4:45
SPEAKER_01: Um, but it took until 2025, and the, you know, if you will, the external impetus in terms of these um individual tax requirements, individual tax changes, to get Congress to essentially get on the same page, take action, and put bonus depreciation back in place.
5:01
SPEAKER_01: So, what we have done in this bill is we've restored bonus depreciation.
5:05
SPEAKER_01: And importantly, we've done it on a permanent basis.
5:07
SPEAKER_01: Oh, wow.
5:08
SPEAKER_01: So now that was a decision that Congress made that was frankly pretty expensive.
5:12
SPEAKER_01: We took, remember, we talk about budget reconciliation and needing the numbers to balance.
5:16
SPEAKER_01: So when Congress takes an action like that for something that as costly as bonus depreciation, you know they believe in it.
5:22
SPEAKER_01: So we're we're we're talking here about a provision that done on a permanent basis costs the federal government over$300 billion.
5:30
SPEAKER_01: Oh, right.
5:30
SPEAKER_01: So that's a lot of money.
5:32
SPEAKER_01: Now it's not a huge amount of money when you think about the entire federal budget, but it's sure not a rounding error either.
5:37
SPEAKER_01: So this was a pretty important decision for Congress to take, really kind of planting a flag and saying bonus depreciation is really important.
5:44
SPEAKER_01: Another thing, and this was one that got a lot of attention from companies that Jen and I talked to a lot, and that is the deductibility of research expenses.
5:53
SPEAKER_01: So, up until 2017, indeed up until 2022, research expenses were deductible in the year in which they were incurred for tax purposes.
6:02
SPEAKER_01: Um, the 2017 legislation built into it a provision that said starting in 2022, you will no longer be able to immediately deduct research expenses.
6:11
SPEAKER_01: You'll have to capitalize and amortize those expenses over five years if they're domestic expenses, or over 15 years if they're foreign incurred research expenses.
6:21
SPEAKER_01: Um, again, going back, politicians love bonus depreciation.
6:25
SPEAKER_01: They also really love research expenses.
6:27
SPEAKER_01: So this was kind of a curious provision to put into the 2017 legislation, right?
6:31
SPEAKER_01: It's sort of uh, you know, a uh kind of almost a trap, if you will, right?
6:35
SPEAKER_01: But it was really the intention, of course, was that a future Congress would come along and fix this, ideally before it ever went into effect.
6:41
SPEAKER_01: Well, that didn't happen.
6:42
SPEAKER_01: Right.
6:43
SPEAKER_01: So in 2022, taxpayers had to start capitalizing and amortize, amortizing RD expense.
6:49
SPEAKER_01: Um, there were a number of proposals to try and get it fixed, but they never got across the finish line until this bill.
6:55
SPEAKER_01: So, with this bill, now again, on a permanent basis, we've gone back to immediate deductibility, but only of domestic research expense.
7:03
SPEAKER_01: We still have this 15-year capitalization and amortization uh for uh for foreign incurred expense.
7:08
SPEAKER_01: There are also some elections built into the research expense.
7:11
SPEAKER_01: So you have the ability to immediately deduct, but you're not obligated to immediately deduct.
7:16
SPEAKER_01: Okay.
7:16
SPEAKER_01: So that was another big change.
7:17
SPEAKER_01: And again, quite taxpayer favorable.
7:20
SPEAKER_01: The third one that I would talk about is we brought in in 2017 a restriction on the deductibility of interest expense.
7:27
SPEAKER_01: Um, essentially, your interest expense is limited in terms of deductibility to 30% of your EBITDA.
7:34
SPEAKER_01: Um, that was the law from 2017 until 2022.
7:38
SPEAKER_01: I keep saying 2022, all these things happened in the same year where we dropped the DA.
7:43
SPEAKER_01: We went from a restriction based on 30% of EBITDA to 30% of EBIT.
7:48
SPEAKER_01: You no longer had the ability to add back depreciation and amortization into your computation.
7:53
SPEAKER_01: That was a big deal for a number of taxpayers, right?
7:56
SPEAKER_01: Uh, and so the ability to deduct interest became more circumscribed for a number of taxpayers.
8:01
SPEAKER_01: Uh, this was again something that was talked about, something there were proposals to try and address, but they didn't get picked up until this bill.
8:07
SPEAKER_01: Again, done on a permanent basis.
8:09
SPEAKER_01: So those were sort of the big three.
8:11
SPEAKER_01: We sometimes refer to them as the TCJA.
8:13
SPEAKER_01: TCJA was the name of the 2017 legislation, the TCJA orphans, because they were sort of left behind and not addressed and not fixed from 2022 through 2025.
8:23
SPEAKER_01: They were all fixed on a retroactive basis back to the start of 2025 and on a permanent basis going forward.
8:29
SPEAKER_02: Oh, wow.
8:30
SPEAKER_01: Yeah.
8:31
SPEAKER_02: Okay.
8:31
SPEAKER_02: Well, maybe, Jen, maybe we'll turn to you and looking at these domestic provisions that Pat talked through, what are some of the key accounting considerations that companies should be thinking about?
8:41
SPEAKER_04: Yeah, I'd really say there's three key things to think about.
8:44
SPEAKER_04: Um, at a high level, deferred taxes, valuation allowances, and then modeling, which I'll get to last.
8:49
SPEAKER_04: From a deferred tax perspective, everything that Pat just talked about has a potential to impact your deferred.
