New income tax disclosure requirements under Accounting Standards Update (ASU) 2023-09 take effect for privately held companies in 2026. Understanding what has changed and what the new requirements are starts with why the disclosure exists in the first place.
Why Financial Statements Carry an Income Tax Footnote
Under generally accepted accounting principles (GAAP), the income tax expense reported on a company’s income statement is an accounting figure and does not necessarily represent what the company actually paid. It reflects the overall tax effect of transactions in the period those transactions hit the books, which is often not aligned with when cash tax payments are remitted. So, the reported tax expense and the checks a company writes rarely match, sometimes by a wide margin.
For companies issuing audit, review, or compilation reports, the income tax footnote, specifically the rate reconciliation, exists to close that gap for the reader. It explains why the effective tax rate differs from the statutory tax rate and summarizes the tax consequences that have already been recognized in book income but not yet settled. Investors eventually told the Financial Accounting Standards Board (FASB) that this footnote had become too summarized to be useful, particularly when they were trying to ascertain whether a company’s tax rate would remain constant over time or what the company’s actual cash tax exposure is. ASU 2023-09 is the response to the investor commentary. These updates, which are outlined below, do not change how income taxes are measured under ASC 740; instead they change what has to be further explained.
Public companies adopted these rules first, for annual periods beginning after December 15, 2024. Everyone else follows a year later, which puts a private calendar-year company inside its first covered period now, with the expanded footnote appearing in its 2026 financial statements.
How the Rate Reconciliation Changed + a New Disclosure Requirement
For public companies, the rate reconciliation became a standardized table including eight prescribed categories covering state taxes, foreign effects, effects of change in tax laws or rates, effects of cross-border tax laws, credits, valuation allowances, nontaxable or non-deductible items, and changes in unrecognized tax benefits. These categories are presented in both dollars and percentages, with any sizable item inside those categories broken out on its own and foreign amounts identified by country.
Private companies were never required to present that table, and they are still not required to do so. However, what has changed is that the same eight categories now have to be explained qualitatively in words. The old approach of noting in one sentence that the effective tax rate differs from the statutory rate due to the existence of a valuation allowance no longer meets the requirement.
One new disclosure applies to everyone equally. Income taxes actually paid, net of refunds actually received, must now be broken out among federal, state, and foreign, and then further broken out by any individual jurisdiction accounting for 5% or more of the total paid on an absolute basis.
Why Life Sciences Companies Will Feel This Update
Life sciences companies in general have the exact profile these rules were amended to highlight. Historically, these early-stage, pre-revenue company rate reconciliations were quantitatively dominated by a full valuation allowance. Now, items which cause the effective tax rate to depart from the statutory rate, such as research credits, capitalized foreign research costs, and stock compensation expense, will have to have their effect described in detail instead of showing one offsetting line.
In addition to the new qualitative disclosure required, the cash tax disclosure is the update that should be monitored closely. When a company pays very little income tax, 5% of that total is a very easy threshold to trip. Companies whose footprint grew through remote employees, contract research organizations, and third-party warehousing may see their state tax footprint grow, and consequently, the new disclosures.
Because these requirements are effective for the 2026 reporting year, there is still time to get ahead of them. A conversation with your team before year-end close, rather than during it, is the difference between capturing this information as it arises and reconstructing it under a deadline. Our Life Sciences and Pharma group is glad to help. Please contact your WG advisor.
