ASC 740: Q1 2026 provision considerations
Executive summary: Updates and considerations for 2026 Q1 tax provisions
The first quarter of 2026 brought limited new tax legislation, but companies must account for changes under the OBBBA that are now effective, upcoming ARPA changes and evolving CAMT guidance and Pillar Two rules, all of which introduce potential permanent differences and tax reporting complexities. International developments across major jurisdictions – including Canada, France, Germany, India, Italy, Spain and the UK – add further compliance considerations for multinational groups.
Income tax provision considerations for Q1 2026
The first quarter of 2026 has been fairly quiet in terms of federal tax law changes; however, the IRS and the U.S. Department of the Treasury continue to issue guidance regarding the implementation of the One Big Beautiful Bill Act (OBBBA). There are also several provisions of the OBBBA that become effective in 2026 along with American Rescue Plan Act (ARPA) changes coming into effect in 2027 that may affect 2026 provisions.
Changes to permanent items effective for 2026
The OBBBA, enacted on July 4, 2025, contained several federal tax law changes that became effective in 2025, with other changes taking effect in 2026 or future years. The most notable changes impacting corporations for tax years beginning after Dec. 31, 2025, relate to charitable contributions and the limitation on executive compensation under section 162(m).
The OBBBA established a new 1% floor on the deductibility of charitable contributions, while retaining the 10% limitation that has existed for many years. If an entity makes a contribution in a given year that is less than 1% of its taxable income, the entire amount will be permanently disallowed. If the contribution is between 1% and 10% of its taxable income, any amount below 1% will be permanently disallowed. However, if the entity contributes greater than 10% of its taxable income, any disallowed deductions can be carried forward for five years, including the amount below the 1% floor.
The OBBBA created an exception to the meal deduction limitations established by the Tax Cuts and Jobs Act (TCJA) under section 274(o). The TCJA established a 100% disallowance of deductions for eating facilities operated by or meals provided to employees for the convenience of the employer, effective for amounts paid or incurred after Dec. 31, 2025. The OBBBA added an exception to section 274(o) for restaurants and fish processing facilities providing meals to their employees.
The OBBBA expands the applicability of section 162(m), the limitation on executive compensation, by applying controlled group rules. This means that if the covered officer receives compensation from any of the controlled group members, those amounts must be aggregated for purposes of calculating the limitation. The limitation would then be allocated to the group members on a pro-rata basis, based on their share of compensation paid. These changes may be particularly relevant to public entities with partnerships in their structure, including Up-C structures.
On a related note, the ARPA of 2021 expands the definition of a ‘covered employee’ under section 162(m) to include the next five highest paid employees, with controlled group rules put in place by the OBBBA also applicable to these employees. While the ARPA change does not go into effect until 2027, entities will need to consider these additional employees when evaluating any future limitation of stock compensation or other deferred compensation arrangements that are currently being expensed for book purposes. As part of developing the annual effective tax rate, companies will need to evaluate current year compensation expense to determine amounts that would be deductible for tax purposes in future years (i.e., would generate a DTA as of Dec. 31, 2026) but ultimately are expected to be limited under section 162(m). Amounts that are expected to be limited under section 162(m) do not meet the definition of a temporary difference under Accounting Standards Codification (ASC) 740.
Key OBBBA changes to U.S. cross-border taxation, now effective
Foreign-derived deduction eligible income (FDDEI)
Effective Jan. 1, 2026, the FDDEI, formerly known as foreign-derived intangible income (FDII), deduction under section 250 is permanently reduced to 33.34%, resulting in an effective tax rate of about 14%. The calculation is simplified by removing the deemed tangible income return (DTIR), which may broaden the taxable base. In addition, interest expense and research & experimentation costs will no longer be allocated to deduction-eligible income for periods after Dec. 31, 2025.
Net CFC tested income (NCTI)
For NCTI, formerly known as global intangible low-taxed income (GILTI), the deduction under section 250 is permanently reduced to 40%, leading to an effective tax rate of approximately 12.6% effective Jan. 1, 2026. Similar to the FDDEI, the DTIR component is eliminated from the NCTI inclusion calculation.
Visit Global taxation reform: What changes to GILTI and FDII mean for multinationals for a detailed discussion on how FDDEI and NCTI interplay with domestic big three provisions.
Base erosion anti-abuse tax (BEAT)
The OBBBA modifies BEAT by setting a permanent rate of 10.5%, effective Jan. 1, 2026, and repealing previously scheduled post-2025 changes. As a result, taxpayers retain favorable treatment for certain credits, including research and development credits.
Most U.S. multinationals account for the above items as period items (i.e., the item affects current taxes only), which will impact the estimated annual effective tax rate (AETR) beginning in Q1 2026 for calendar year entities.
Foreign tax credits (FTC)
The OBBBA limits expense allocation to the NCTI basket to only directly allocable deductions and the related section 250 deduction, with all other expenses assigned to U.S.-source income. In parallel, the deemed paid FTC is increased from 80% to 90% for the NCTI basket, raising the foreign effective tax rate threshold to approximately 14% to eliminate residual U.S. tax, particularly when combined with reduced expense allocation. The OBBBA also introduces a matching limitation for previously taxed NCTI earnings, allowing only 90% of associated foreign taxes to be credited on distributions. Additionally, for FTC limitation purposes, up to 50% of income from foreign sales of U.S.-produced inventory may be treated as foreign-source income if attributable to a foreign fixed place of business, providing incremental relief from double taxation. These changes are also effective Jan. 1, 2026.