8:55
SPEAKER_04: So if you take in additional bonus depreciation where that was being phased out pre-this change, um, now that could actually increase your deferred tax liabilities.
9:06
SPEAKER_04: That might have an interplay on like a valuation allowance assessment.
9:09
SPEAKER_04: Um, interest deductibility, to the extent that the moving back to the DA allows companies to use up more of their interest.
9:17
SPEAKER_04: That potentially means less stockpiling in a deferred tax asset.
9:20
SPEAKER_04: It also could mean they're getting to their carry-forwards for the first time in a few years.
9:25
SPEAKER_04: Um, so really all three of these provisions have the potential to impact your deferred taxes.
9:30
SPEAKER_04: It could create new ones, reduce them, assets, liabilities, it's really across the board.
9:36
SPEAKER_04: Now, all of that really just has, those are all just temporary differences.
9:41
SPEAKER_04: And if that's all we had, then there'd really be no effective tax rate impact on these as a result of these provisions.
9:48
SPEAKER_04: But some of those provisions might also impact our valuation allowance assessment.
9:53
SPEAKER_04: So again, to the extent that you had made a determination previously about your ability to use those interest carry forwards, you might have needed a valuation allowance.
10:03
SPEAKER_04: You now need to assess in the period of enactment whether in fact that assessment changes as a result of some of these things that Pat's talked about.
10:11
SPEAKER_04: You know, 163J moving back to the DA may help companies.
10:15
SPEAKER_04: There were some other changes that were made that could, in fact, have the opposite effect for some companies.
10:20
SPEAKER_04: So the key is then getting to that modeling.
10:23
SPEAKER_04: And the modeling is there from a perspective as well of all of these changes that Pat just talked about, as well as some of the things we'll talk about on the international side.
10:33
SPEAKER_04: Companies are analyzing right now, when they take those deductions, if they were to take those deductions, does it have an impact on potentially putting them into the corporate alternative minimum tax in the US or BEAT?
10:47
SPEAKER_04: So both CAMT and BEAT are period costs.
10:50
SPEAKER_04: But to the extent that these will put them into it, there are some policy choices that need to be made, potentially for the first time, around whether and how to consider those impacts.
11:03
SPEAKER_04: If you're perpetually going to be, let's say, a CAMT payer, whether you want to consider that in the assessment of the realizability of your regular deferred taxes.
11:12
SPEAKER_04: So to the extent CMT has not been relevant for you before now, all of a sudden it could be relevant.
11:17
SPEAKER_04: But it takes a little bit of work to figure out, as Pat said, those are elections.
11:22
SPEAKER_04: You don't have to take bonus depreciation.
11:24
SPEAKER_04: You don't have to take the RD immediately.
11:27
SPEAKER_04: You have some levers you can pull.
11:28
SPEAKER_04: So all of that has really resulted in a lot of discussions around modeling to figure out what is the right picture to sort of leverage all of this that's just happened.
11:37
SPEAKER_01: Yeah, and one thing I would add, uh Diane, I should have mentioned it when I was talking about it previously, but it ties in exactly to the point Jen was just making, which is included in the legislation was the ability for taxpayers to take what we're calling a catch-up deduction for RD expense.
11:53
SPEAKER_01: So remember, between 2022, 2022, 2023, 2024, you were capitalizing and amortizing.
12:00
SPEAKER_01: Now we've gone back to immediate deductibility starting in 2025.
12:04
SPEAKER_01: Well, taxpayers were given the option by Congress in this legislation, to the extent you have unamortized amounts that you previously capitalized from 2022 through 2024, you have an election to accelerate the reversal of that amortization, either over one year or over two years.
12:21
SPEAKER_01: Going exactly to Jen's point, that is a real modeling exercise because now you have to consider the interaction with CAMT, the interaction with the beat, these other provisions that are tied off of your taxable income computation.
12:35
SPEAKER_01: Well, if you take a big accelerated deduction, your taxable income drops way down, potentially exposing you.
12:41
SPEAKER_01: It's a little bit like when the water level drops and you can see more things, right?
12:44
SPEAKER_01: When the taxable income level drops way down, now you see, well, I have a CAMT issue or I have a beat issue, which is exactly where Jen was going.
12:51
SPEAKER_04: Yeah, so that's exactly right, Pat.
12:53
SPEAKER_04: And so all of those things can come in, they impact your what level of deferred taxes, which again, that is really just a flip between deferred and current.
13:02
SPEAKER_04: So not going to have a generally going to have an ETR impact.
13:06
SPEAKER_04: But if we start bringing in the valuation allowance impacts and potentially bringing in CAMT or BEAT, which are period costs, each one of those start to have a different flavor and potential for impacting the effective tax rate.
13:19
SPEAKER_02: Okay, great.
13:19
SPEAKER_02: And one thing, which I'm sure our listeners probably know, but just to make sure when we use acronyms, we do like to define what they are.
13:27
SPEAKER_02: So we've used EBITDA a few times and the duh a few times.
13:30
SPEAKER_02: And so EBITDA is earning before interest, taxes, and depreciation and amortization.
13:35
SPEAKER_02: And then we're saying duh, it's depreciation and amortization, just making sure we're all on the same page.
13:42
SPEAKER_02: So maybe now, Pat, should we shift to the international side and you can talk us through some of the top provisions that we saw that were impacted?
