ASU 2023-09 Income Tax Disclosures: 2026 Compliance Guide

FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures in December 2023, and for calendar-year public business entities, it is no longer a future problem. The first ASU 2023-09-compliant 10-Ks landed with the SEC in early 2026, and the questions finance and tax teams are wrestling with right now are not about what the rule says but about how to execute it cleanly, avoid SEC comments, and handle the open questions the standard itself does not answer.

This guide is for CFOs, tax directors, and ESG controllers at mid-to-large enterprises who are either finalizing their first live filing or preparing for the non-PBE effective date. It covers the eight required ETR reconciliation categories, how the 5% threshold actually works in numbers, the Pillar Two categorization problem, and the SEC scrutiny risk that comes with more granular disclosures.

What Did ASU 2023-09 Change, and Why?

ASU 2023-09 is the most significant overhaul of income tax disclosure requirements under US GAAP in decades. Before the standard, ASC 740 required public entities to provide a tabular rate reconciliation but left "significant" undefined. In practice, most companies relied on SEC Regulation S-X 4-08(h)(2) as the de facto threshold, which required disclosure of items exceeding 5% of pre-tax income multiplied by the statutory rate. The categories were self-selected, the format varied widely, and entities could present in either dollars or percentages.

Investors and analysts had long complained that ETR reconciliations were too aggregated to be useful for capital allocation decisions. FASB responded by codifying and expanding the 5% threshold into GAAP itself, mandating eight specific reconciliation categories, requiring both dollar amounts and percentages, and adding a new income taxes paid disclosure disaggregated by jurisdiction.

As PwC summarizes: "The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions."

Effective Dates: When Does ASU 2023-09 Apply to You?

Early adoption is permitted for all entities. The default transition method is prospective, meaning prior-period disclosures are not restated, but entities must disclose the nature of and reason for the change in accounting principle in the adoption year. Retrospective application is optional.

Key takeaway: Calendar-year PBEs are already in year one of live compliance. Non-PBEs have one additional year, but the data-gathering work should start now, not in Q4 2026.

The standard applies to all entities subject to income taxes, including not-for-profit entities with taxable subsidiaries. This is broader than some practitioners initially assumed, per PwC's October 2025 guidance.

The Eight Required ETR Reconciliation Categories

PBEs must now organize their rate reconciliation into eight prescribed categories rather than self-selecting line items. This is the single biggest structural change for tax provision teams, because the categories do not map cleanly to how most companies currently organize their tax workpapers.

The eight categories, as codified in ASC 740-10-50-12A and detailed in Deloitte's Heads Up publication, are:

1. State and local income tax, net of federal (national) income tax effect
2. Foreign tax effects
3. Effect of changes in tax laws or rates enacted in the current period
4. Effect of cross-border tax laws (GILTI, FDII, BEAT, and similar provisions)
5. Tax credits (R&D credits, production tax credits, IRA-expanded credits)
6. Changes in valuation allowances
7. Nontaxable or nondeductible items
8. Changes in unrecognized tax benefits

Items that do not fall into any of the eight categories go into a residual "other" line. The reconciliation must be presented in both dollar amounts and percentages, a change from prior GAAP which allowed entities to choose one or the other.

Non-PBEs are not required to provide a tabular rate reconciliation. They must provide qualitative disclosure about specific categories of reconciling items and individual jurisdictions that result in a significant difference between the statutory rate and the effective rate.

Practical mapping challenge

The categories sound clean on paper. In practice, a US multinational's tax provision workpapers might carry dozens of line items built around internal legal entity structures, not FASB's eight buckets. Mapping existing provision data to the new categories requires a deliberate reconciliation exercise, often involving both the tax provision team and external auditors, before the first filing deadline.

For companies with significant Inflation Reduction Act tax credits, the "tax credits" category deserves particular attention. The IRA's expansion of transferable and direct-pay credits for clean energy and manufacturing has made this category more material for many entities, increasing the likelihood it will meet the 5% disaggregation threshold.

How the 5% Disaggregation Threshold Works in Practice

The 5% threshold determines which individual reconciling items within the eight categories must be separately disclosed. Most summaries explain this conceptually. Here is how it works with numbers.

The threshold is calculated as:

5% x |Pre-tax income (or loss) from continuing operations| x Applicable statutory federal (national) income tax rate

For a US-domiciled entity subject to the 21% federal statutory rate:

• If pre-tax income is $500 million, the threshold is: 5% x $500M x 21% = $5.25 million
• Any individual reconciling item within a prescribed category whose absolute value equals or exceeds $5.25 million must be separately disclosed
• In effective tax rate terms, this equals a 1.05 percentage point movement (5% x 21%), consistent with the existing SEC Regulation S-X 4-08(h)(2) threshold that ASU 2023-09 now codifies into GAAP

Three mechanics matter here:

1. Absolute value applies. Both favorable and unfavorable items that meet the threshold must be separately disclosed. A large R&D credit that reduces the ETR and a large valuation allowance charge that increases it are both subject to the same test.

