ASC 740: Q3 2026 provision considerations
Executive summary: Updates and considerations for 2026 Q3 tax provisions
Companies preparing their Q3 2026 tax provisions should evaluate the impact of recent federal, international and state tax developments on their income tax provision for the period. Key considerations include the impacts of recently issued proposed regulations providing guidance on changes to international tax provisions of the OBBBA, section 162(m) changes, state tax law developments, OECD Pillar Two implementation and changes to income tax disclosures becoming effective for non-public companies in 2026.
Income tax provision considerations for Q3 2026
More than a full year after the enactment of the One Big Beautiful Bill Act (OBBBA), the Treasury Department and the IRS are busy issuing regulatory packages to clarify key provisions of the law. Most notably, there were significant developments related to international tax provisions of OBBBA in Q3, including proposed regulations issued with guidance around net CFC tested income (NCTI), foreign-derived deduction-eligible income (FDDEI), subpart F income, section 987, and related foreign tax credits (FTCs). In short, for multinational entities, the Q3 2026 income tax provision may warrant a second look at the various items of new guidance.
Legislative changes to deductible compensation under section 162(m)
- OBBBA: The OBBBA, enacted in 2025, applies controlled group rules to the limitation on executive compensation under section 162(m), effective for tax years beginning after Dec. 31, 2025 – commonly, calendar year 2026. Amounts paid to a covered officer by any of the controlled group members must be aggregated for purposes of calculating the limitation. The controlled group members would then be required to allocate the limitation on a pro rata basis, according to their share of compensation paid. Given recent and expected future IPO activity involving UP-C structures, where a public entity acquires a partnership, these changes may become more relevant in 2026 and future years.
- ARPA: In 2021, the American Rescue Plan Act (ARPA) expanded the definition of covered employees. This change is effective for tax years beginning after Dec. 31, 2026 – commonly, calendar year 2027. Entities must now evaluate up to the next five highest-compensated individuals, which could be officers or employees, to determine if their compensation exceeds the $1 million threshold for the tax year. Because the law was enacted in 2021, companies should consider whether their deferred tax assets related to equity-based and other deferred compensation arrangements are accurately stated as soon as feasible, if they have not already done so.
Return-to-provision adjustments
ASC 250-10-45-17 requires that changes in estimates be recognized in the period in which they become known. Accordingly, even if federal tax returns are still being finalized as of Sept. 30, companies should evaluate the effect on the interim financial statements of identified differences between the amounts expected to appear on the tax return and the prior-year provision. These adjustments should be treated as discrete items in the quarter rather than incorporated into the annual effective tax rate. There could be secondary impacts – changes to the interest limitation under section 163(j), charitable contributions, net operating losses, state tax liabilities or any other items that rely on taxable income – that may not be known until after quarter-end, which may result in companies including additional return-to-provision adjustments in the year-end provision.
International tax
The Treasury Department and the IRS issued several proposed regulations during the third quarter of 2026 that may affect multinational companies’ tax calculations, forecasts and related disclosures. The guidance addresses the recognition of section 987 foreign currency gain or loss, section 250 deduction for FDDEI, the allocation of controlled foreign corporation (CFC) income among U.S. shareholders and the allocation and apportionment of expenses for section 951A-related FTC and FDDEI purposes.
On Aug. 14, 2026, the Treasury Department and the IRS published proposed regulations (REG-103844-26) that would permit a CFC exemption election for CFCs that own foreign branches that are qualified business units (QBUs), which otherwise would be subject to section 987 gain or loss calculation. Under the proposed election, section 987(3) generally would not apply to an electing CFC, and the CFC generally would not compute or recognize section 987 gain or loss with respect to its section 987 QBUs, except in connection with certain inbound nonrecognition transactions.
The proposed regulations include election, revocation and consistency requirements and generally require pre-election section 987 gain or loss to be recognized ratably over 120 months. Taxpayers generally may rely on the proposed rules for tax years beginning after Dec. 31, 2024, if the applicable requirements are satisfied. Companies considering the election should inventory their section 987 QBUs and existing gain or loss pools and evaluate whether the election would affect their current tax provisions.
Visit IRS proposal could ease section 987 compliance for CFCs for a detailed discussion.
On Aug. 20, 2026, the Treasury Department and the IRS published proposed regulations (REG-117130-25) providing guidance on the scope of the OBBBA exclusion from deduction-eligible income (DEI) for income or gain from sales or other dispositions of intangible property and property of a type subject to depreciation, amortization or depletion. The proposed regulations generally follow Notice 2025-78 and explain which transactions and property fall within or outside the exclusion.