13:50
SPEAKER_01: Yeah, sure.
13:50
SPEAKER_01: And you know, with respect to international tax, it's important to point out the dollar numbers that are affected here in terms of the size of the federal budget are quite small as a relative matter.
14:02
SPEAKER_01: A big change in the international tax base might be in the area of$100 billion, right?
14:07
SPEAKER_01: The individual tax changes in this bill we're talking about were in the trillions of dollars of revenue impact.
14:12
SPEAKER_01: So as a relative matter, small, small changes, but the impact to the affected taxpayers was really quite significant.
14:19
SPEAKER_01: So there were some meaningful changes to the international tax regime brought in in this legislation.
14:25
SPEAKER_01: They were all changes really that built off of the things that Congress did in 2017, right?
14:30
SPEAKER_01: Again, we go back to that.
14:31
SPEAKER_02: Always going back to 2017.
14:32
SPEAKER_02: Going back to 2017.
14:34
SPEAKER_01: Um, because in 2017, Congress made pretty major changes to the U.S.
14:39
SPEAKER_01: international tax rules.
14:40
SPEAKER_01: One of the things that we did was we introduced a broad-based minimum tax called the guilty regime, global and tangible low-taxed income.
14:47
SPEAKER_01: Uh, and the guilty regime essentially applies to the foreign subsidiaries of U.S.
14:52
SPEAKER_01: headquartered companies.
14:53
SPEAKER_01: And it provides, in general terms, that the foreign income of the U.S.
14:58
SPEAKER_01: headquartered companies has to be subject to a minimum level of tax.
15:01
SPEAKER_01: Okay.
15:02
SPEAKER_01: That was brought in in 2017, the guilty regime.
15:04
SPEAKER_01: At the same time, Congress brought in a companion provision.
15:08
SPEAKER_01: We sort of talked about it and have always talked about it as kind of a carrot and stick.
15:11
SPEAKER_01: So we had guilty.
15:12
SPEAKER_01: You can think about guilty as sort of a stick provision.
15:14
SPEAKER_01: It's a minimum tax.
15:15
SPEAKER_01: You're not going to be able to shift income offshore and maintain a very, very low rate because there's going to be a minimum tax imposed on that.
15:22
SPEAKER_01: At the same time, Congress brought in an incentive.
15:25
SPEAKER_01: We want you to do more in the United States.
15:26
SPEAKER_01: We want you to own more valuable IP in the United States.
15:29
SPEAKER_01: We want you to manufacture more here and export.
15:33
SPEAKER_01: And that was the FDII regime, foreign derived intangible income regime.
15:37
SPEAKER_01: And it essentially provides for a reduced rate that's roughly comparable to the guilty rate.
15:42
SPEAKER_01: So if you do it, if you do these activities that are bound for that are directed at foreign markets in the United States, you can qualify for FDII, which is a reduced rate of tax.
15:52
SPEAKER_01: If you do them outside of the United States, you're going to pay a comparable rate under guilty.
15:55
SPEAKER_01: So the idea was to make it neutral so that taxpayers essentially, you know, can let the business decisions drive where they conduct these activities.
16:04
SPEAKER_01: And hopefully, from Congress's perspective, more of it happens in the United States, right?
16:08
SPEAKER_01: So not a crazy thing from Congress.
16:10
SPEAKER_01: And then the third of the uh of the three provisions, the sort of big three international changes that came in in 2017 was the beat.
16:16
SPEAKER_01: Now, the beat stands for base erosion and anti-avoidance tax or anti-abuse tax.
16:21
SPEAKER_01: Um, the beat is another form of minimum tax.
16:24
SPEAKER_01: And actually, Jen and I mentioned it in passing earlier because the beat is a provision, essentially, requires you to compute your taxes twice.
16:32
SPEAKER_01: You first compute your taxes under your regular tax rules, and then you recompute your taxes using a modified set of rules, but at a lower rate.
16:41
SPEAKER_01: The beat is essentially intended to protect against base eroding payments, deductible payments from the US to a related foreign person that would strip the U.S.
16:51
SPEAKER_01: base.
16:51
SPEAKER_01: Now, I'm not really doing the beat justice.
16:53
SPEAKER_01: It's a very confusing provision, and it's frankly pretty illogical in its operation, but just at a high level.
16:59
SPEAKER_01: Those are the big three provisions that Congress brought into in 2017.
17:03
SPEAKER_01: They needed to look at all of them in this bill, because if they hadn't taken action, all three of them were going to see changes starting January 1st of next year.
17:11
SPEAKER_01: They were all going to get actually considerably more onerous on taxpayers.
17:15
SPEAKER_01: So this was something that taxpayers were watching very closely.
17:18
SPEAKER_01: You sort of knew you had a little bit the sort of Damocles hanging over your head with respect to all three of these provisions.
17:24
SPEAKER_01: So what did Congress end up doing in this legislation?
17:26
SPEAKER_01: So, with respect to the guilty regime, they made a couple of significant changes.
17:30
SPEAKER_01: One is they notched the rate up a little bit.
17:32
SPEAKER_01: So that's not great news, obviously, when you see the rate go up.
17:36
SPEAKER_01: But in exchange for that, they did something else which was much more meaningful to taxpayers, and that is for some taxpayers, and that is they changed the way in which you compute your foreign taxes, your foreign tax credit for purposes of the application of the guilty regime.