2. Year-by-year assessment. If a reconciling item meets the 5% threshold in one year but not in others presented, it must be separately disclosed only in the year it meets the threshold. It does not need to be separately disclosed in years where it falls below, per PwC's October 2025 guidance.

3. Qualitative overlay. The threshold is not purely mechanical. Deloitte's Heads Up notes that entities should also consider whether a reconciling item "affects the historical trend line of the category to which the underlying adjustment is related" as a qualitative factor for additional disaggregation, even if the item falls below 5%.

Key takeaway: An item can sit within a prescribed category but fall below the threshold and therefore not require separate disclosure. Conversely, an item above the threshold in a residual "other" category still must be separately broken out. Both conditions, category membership and threshold, must be evaluated independently.

Income Taxes Paid: The New Jurisdictional Disclosure

All entities, PBEs and non-PBEs alike, must now disclose income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign. This requirement applies regardless of whether the entity provides a tabular rate reconciliation.

The additional layer: any individual jurisdiction where income taxes paid equal or exceed 5% of total income taxes paid must be separately disclosed. For a multinational paying taxes in 30 or 40 countries, this means identifying which specific countries cross the threshold and reporting them individually.

As Deloitte's guidance specifies, the disclosure must also include:

• Income (or loss) from continuing operations before income tax expense (or benefit), disaggregated between domestic and foreign
• Income tax expense (or benefit) from continuing operations, disaggregated by federal (national), state, and foreign
• Income taxes on foreign earnings imposed by the jurisdiction of domicile are included in the domicile jurisdiction's amount, not the foreign amount

The data infrastructure problem

This is where many companies are running into real operational difficulty. Existing ERP systems and tax provision software often track cash taxes paid at a consolidated or regional level, not by individual country. Producing a compliant disclosure requires either upgrading data collection processes or building manual workarounds, neither of which is trivial for a company operating in dozens of jurisdictions.

For companies with significant ESG reporting obligations, there is also a meaningful intersection here. The income taxes paid disclosure under ASU 2023-09 overlaps substantially with the tax transparency disclosures required under GRI 207 (Tax Standard) and emerging CSRD requirements. Finance and ESG teams that align their data collection processes across these frameworks can reduce duplication, but this requires deliberate coordination before the close.

Non-US Domiciled Entities: The State-Like Jurisdiction Problem

Non-US domiciled PBEs filing with the SEC face a specific challenge: they must now start their rate reconciliation from the federal (national) income tax rate of their country of domicile, not a blended federal-plus-state rate.

This matters most for companies domiciled in Switzerland (cantons), Canada (provinces), Germany (trade tax), and similar jurisdictions where state-like taxes are a substantial portion of total income tax expense. Many of these companies have historically blended federal and state-like rates as their starting point.

Under ASU 2023-09, that is no longer permitted. As PwC confirms: "Companies domiciled outside the US will need to separately disclose the state and local effects in their jurisdiction of domicile separately in their rate reconciliation upon adoption of the ASU."

Additionally, any PBE that does not use the US federal statutory rate must disclose the rate used and the basis for using that rate, a new transparency requirement for non-US domiciled SEC registrants.

The Pillar Two Problem: An Open Question for Multinationals

ASU 2023-09 does not explicitly address how Pillar Two global minimum tax top-up taxes should be categorized within the eight prescribed ETR reconciliation categories. This is the most pressing unresolved question for multinational CFOs and tax directors in 2026.

FASB has not issued a separate ASU or staff Q&A specifically addressing Pillar Two's interaction with ASU 2023-09. The leading practice approach among early adopters has been to include Pillar Two top-up taxes within the "foreign tax effects" category or the "effect of cross-border tax laws" category, depending on the specific mechanism. The "effect of cross-border tax laws" category was designed to capture GILTI, FDII, BEAT, and similar provisions, and Pillar Two has some structural similarities to GILTI for US multinationals.

The practical risk: if Pillar Two top-up taxes are material and meet the 5% threshold, they will need to be separately disclosed regardless of which category they land in. Companies should document their categorization rationale clearly, because this is exactly the kind of judgment call that SEC staff comment letters target.

For companies navigating both ASU 2023-09 and the OBBBA 2026's uncertain tax position implications, the OBBBA 2026 ASC 740 guide covers the UTP recognition and measurement questions that intersect with the "changes in unrecognized tax benefits" category.