Controlled Foreign Corporation (CFC) income inclusion rules
IRS Fact Sheet 2025-09 confirms a change under OBBBA affecting the section 163(j) interest limitation. For tax years beginning after Dec. 31, 2025, a U.S. shareholder must exclude CFC income inclusions under sections 951(a), 951A(a) and 78, along with related deductions, from the calculation of adjusted taxable income (ATI). As a result, U.S. shareholders can no longer increase ATI by including these CFC income amounts by making CFC group elections, which may reduce their ability to deduct interest expense.
On March 18, 2026, the IRS issued Rev. Proc. 2026-17, providing transition guidance for taxpayers regarding the CFC group election under section 163(j). For the first specified period of a specified group beginning after Dec. 31, 2024, a designated U.S. person may make or revoke a CFC group election without regard to the 60‑month limitation. Any election made or revoked under this relief must otherwise satisfy the procedural requirements of Reg. section 1.163(j)-7(e)(5). The 60‑month limitation applies to all subsequent specified periods. Accordingly, if a CFC group election is made or revoked for a specified period ending December 2025, no further CFC group election may be made or revoked for any specified period beginning before Dec. 31, 2030.
For most entities, the provisions of the OBBBA that took effect in 2025 (i.e., changes to bonus depreciation, research and development expenditures and limitations on interest expense) did not have a direct impact on their effective tax rate (ETR). However, the changes related to charitable contributions, limitations on compensation under section 162(m), as well as the changes to the international tax-related items, are more likely to impact an entity’s calculation of the estimated AETR for the first quarter of 2026.
For a detailed discussion on the impacts of tax reform on financial reporting, read our article: Accounting for the income tax impacts of the One Big Beautiful Bill Act.
Corporate alternative minimum tax (CAMT): Notice 2026-7
Notice 2026-7, released Feb. 18, 2026, adds additional taxpayer-friendly adjustments to the CAMT calculation. The notice added several new adjustments to the calculation of adjusted financial statement income (AFSI) that more closely align the calculation with federal taxable income, which are expected to impact a wide range of corporate entities. These changes include the following adjustments when calculating AFSI:
- Amortization on domestic research and development costs capitalized under section 174 from 2022 through 2024.
- Amortization of goodwill and ‘eligible’ section 197 intangible assets. An ‘eligible’ intangible is an intangible that is not amortized for book purposes but rather would be expensed upon impairment or disposal.
- Certain repairs, maintenance, materials and supply costs, where these costs are capitalized for book purposes.
These adjustments were introduced by the Treasury largely in response to requests from entities that were more likely to pay CAMT in the future due to the changes to federal taxable income after the enactment of the OBBBA. In addition to the new AFSI adjustments, the notice provided clarity and guidance around the treatment of fresh start accounting adjustments and attribute reduction for companies emerging from bankruptcy and around the treatment of transfers of intangible property or stock to or from a foreign corporation for purposes of CAMT.
Under ASC 740, entities subject to CAMT should continue to measure their deferred taxes using the regular federal statutory tax rate of 21%; however, they may consider the effect of CAMT in assessing the need for a valuation allowance. Given the evolving nature of CAMT guidance, entities should continue to evaluate the impacts on any unrecognized tax benefits and the assessment of the need for a valuation allowance, if applicable.
Tariffs
On Feb. 20, 2026, the Supreme Court ruled that the tariffs put in place as part of the International Emergency Economic Powers Act (IEEPA) were unlawful, and on March 5, 2026, the US Court of International Trade issued an order that could result in refunds of tariffs previously paid by importers. The impacts of this decision are wide-ranging, complex and uncertain. To read more about the potential impacts and uncertainties, read our Accounting Brief: Update on Potential Tariff Refunds.
Updates from Financial Accounting Standards Board (FASB)
The FASB did not issue any new accounting standards updates (ASUs) during the first quarter of 2026, but that does not mean that there is no work to be done. Some of the ASUs issued in 2025 and recent years are effective for years beginning after Dec. 15, 2025, generally calendar year 2026, including the following:
- ASU 2025-05 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets
- ASU 2024-04 – Debt – Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments
Additionally, many of the other ASUs issued in 2025 allow for early adoption.
It is not often that these updates are directly related to ASC 740, but it is crucial for tax professionals to stay attuned to these updates as changes to pre-tax income may affect the income tax provision.
In December of 2025, the FASB finalized ASU 2025-10, Government Grants (Topic 832): Accounting for Government Grants Received by Business Entities. Read more about the ASU and the impact on entities in RSM US’ Financial Reporting Insights: FASB issues guidance on accounting for government grants.