17:52
SPEAKER_01: They may they essentially dropped a requirement that you apportion some of your domestic expenses, like interest and things like that, against your guilty income in doing your foreign tax credit computation.
18:03
SPEAKER_01: I'm not gonna go crazy technical on this, Diana, but just to say it for a lot of taxpayers, even if they had only high-tax foreign operations, they were still paying meaningful US tax on their foreign income because of the impact, because basically because of a limitation on the ability to claim foreign tax credits.
18:23
SPEAKER_01: So Congress took a huge step in this legislation to eliminating that penalty.
18:28
SPEAKER_01: And that was a big deal and very significant for a lot of taxpayers.
18:31
SPEAKER_01: Um, on the FDII regime side, the thing that I would focus on here, so again, guilty is the stick that operates to impose a minimum tax outside the United States.
18:39
SPEAKER_01: FDI operates inside the United States.
18:42
SPEAKER_01: Again, the rate tweaked up a little bit.
18:44
SPEAKER_01: Well, why did it do that?
18:45
SPEAKER_01: Well, they want to stay comparable with the guilty rate.
18:47
SPEAKER_01: So the guilty rate goes up, the FDI rate goes up in kind of similar fashion.
18:52
SPEAKER_01: But the other thing they did, one of the issues with FDII when it was originally enacted is for a lot of taxpayers, if you had meaningful investments in the United States in plant and equipment, you couldn't actually take advantage of FDI because the way FDI was computed, essentially it was intended to get at your intangible profits.
19:11
SPEAKER_01: So the way that that was uh designed in 2017 was Congress said, take 10% of the basis of your tangible property that's used in business.
19:21
SPEAKER_01: And that's essentially the floor.
19:22
SPEAKER_01: It's only income above that floor that can qualify for FDII, right?
19:27
SPEAKER_01: And this was because this is essentially a formulaic way to eliminate your routine return on your uh plant and equipment and only allow for the benefit to your intangible uh profits.
19:38
SPEAKER_01: The problem with that is for a lot of companies, if you had a huge capital investment footprint in the United States, you didn't really get a benefit of FDII.
19:47
SPEAKER_01: Similarly, if you were a company that was taking advantage of FDII, you had you were getting meaningful FDII benefits, and now you were looking at making a big incremental investment.
19:57
SPEAKER_01: Do you want to make that in the United States or outside the United States?
20:00
SPEAKER_01: Well, if you make it inside the United States, you're gonna get a big cut in your FDII benefit because you just massively increased the amount of plant equipment you have in the United States.
20:09
SPEAKER_01: Congress understandably looked at that and said, that doesn't seem like a great outcome we want to.
20:13
SPEAKER_01: Right.
20:13
SPEAKER_02: That's not what we're trying to achieve.
20:14
SPEAKER_01: Yeah, exactly.
20:15
SPEAKER_01: So they got rid of that.
20:16
SPEAKER_01: Big deal for taxpayers uh who are affected by that.
20:20
SPEAKER_01: And we, I've talked to a lot of companies who essentially we make a lot of things in the United States, we do all our RD in the United States, we own our IP in the United States.
20:28
SPEAKER_01: We look like the poster child for what Congress should want, and yet we can't benefit from this regime.
20:33
SPEAKER_01: So that was a big deal and a big positive change.
20:35
SPEAKER_01: Now, the last thing I'll just mention quickly the beat, they didn't really make meaningful changes to the beat.
20:40
SPEAKER_01: They toyed with it.
20:40
SPEAKER_01: The Senate had some proposals that frankly were causing some confusion with some taxpayers, dividing the business community uh pretty significantly.
20:49
SPEAKER_01: In the end, all they did with respect to the beat is avoid making those onerous changes that were supposed to come into effect next year.
20:55
SPEAKER_01: So they pushed those out and said, we're not doing that.
20:57
SPEAKER_01: And they tweaked the rate up slightly on the beat.
21:00
SPEAKER_01: Otherwise, we have the beat that we all know and hate today is going to continue forward indefinitely.
21:05
SPEAKER_01: So that's more or less what they did in the international space, at least at a high level.
21:09
SPEAKER_02: Okay.
21:10
SPEAKER_02: Maybe I'll turn back to you, Jen, and then understanding what are the accounting implications from these changes.
21:15
SPEAKER_04: Yeah, so the accounting for these three is is a little bit different than what we just talked about on the domestic provisions.
21:21
SPEAKER_04: So the provisions, the changes that Pat just walked through are generally effective for next year.
21:26
SPEAKER_04: So years beginning after December 31st, 2025.
21:30
SPEAKER_04: Um, and so from a financial statement perspective, in 2025, these provisions may not have a impact.
21:39
SPEAKER_04: Now, let me explain why that is and why that might not be the case for some.
21:45
SPEAKER_04: And so, for when you look at FDII, um it's a period cost.
21:50
SPEAKER_04: When you look at BEAT, it's a period cost.
21:51
SPEAKER_04: What does that mean?
21:52
SPEAKER_04: It means it doesn't come into the measurement of our deferred taxes.
21:56
SPEAKER_04: So if it doesn't come into the measurement of our deferred taxes and it's not a effective until next year, for that purpose, you would expect that there might not be much impact.
22:05
SPEAKER_04: From a guilty perspective, there was a policy choice.