The exclusion may apply to actual and deemed dispositions, including transfers subject to section 367(d). By contrast, leases and licenses characterized as such under general federal income tax principles generally may not be treated as dispositions, property held solely as inventory may not be excluded, and copyrighted articles generally may not be treated as intangible property. The proposed rules also include an anti-abuse provision for certain transfers undertaken with a principal purpose of avoiding excluded-property treatment.
Companies affected by the proposed clarifications should consider whether their treatment of relevant dispositions is consistent with the proposed regulations and whether any resulting change affects projected FDDEI, the related section 250 deduction and, as a result, the annual effective tax rate used to calculate the third-quarter provision.
Visit Proposed section 250 regulations narrow FDDEI for certain asset sales for a detailed discussion.
On Aug. 26, 2026, the Treasury Department and the IRS published proposed regulations (REG-115646-25) providing operational detail for the OBBBA changes to the determination of a U.S. shareholder’s pro rata share of subpart F income, tested income or tested loss. The proposed rules provide operational guidance on the ownership periods and percentages included in the calculation by generally replacing the historical last-day ownership approach for subpart F income, tested income and tested loss with a period-based method that takes into account the shareholder’s ownership percentage and the days during the CFC year for which the relevant ownership and status requirements are met.
The proposed regulations would also explain the treatment of changes in multiple stock classes, changes in shares outstanding, mandatory year closings when a foreign corporation becomes or ceases to be a CFC, and an elective closing following certain significant ownership changes.
Companies with CFC ownership changes should consider whether the proposed clarifications would affect their application of the enacted pro rata share rules and, if so, the timing or amount of subpart F income, net CFC tested income and the related amounts included in the tax provision.
Visit Proposed regulations would tie CFC income share to ownership periods for a detailed discussion.
On Sept. 11, 2026, the Treasury Department and the IRS published proposed regulations (REG-117273-25) delineating how the OBBBA changes apply to deduction allocation for the section 951A FTC limitation and the computation of DEI and FDDEI. For tax years beginning after Dec. 31, 2025, interest expense and research or experimental expenditures generally would be excluded from allocations to foreign-source section 951A category income and from reductions to gross DEI or gross FDDEI.
The proposed regulations further identify the deductions that would remain in the calculation; other deductions generally would reduce foreign-source section 951A category income only when directly allocable to that income, while the applicable section 250 deduction and certain taxes would remain allocated to the category. These changes may increase both the amount of foreign-source section 951A category taxable income in the FTC limitation calculation and the section 250 deduction.
Companies affected by the proposed clarifications should consider whether their application of the enacted expense allocation rules remains appropriate and whether any resulting change affects FTC utilization.
Updates from the Financial Accounting Standards Board (FASB)
FASB issued Accounting Standards Update (ASU) 2026-03 — Fair Value Measurement (Topic 820): Investment Companies with Equity Securities Subject to Contractual Sale Restrictions — on Sep. 9, 2026. The update requires investment companies specifically (as defined in Topic 946, Financial Services – Investment Companies) to account for contractual restrictions on sales of equity securities when measuring those securities at fair value. This is a change from the previous standard where this was not required. Read more in RSM’s article FASB issues valuation guidance for investment companies.
Adoption of ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, is on the horizon for private companies, which should be considering their plan for adoption before year-end. The private company requirements continue to allow a qualitative rate reconciliation disclosure; however, companies need to ensure they accumulate the required data and perform many of the underlying calculations to comply with the enhanced disclosure requirements. Additionally, companies that have previously disclosed a numerical rate reconciliation table may want to consider whether they will continue to do so after reviewing the new requirements.
ASU 2023-09 also requires additional disaggregated disclosures of income taxes paid (refunded) into its federal, state and local and foreign components, and by jurisdiction if certain thresholds are met. Further disclosures of income tax expense and income (loss) from continuing operations are also required. Discussions with financial statement auditors should be initiated before year-end to avoid delays in the issuance of financial statements. Read more about the requirements under ASU 2023-09 in RSM’s whitepaper: ASU 2023-09-Expanded Income Tax Disclosure Requirements and RSM’s Accounting Brief: ASU 2023-09 Planning Considerations
State tax
Although activity has slowed during the third quarter of 2026, states are continuing to address conformity with OBBBA. Additionally, other items such as Public Law 86-272, state tax rate changes and other routine changes are beginning to resurface. Companies should continue to monitor these tax law changes to ensure any impacts are accounted for in the financial statements in the period of enactment. A detailed discussion on recent state tax law changes, as well as their impacts under ASC 740, can be found in our tax alert: State corporate income tax law changes for the third quarter of 2026.