SEC Comment Letter Risk Under ASU 2023-09

The SEC staff has historically scrutinized ETR reconciliation disclosures. With ASU 2023-09 raising the specificity bar, the risk of comment letters on income tax disclosures is higher than it was under the old standard. More granular disclosures create more surface area for staff questions.

Based on the SEC's historical comment patterns on income tax disclosures and the new standard's requirements, the areas most likely to draw scrutiny include:

• Cross-border tax laws category: GILTI, FDII, and BEAT disclosures are already a known SEC focus area. The new prescribed category makes it harder to bury these items in an aggregated "other" line.
• Pillar Two categorization: Any company with material Pillar Two exposure that does not clearly explain its categorization choice is a comment letter candidate.
• IRA tax credits: Companies benefiting from transferable or direct-pay credits under the Inflation Reduction Act that do not separately disclose them if they meet the 5% threshold will face questions.
• Income taxes paid disaggregation: If the jurisdictional breakdown in the new disclosure is inconsistent with geographic segment disclosures or prior-year cash flow statement disclosures, staff will notice.
• Non-US domicile rate disclosure: Failure to disclose the rate used and the basis for using it is a straightforward compliance miss that staff will flag.

For broader context on what the SEC is currently focusing on in comment letters, see SEC Comment Letter Trends: Seven Issues and Three New Focus Areas.

Prospective vs. Retrospective Adoption: How to Decide

The default under ASU 2023-09 is prospective adoption, meaning the new disclosures appear in the year of adoption and prior-period comparatives are not restated. Retrospective application is optional.

The decision framework:

Companies that expect investor or analyst questions about why the ETR looks different in the adoption year should consider retrospective application. The extra operational work of restating prior-period disclosures into the new format is often worth it when the alternative is fielding comparability questions on earnings calls.

What Non-PBEs Need to Know

Non-PBEs, including private companies and not-for-profit entities with taxable subsidiaries, have a later effective date (annual periods beginning after December 15, 2025, meaning fiscal year 2026 for calendar-year entities) and different requirements.

Key differences for non-PBEs:

• No tabular rate reconciliation required. Non-PBEs must provide qualitative disclosure about specific categories of reconciling items and individual jurisdictions that result in a significant difference between the statutory rate and the effective rate.
• Income taxes paid disclosure applies. The jurisdictional disaggregation of income taxes paid (net of refunds) is required for all entities, including non-PBEs.
• Scope includes not-for-profits with taxable subsidiaries. This catches some organizations that may not have been tracking the standard closely.

Non-PBEs considering whether to align with PBE peers through early adoption should weigh whether the qualitative-only reconciliation requirement is sufficient for their stakeholders, or whether voluntary adoption of the more granular tabular format would better serve lenders, private equity sponsors, or other users of their financial statements.

FAQ

Why did FASB issue ASU 2023-09 on income tax disclosures? FASB issued ASU 2023-09 in response to investor requests for more transparent, decision-useful income tax information. The prior standard left "significant" undefined and allowed wide variation in presentation, making it difficult for investors to compare ETR drivers across companies or assess future cash tax obligations.

What is the 5% threshold under ASU 2023-09, exactly? The threshold equals 5% of the absolute value of pre-tax income (or loss) from continuing operations multiplied by the applicable statutory federal income tax rate. For a US entity with $500 million pre-tax income and a 21% statutory rate, that is $5.25 million. Any individual reconciling item within a prescribed category at or above that amount must be separately disclosed.

Do we have to present the ETR reconciliation in both dollars and percentages? Yes, for PBEs. ASU 2023-09 requires both dollar amounts and percentages. Prior GAAP allowed entities to choose one or the other. Non-PBEs are not required to provide a tabular reconciliation at all.

How should Pillar Two top-up taxes be categorized in the eight-category reconciliation? FASB has not issued specific guidance on this. The leading practice is to include Pillar Two top-up taxes in either the "foreign tax effects" or "effect of cross-border tax laws" category, with clear narrative explanation. If the amount meets the 5% threshold, it must be separately disclosed regardless of category.

What happens if a reconciling item meets the 5% threshold in one year but not others? The item must be separately disclosed only in the year it meets the threshold. It does not need to be separately disclosed in years where it falls below 5%, per PwC's October 2025 guidance.

Does ASU 2023-09 apply to not-for-profit entities? Yes, to the extent a not-for-profit entity is subject to income taxes, including through taxable subsidiaries. This is broader than some practitioners initially assumed.

For related ASC 740 questions arising from recent tax law changes, see the OBBBA 2026 uncertain tax positions guide and the Section 899 retaliatory tax and ASC 740 analysis. For the broader income statement disaggregation picture, ASU 2024-03 DISE runs in parallel and deserves attention from the same teams implementing ASU 2023-09.