22:09
SPEAKER_04: So back in 2017, you could either choose to treat that as a period cost, which the vast majority of registrants did, or you could treat that and consider that in the measurement of your deferred.
22:23
SPEAKER_04: So again, if you're in that period policy of choice, that's really a 2026 effect.
22:30
SPEAKER_04: It'll start to impact your effective tax rate in 2026.
22:33
SPEAKER_04: But if you're in that population that chose to account for guilty consider, I should say, guilty in the measurement of your deferred, there could be an impact with the enactment date.
22:45
SPEAKER_04: Now there's one other area that could cause you to have an impact in 2025, even though these provisions are not effective until 2026.
22:53
SPEAKER_04: So you have to account for all the effects of a change in tax law in the period of enactment.
22:59
SPEAKER_04: In if you have a delayed effective date, you just have to consider that delayed effective date in your analysis.
23:05
SPEAKER_04: So I mentioned valuation allowance before.
23:08
SPEAKER_04: In theory, these provisions could have an impact on a company's future forecast, which could impact their valuation allowance assessment.
23:16
SPEAKER_04: So depending upon where a company was prior to the enactment of the One Big Beautiful Bill Act, prior to that, then you would have to consider whether these changes have any incremental impact on that assessment.
23:29
SPEAKER_04: And you'd have to consider those in this period of enactment.
23:33
SPEAKER_04: It also goes back to the modeling thing that I mentioned because Pat was talking about FDII.
23:39
SPEAKER_04: So for companies that have these significant RD expenses and they're a significant FDII benefiter, you know, so they're, they are realizing the benefits of that, those two factors together could be putting you into that place that could be throwing you into let's say a CAMT basis.
23:55
SPEAKER_04: So again it does go back to that original conversation on the domestic side, but generally all around this valuation allowance area.
24:02
SPEAKER_02: Okay, got it.
24:03
SPEAKER_02: Maybe shifting gears a little bit.
24:05
SPEAKER_02: So I know Pat, we've talked a lot about these changes and following up on things that happened in 2017.
24:11
SPEAKER_02: Yes.
24:11
SPEAKER_02: But there were also some changes related to some of the credits under the Inflation Reduction Act.
24:17
SPEAKER_02: And just a quick plug we had a podcast um recently where we talked about some of those changes if our listeners want to get into the details.
24:24
SPEAKER_02: But maybe Pat, you can also help us by just talking a little bit on what were some of the changes to some of those credits as well.
24:31
SPEAKER_02: Yeah.
24:32
SPEAKER_01: And just I mean I I'm not going to go into detail as you noted Diana there's another podcast to do that.
24:37
SPEAKER_01: But just sort of again contextualizing what happened in this bill.
24:41
SPEAKER_01: So the Inflation Reduction Act adopted by in 2022, Democrats controlled the Congress, President Biden was in the White House.
24:49
SPEAKER_01: That was their version of reconciliation.
24:51
SPEAKER_01: It was done as a reconciliation bill.
24:54
SPEAKER_01: When Republicans came out of the November elections with control of both houses of Congress and the White House, one of the first things that they pointed to was all those incentives that were adopted by those green energy incentives in the Inflation Reduction Act, those can be a significant pay for in other words though we can repeal those incentives that'll give us money that we can use to put into our priorities in our reconciliation bill because remember reconciliation bills have all those weird procedural things and you have to make the numbers work.
25:24
SPEAKER_01: The issue of course was there were a lot of provisions in the Inflation Reduction Act that had become pretty popular in states that were represented by Republicans because they were leading to investment in these places.
25:35
SPEAKER_01: And so in the end what we saw was Republicans in this 2025 legislation did take a meaningful swipe at a number of the green energy incentives in the Inflation Reduction Act, but a number of them have remained in place and that's an important thing to note.
25:49
SPEAKER_01: So you have to really pay attention to which particular incentives we're talking about here.
25:53
SPEAKER_01: I'm just going to highlight two very quickly one is Section 45 Cap Y, the Clean Energy Production Credit, and Section 48 CAPE, the Clean Energy Investment Tax Credit.
26:04
SPEAKER_01: Those are two credits that were, I would say, disfavored from the standpoint of when the Republicans took power, but they weren't repealed outright.
26:13
SPEAKER_01: Instead what they did was they accelerated essentially the requirement for when the investment has to be placed in service.
26:18
SPEAKER_01: So essentially you're under a little bit of a tighter time horizon for make purposes of making those investments.
26:25
SPEAKER_01: Now we're actually seeing this play out interestingly in real time with respect to some of the so one of the things that the Republicans did in this bill was they almost immediately repealed the green energy the electric vehicle credits.
26:38
SPEAKER_01: So those are going away very quickly.
26:40
SPEAKER_01: So what are we seeing right now in real time as we sit here today recording this podcast is sort of a rush by people to go get their EVs before the incentive goes away.
26:48
SPEAKER_01: Right.
26:49
SPEAKER_01: So how this will play out in the business community and how it will play out in terms of investment decisions remains to be seen.
26:55
SPEAKER_01: But we did accelerate essentially the phasing down of those two credits.
26:59
SPEAKER_01: So that's something to pay close attention to we also in this legislation Congress in this legislation kind of up the ante or up the restrictions for what we sometimes call Fiat, foreign entity of concern rules.