Global tax compliance updates: OECD Pillar Two and country-specific changes
The following section includes key global tax law updates contributed by RSM’s global teams.
Status of Pillar Two
On Sept. 11, 2026, the OECD/G20 Inclusive Framework released a Pillar Two implementation package consisting of (1) an updated GloBE Information Return (GIR), (2) new administrative guidance addressing explicitly conditional taxes and qualified domestic minimum top-up tax (QDMTT) fiscal-period mismatches, and (3) a legislative peer review framework for evaluating the consistency of local Pillar Two regimes with the GloBE rules. The updated GIR incorporates changes arising from the January 2026 side-by-side package, including permanent safe harbors, related elections, and additional reporting requirements intended to improve consistency and administration across jurisdictions.
The accompanying administrative guidance clarifies that taxes that apply solely because a taxpayer is subject to a foreign income inclusion rule (IIR) or undertaxed profits rule (UTPR) generally are not treated as covered taxes for GloBE purposes. The guidance also clarifies the operation of the QDMTT safe harbor where local financial accounting standards are used and the local fiscal period does not align with the ultimate parent entity's fiscal year. In addition, the OECD released the Terms of Reference and Assessment Methodology for full legislative peer review, establishing a framework under which Inclusive Framework members will assess whether domestic IIR, UTPR, and QDMTT legislation is consistent with the GloBE model rules, commentary, and administrative guidance. Multinational groups operating in jurisdictions that have adopted Pillar Two rules should evaluate whether the guidance affects existing Pillar Two calculations, compliance processes, data gathering requirements, or tax provision assumptions. Companies also should continue to monitor jurisdiction-specific implementation of the guidance, particularly with respect to QDMTTs, the treatment of taxes that may be considered explicitly conditional under the OECD framework and developments arising from the OECD’s legislative peer review process.
Under Brazil’s corporate withholding tax regime (IRRF), a new flat 10% withholding tax now applies to profit/dividend distributions remitted abroad, regardless of amount.
Two additional regulations were issued under Brazil’s QDMTT:
- IN RFB 2.329/2026 defines payment procedures and the transitional GloBE safe harbor rules, addressing mismatches between a jurisdiction's fiscal year and the Country-by-Country Report fiscal year.
- IN RFB 2.342/2026 introduces a new mechanism allowing multinational groups to treat qualified tax incentives as an addition to Adjusted Covered Taxes, via annual election, starting in 2026, and extended a zero-surcharge transitional safe harbor for fiscal years beginning in 2027 but ending no later than June 2029.
The Department of Finance released draft legislation in July 2026. For companies with cross-border operations, the most pertinent aspects include the second bundle of hybrid mismatch rules. Taxpayers making cross-border payments or using hybrid instruments treated differently across jurisdictions should review these rules. All hybrid mismatch-related amendments apply to payments made on or after July 1, 2026, except for the revised definition of specified minimum tax regime, which applies for foreign tax years beginning after Dec. 31, 2025.
The draft legislation also includes targeted amendments affecting loans to, or income allocations from, foreign affiliates. Effective for loans received or indebtedness incurred after Aug. 12, 2024, the shareholder loan rules would be narrowed to exclude loans to certain foreign affiliates of the lender corporation, or of a related Canadian corporation, with similar relief for certain qualifying partnerships.
Separate amendments address the foreign affiliate service rules. Under those changes, service income earned by a payee affiliate is included in its foreign accrual property income (similar to Subpart F in the United States) only to the extent of Canadian taxpayers’ aggregate interests in the payer affiliate, rather than including all such income. These changes apply to tax years beginning after 2015.
In Canada, when a business acquires depreciable property, its cost is generally deducted over time for tax purposes at or below a prescribed rate. The federal government announced intentions to allow immediate expensing of assets in the year they become available for use for assets acquired on or after Sept. 15, 2026. Approximately two- thirds of investment in capital assets would be eligible for this measure, termed the “Productivity Super Deduction.”
In the third quarter of 2026, Ireland has clarified the availability of double tax relief for Section 110 companies and the availability of Capital Gains Tax (CGT) group relief for MNE groups and has outlined potential reforms in the Budget 2027 Tax Strategy Group papers.