27:12
SPEAKER_01: So this is going to be countries like China, Iran, North Korea, Russia, to the extent the investment is somehow connected it doesn't have to be you know in a sort of an intimate connection but there's some level of connection with an entity or an affiliate in those jurisdictions.
27:29
SPEAKER_01: That's the kind of thing that you have to pay very close attention to because Congress obviously has taken the position that they disfavor those those locations or they disfavor those jurisdictions.
27:39
SPEAKER_01: So that's something we're going to have to watch very carefully as well.
27:42
SPEAKER_02: Okay, great.
27:42
SPEAKER_02: Maybe we'll do it again, Jen.
27:44
SPEAKER_02: We'll turn back to you to understand what are what are the accounting implications from these changes.
27:48
SPEAKER_04: We're in like a I was going to say a tennis match, but maybe I should say pickleball because that's really the thing these days, right?
27:54
SPEAKER_04: Yes.
27:56
SPEAKER_04: Listen, for credits, um much many of those changes as Pat mentioned really are a future effect.
28:04
SPEAKER_04: But to the extent that you are one of these companies that benefits from some of these clean vehicle credits from a corporate perspective, you will have to think about whether there's any impact to you.
28:15
SPEAKER_04: And I think the key thing that Pat said which would be very relevant for the accounting is it's going to be facts and circumstances.
28:21
SPEAKER_04: You really have to look at where you sit, which credits you have looked at in the past and which might be flowing through from a financial statement perspective.
28:30
SPEAKER_04: So a couple of areas that could impact to the extent you are a company that let's say was buying some credits that are actually impacted this year, in those cases you may have already taken some of that benefit through your annual effective tax rate, your AETR.
28:46
SPEAKER_04: And so to the extent that there is an impact that needs to be adjusted here, you'd have to be thinking about that in the period of enactment.
28:53
SPEAKER_04: And then more nuanced but if you're looking at equity investments where they've got flow throughs where they're benefiting from some of the credits, even some of the qualifications for the use of the proportional amortization method.
29:06
SPEAKER_04: Again, those are pretty nuanced rules very specific to companies that have to meet certain rules but to the extent those might be impacted the amount of benefit you're getting um things like that will have to be taken into account.
29:19
SPEAKER_04: But it would be hard to just broadly say here is the impact, because it's really going to depend upon which credits and your specific facts and circumstances.
29:28
SPEAKER_04: Okay, that's very helpful.
29:30
SPEAKER_01: Well maybe as we're wrapping things up here, Pat, any other provisions that change that companies should be keeping an eye out for well I would just highlight a couple um one um the nonprofit sector is not something that we tend to you know see as sort of a major area of focus and attention for Congress.
29:46
SPEAKER_01: In this bill there were a couple of provisions though that were one, of course we've seen how President Trump and the Trump administration have had universities, certain universities in particular in their sites and have been focusing more attention on those.
30:01
SPEAKER_01: There's also been a lot of folks in recent years about the size of some university endowments.
30:05
SPEAKER_01: And so what we saw was an increase in the excise tax on certain university endowments.
30:09
SPEAKER_01: So that was something that was not necessarily super surprising compared to some proposals that were in the early stages of this legislation the final bill was a lot more modest but you know that's easy for me to say because I'm not the one who's going to be subject to these increased excise taxes.
30:23
SPEAKER_01: So that's one issue.
30:24
SPEAKER_01: Another one is the Congress adopted a 1% floor and a 10% ceiling on corporate charitable contributions.
30:31
SPEAKER_01: This is going to be an interesting issue for corporations from the standpoint of technical tax for for at least two reasons.
30:36
SPEAKER_01: One of which is how do you think about the rhythm of your charitable contributions when you're dealing with a 1% floor every single year for those and this 10% ceiling.
30:47
SPEAKER_01: So do you think about the timing of those but the other thing is and this is something that maybe wouldn't would not have been thought about at all in the past when you make a contribution to something you fund something you know you as a corporation you obviously you you do that for charitable impulses but you also do it to get your name out there.
31:05
SPEAKER_01: You also do it for reasons that are tied to your business right reputation things like that.
31:11
SPEAKER_01: So is that a charitable contribution expense under section 170 or is it an ordinary and necessary business expense under section 162?
31:19
SPEAKER_01: These are things that companies have never necessarily thought about in the past but maybe thinking a little bit more about now.
31:25
SPEAKER_02: Okay.
31:25
SPEAKER_02: Jen, we'll hit it back to you for any accounting implications.
31:29
SPEAKER_04: Yeah so the the excise tax, the endowment excise tax that Pat mentioned, so that exists today uh but in a smaller scope so a uh um less universities are included in the scope today.
31:43
SPEAKER_04: For those universities really that are already in it, they are likely recording their deferred taxes most likely deferred taxes but it's I suppose you could have some deferred assets as well but um they are measuring those at 1.4% which is the tax rate today.
32:00
SPEAKER_04: So the two things that happened you've now brought more private universities into scope.
32:06
SPEAKER_04: So now for those entities they need to be able to gather the data to figure out what their basis differences are between book and tax to be able to record their deferred taxes for the first time, which is a big deal and it would be at the date of enactment.
32:21
SPEAKER_04: And then for both populations you've got a tiered, a three-tiered structure from 1.4% up to 8% of a tax.
32:28
SPEAKER_04: So you've got to think about where you fit in that again as part of measuring those deferred taxes.