- Section 110 securitization companies
Revenue updated its Section 110 Tax and Duty Manual (“TDM”) to confirm that foreign withholding tax is not deductible in calculating Section 110 profits. Relief must instead be claimed under Schedule 24, subject to the applicable double tax relief rules. The guidance also addresses excess foreign withholding tax and the Irish Measure of Income used to calculate available relief. U.S. MNEs should assess the availability of Irish foreign tax credits under the appropriate section, as excess withholding taxes may increase cash tax costs and impact effective tax rates. - Classification of foreign entities for CGT group relief
Revenue updated its TDM to clarify that eligibility for Section 617 no-gain/no-loss treatment may depend on whether a foreign entity is classified as tax opaque or tax transparent for Irish tax purposes. U.S. MNEs should review the Irish tax classification of foreign entities to ensure Section 617 group relief is available to specific transactions. - Irish High Court: Meaning of "land in the state"
Revenue updated its Section 980 TDM to reflect the High Court decision in Cintra Infraestructuras Internacional SLU v Revenue Commissioners. The guidance clarifies when shares derive their value from Irish land and fall within the purchaser withholding tax regime. This update may impact U.S. MNEs with Irish real estate or infrastructure investments and should be considered prior to disposal of shares in these Irish land-rich entities. - Budget 2027 tax strategy group papers
The Department of Finance has published papers which outline potential future corporation tax changes relating to OECD Pillar Two administrative guidance, the R&D tax credit, interest deductibility rules and the Knowledge Development Box. Although these measures remain under consultation, U.S. MNEs should monitor developments for potential future tax accounting implications. Published RSM Ireland insight into the potential corporation tax and R&D measure can be accessed at the following links:
Effective Jan. 1, 2027, the new Italian Income Tax Code published in July reorganizes and consolidates the country's direct taxation framework into a single legislative text. While the reform largely represents a structural reorganization rather than a broad increase in taxation, it significantly reshapes the way Italian corporate and international tax rules are organized and referenced.
International groups should pay particular attention to provisions concerning non-resident entities, permanent establishments, CFC rules, dividends, participation exemption and global minimum taxation. U.S. groups with Italian subsidiaries or branches should review existing tax policies, technical positions and intercompany documentation to ensure that references and analyses are aligned with the new framework.
On August 6, 2026, the Italian Revenue Agency issued Circular No. 6/E providing systematic guidance on the cooperative compliance regime and the Tax Control Framework (TCF). The guidance clarifies, among other things, the requirements for the TCF, certification, the enhanced penalty-protection framework, preventive dialogue with the tax authorities and circumstances that may lead to exclusion from the regime.
For multinational groups, this development is particularly relevant when a global tax control framework is already in place. Italian subsidiaries may assess whether their existing group-wide tax governance, risk assessment and internal control processes can be mapped against the Italian TCF requirements, potentially creating a more integrated approach to tax risk management and tax authority engagement.
Hybrid mismatch guidance: On July 24, 2026, the Ministry of Finance published a new hybrid mismatch decree, in force from July 25, 2026, replacing the 2022 decree. It treats the former U.S. GILTI regime and the current NCTI regime as CFC-type regimes; a Dutch deduction that is also taken into account in the United States under those regimes does not by itself create a double deduction, and income picked up only under those regimes does not count as taxed or as dual- inclusion income. This is administrative guidance rather than a change in law, but it is relevant to uncertain tax positions on Dutch deductions in U.S.-parented groups.
Missed the first Pillar Two deadline? Penalty-free grace period available through October: The first Dutch Pillar Two filing cycle fell in this quarter. For groups with a 2024 calendar year, the information return or notification was due June 30, 2026. and the top-up tax return and any payment owed were due on Aug. 31, 2026. However, late filing and late payment carry no administrative penalty through Oct. 31, 2026.
Budget Day proposals: On Sept. 15, 2026. the government presented the 2027 tax package, which includes a bill implementing the OECD side-by-side safe harbors in the Dutch Minimum Tax Act. For a U.S.-parented group, that bill would switch off the Dutch income inclusion rule and undertaxed profits rule, while leaving the Dutch domestic minimum top-up tax in place. The package would also narrow the participation exemption for currency results on hedging instruments, effective for book years beginning on or after Jan. 1, 2027. The proposals are expected to be voted on by the Senate next quarter, in mid-December.