32:33
SPEAKER_04: On the charitable contribution side this 1% floor people have talked about will that have an effective tax rate impact, a negative impact on the effective tax rate my gut is that may not be material, but you know companies are certainly needing to look at that.
32:51
SPEAKER_04: But as they look at it for the 10% limit you could be looking at more carry forwards they're subject to a carry forward limitation.
32:58
SPEAKER_04: You're talking about deferred taxes and then of course the valuation allowance assessment I think we could do a bingo game with this valuation allowance that in 2017 and 2022 I think.
33:11
SPEAKER_04: Right, right.
33:12
SPEAKER_04: So um so anyway so those are some of the impacts that companies are looking at in with regard to those provisions.
33:18
SPEAKER_02: Okay that's helpful.
33:19
SPEAKER_02: One other thing Pat I wanted to ask you about was retaliatory taxes.
33:24
SPEAKER_02: There was a lot of debate in the draft legislation so maybe you can explain what are those and why they didn't end up in the final bill.
33:31
SPEAKER_01: Yeah yeah what the heck is all that about so um you know for a lot of people who don't pay close attention necessarily to tax uh CFOs, controllers, people like that, uh, and certainly don't traffic in code sections um uh on a on a day-to-day basis uh if there's one code section they heard about as this bill was moving forward, it was Section 899.
33:52
SPEAKER_01: Section 899 was a proposal that was in this legislation all the way up until the very end, right before it went to the Senate floor for a vote that essentially was going to impose retaliatory taxation on other countries who were perceived to be imposing unfair taxes on the United States.
34:08
SPEAKER_01: Now I'm not going to get into a huge amount of detail on this Diana but ultimately what we're talking about here is an OECD project which Jen and I have talked about in the past on some of some of these podcasts that relates to the idea of other countries imposing a minimum tax on income of multinationals above a certain size.
34:27
SPEAKER_01: If it sounds a little bit like you know our minimum tax, whether that's the guilty or the KMT or the beat, we've got a lot of minimum taxes in the United States it is kind of similar in concept but the reality is because the OECD's design for a minimum tax doesn't match up with the US design essentially what Congress was reacting to was other countries are going to essentially be imposing increased tax on US companies because they're going to be perceived to be those US companies will be perceived to be not be pay not be paying enough tax.
34:58
SPEAKER_01: Well Congress sort of found that enraging because they said well is the problem here that we're being too generous, we the Congress with things like RD tax credits or other forms of tax incentives hey that's our decision.
35:09
SPEAKER_01: We've read the Constitution Article one says we make the tax law for the United States not other countries.
35:14
SPEAKER_01: So they were pretty upset about that.
35:15
SPEAKER_01: So that was sort of a sovereignty point.
35:17
SPEAKER_01: But the other point is there's a real revenue implication here if other countries are imposing more tax on U.S.
35:22
SPEAKER_01: companies and the U.S.
35:23
SPEAKER_01: is collecting less tax as a result of the foreign tax credit, that's going to hurt U.S.
35:27
SPEAKER_01: revenue so Congress essentially really you know got in pretty high dudgeon about all of this and says well we're going to impose tax on other countries that are imposing unfair taxes on us.
35:37
SPEAKER_01: In the end there was a deal that was struck Secretary Besson announced shortly before the bill went to the Senate floor that the G7 countries had agreed on a new framework that would essentially carve US companies out of the more onerous aspects of this minimum tax.
35:52
SPEAKER_01: It's an agreement to agree it's not binding on these countries in a legal sense so we have a lot more to work through Diana as we look forward over the next few months but it allowed it gave essentially Congress and the administration cover to say we're going to remove this retaliatory tax provision, which was causing a lot of concern from foreign headquartered companies with big US investments.
36:16
SPEAKER_01: So there was a lot of concern kind of in the background about what's this tax going to mean, where's it going to hit?
36:20
SPEAKER_01: It allowed Congress to say we're going to pull back on this for now but we're watching this G7 statement and how it develops and we'll see if that ultimately leads to a satisfactory outcome.
36:31
SPEAKER_02: Okay.
36:31
SPEAKER_02: So more to come on that.
36:32
SPEAKER_02: Sure.
36:33
SPEAKER_02: So Jen, given this G7 agreement, do companies still need to be accounting for Pillar two?
36:39
SPEAKER_04: Yeah I I think this is there's really two things in this area.
36:44
SPEAKER_04: So Pillar two is um for better or worse still alive and well it is enacted in jurisdictions all around the world and those are already being accounted for by companies and they need to continue to account for that.
36:57
SPEAKER_04: So that impact will continue to be in your financial statements until laws are changed.
37:03
SPEAKER_04: So one, yes, you need to continue to account for pillar two.
37:07
SPEAKER_04: But the second part is what Pat was talking about is what's to come and how's that going to get done and when is that going to get done?
37:14
SPEAKER_04: And I think that from a financial reporting perspective is a really big deal.
37:18
SPEAKER_04: I mean obviously from a corporate perspective it's a really big deal as well.
37:22
SPEAKER_04: But as I think about the questions that we're getting from a financial reporting perspective, the OECD, the G7 is just an agreement.
37:30
SPEAKER_04: In order for this to you know continue down its path you're gonna need to see some guidance from the OECD but the OECD does not set law all of these local countries all of these jurisdictions have to implement the laws under their own legislative process.
37:47
SPEAKER_04: As you can imagine there is wide diversity and how long that takes what that looks like how complicated it is to get something through there are some jurisdictions that automatically I think you can call it bring in OECD administrative guidance, but it's not Pat I'm looking at you, it's not the majority of no very far from the majority for the vast majority of countries this is going to have to be done the old fashioned way.
38:14
SPEAKER_01: Right.
38:14
SPEAKER_01: You know there's an agreement reached at the OECD on language and then they have to go through their legislative process.
38:19
SPEAKER_01: Right.
38:20
SPEAKER_04: And so as you think about that from a financial reporting perspective, what that basically means there are companies out there today that are relying on a safe harbor as to deal with the UTPR, one of the mechanisms under Pillar two that safe harbor expires at the end of this year, potentially subjecting US parented companies to to the UTPR in other jurisdictions.
38:42
SPEAKER_04: So as we look at all of that, that is something that companies are going to have to be thinking about as they head into calculating their annual effective tax rate as they get into 2026.
38:52
SPEAKER_04: And so people are anxiously awaiting to say how is this going to play out?
38:56
SPEAKER_04: And I think the reality is it's gonna take time to tell and then to be able to understand the financial reporting impacts but you do not account for potential changes you only start accounting once you have enacted law in the particular jurisdiction.
39:11
SPEAKER_04: So a lot to be watching.
39:13
SPEAKER_02: Yeah okay well before we wrap up um Pat and Jen, are there any other things that you think that companies should be keeping an out eye out for post enactment maybe Pat will start with you.
39:25
SPEAKER_01: So I mean I'll I'll go real quick Diana I think um we just talked about this G7 agreement and the what's to come in front of us in terms of how this gets finally agreed, the details and then pushed out to legislation that's going to unfold over a period of months at a minimum.
39:41
SPEAKER_01: So we're gonna need to be paying attention to that.
39:43
SPEAKER_01: Of course anytime major legislation gets done the Treasury department uh has to write regulations essentially you know filling in the gaps, filling in the details um so we'll be closely watching Treasury department regulations.
39:56
SPEAKER_01: They will likely start with the individual tax provisions.
39:59
SPEAKER_01: Again they affect most of the taxpayers but they know that there are some meaningful changes that came in in this bill that are going to have a big impact on corporations and so there will be corporate guidance that comes out I would expect some of that will be happening before the end of the year.
40:13
SPEAKER_01: So we'll be looking for that as well.
40:15
SPEAKER_01: In terms of additional legislation in the tax area as such, I'm skeptical we may see some form of a year-end tax extenders package that will relate to things more in the healthcare space than in the tax space, but it may have a tax aspect to it.
40:30
SPEAKER_01: Speaker Johnson has talked about the idea of doing a second reconciliation bill.
40:34
SPEAKER_01: I think that is extraordinarily unlikely unless President Trump essentially says fellas it's time to do another reconciliation bill in which I'd say the odds would go up considerably.
40:44
SPEAKER_01: Right.
40:45
SPEAKER_01: Right now he hasn't and so I think the likelihood of there being a second reconciliation bill this year is really quite low.
40:51
SPEAKER_01: So but those are some of the things we're watching okay great Jen?
40:54
SPEAKER_04: Yeah I I'm actually only going to raise one point and it's really not specific necessarily to um the One Big Beautiful bill act um but that has to do with the income tax accounting disclosure project or actually I should say standard.
41:08
SPEAKER_04: It's no longer a project right so the standard which is effective for companies calendar year companies for this year end.
41:14
SPEAKER_04: So we only have a few months to go before you need to be reflecting that the change in tax law that we're looking at now will be one of the categories that you're looking at in that effective tax rate reconciliation that you're going to be doing.
41:28
SPEAKER_04: But what I just wanted to raise and it's an area that we've been seeing a lot of questions.
41:32
SPEAKER_04: So I I I forget now at several weeks maybe as much as a month ago there was an appropriations bill that included a provision that would essentially ban the SEC from funding the FASB until the FASB actually pulls this ASU, this disclosure ASU.
41:52
SPEAKER_04: And so we've had a number of questions from companies just what does that mean to me?
41:56
SPEAKER_04: What does that really look like?
41:57
SPEAKER_04: And I thought it would be a good topic for us to bring in on this podcast as well because it actually doesn't really mean anything right now.
42:05
SPEAKER_04: It should still be pencils up.
42:07
SPEAKER_04: While the House subcommittee supports this, it would still need to go through the Senate and whether the Senate would um you know agree with the provision would be of debate.
42:18
SPEAKER_04: There's also a question as to how fast or not any kind of appropriations bill, whether it would ever make its way through.
42:25
SPEAKER_04: And so what we've really just encouraged companies is to be sure not to be pencils down.
42:29
SPEAKER_04: We should still be pencils up because the clock is ticking as far as how much time and when you think about everything that companies are going to be dealing with with the one big beautiful bill act and you add then the level of detail required for the disclosure um the new disclosure rules it's going to be important to keep moving on that.
42:47
SPEAKER_02: Yeah there's a lot going on a lot to keep your eyes on.
42:51
SPEAKER_02: Well thank you so much Pat and Jen for joining me today.
42:54
SPEAKER_02: As we've said there's a lot of changes we have a number of resources available for these companies or for our listeners and so we'll put those in the show notes.
43:04
SPEAKER_02: So thank you again for joining me today and it was really great conversation.
43:07
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43:22
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