State tax
A significant number of states have adopted legislation in Q1 2026 in response to the OBBBA. The results vary widely from state to state, potentially adding complexity to state tax calculations for the foreseeable future. Companies should monitor these changes closely throughout the year, and updates on state law changes for Q1 are discussed in State corporate income tax law changes for the first 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
The OECD’s January 2026 ‘side-by-side’ (SbS) package introduces a coordinated framework that allows U.S.-parented multinational enterprises to coexist with Pillar Two global minimum tax rules while significantly reducing exposure to top-up taxes. Effective for fiscal years beginning on or after Jan. 1, 2026, the package provides elective safe harbors, most notably the SbS and ultimate parent entity (UPE) safe harbors, that can effectively eliminate liability under the income inclusion rule (IIR) and undertaxed profits rule (UTPR) for eligible U.S. groups. Additional measures, including a permanent simplified effective tax rate safe harbor, an extension of transitional country-by-country (CbC) reporting relief, and a substance-based tax incentive safe harbor, are intended to streamline compliance and preserve the intended 15% minimum tax framework while recognizing the U.S. tax system as broadly aligned with Pillar Two objectives.
While the package represents a significant policy shift, its financial reporting impact will depend on jurisdictional enactment. U.S. multinationals may still face interim volatility where top-up taxes must be accrued prior to local enactment of the SbS rules, even if ultimately relieved upon enactment. Importantly, the relief does not extend to qualified domestic minimum top-up taxes (QDMTTs), and companies must continue to meet global anti-base erosion (GloBE) reporting requirements and invest in data, governance and modeling capabilities. As such, the package reduces global minimum tax exposure but does not eliminate compliance complexity, requiring continued monitoring of legislative developments and proactive planning around elections, incentives, and reporting positions. Visit OECD's ‘side-by-side’ package offers a path for US multinational enterprises for detailed discussions.
As of March 2026, most jurisdictions have not enacted legislation implementing the SbS Package. While the European Union (EU) has formally acknowledged the SbS package as a qualifying safe harbor framework under the EU Minimum Tax Directive, application of the SbS provisions generally requires national level legislative or administrative implementation by individual member states. The United Kingdom announced on Jan. 7, 2026, its intention to implement the SbS package with effect for accounting periods beginning on or after Jan. 1, 2026; however, legislation is expected to be introduced in the next Finance Bill which is likely to be enacted in the Spring of 2027.
There were no legislative developments in Australia during Q1 2026 expected to affect U.S. corporate taxpayers. However, a couple of important judicial decisions were issued.
In Commissioner of Taxation v. S.N.A. Group Pty Ltd [2026] FCAFC 10, the Court held that related‑party service fees exceeding $19 million were not ‘incurred’ and, therefore, not deductible, emphasizing the need for robust contemporaneous documentation and distinguishing payment from incurrence. This judgment serves as a reminder of the error in assuming that ‘paid’ equals ‘incurred’ to many companies. It highlights that, for tax purposes, a legal liability must be definitively committed, not merely settled in cash, before a deduction is allowed. Companies will want to prepare clear and substantiated documentation at the time the issue arises, not just when payments are made.
In Brisbane Club v. Commissioner of Taxation [2026] FCA 220, the Federal Court determined that a building constituted a pre‑Capital Gain Tax (CGT) asset, concluding that a post‑CGT construction contract varied, rather than replaced, an earlier pre‑CGT development agreement. The asset retained its original pre-CGT status, so the capital gain on disposal may remain exempt.
Looking ahead, the Australian Federal Budget is scheduled for May 12, 2026, with significant tax reform anticipated.
On March 26, 2026, Bill C-15 received royal assent. For companies with cross-border operations, the most significant changes include updated transfer pricing requirements for related company transactions and the treatment of passive income earned through foreign affiliates. The legislation also introduces new tax depreciation acceleration rules and expanded eligibility for scientific research and development credits, which aims to support innovation, manufacturing and green technologies development. Ontario has announced in its budget an intention to align provincial rules with the new federal tax depreciation acceleration rules.
Additionally, the Canadian government released a package of draft legislation in January. Most notably, this package includes the second bundle of rules for hybrid mismatch arrangements. Taxpayers who engage in cross-border payments or those who use hybrid instruments in their cross-border transactions, e.g., financial instruments that might be treated as debt in one country and equity in another country, will need to 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 taxation years beginning after Dec. 31, 2025.
On Feb. 10, 2026, the Location Promotion Act entered into force. With the Act, several amendments to the German Investment Tax Act as well as an increase in the maximum amount of hidden reserves (unrealized gain) attributable to shares in corporations that are held as business assets, which may be deferred by transferring those gains from the sale of such shares into qualifying replacement or reinvestment assets. Read more from Ebner Stolz.
On Feb. 13, 2026, the German Federal Ministry of Finance published a comprehensive draft letter on the interpretation and application of permanent establishment (PE) criteria under both German and international tax law. The draft letter addresses numerous practical scenarios, such as home offices, working in third-party premises as well as service and management companies. It also clarifies the differences between the German and treaty-based concept of a PE. Read more from RSM Ebner Stolz.
During Q1 2026, India enacted Budget 2026, which introduced several direct tax measures relevant to corporate taxpayers, including changes to the minimum alternate tax (MAT) regime. Notably, MAT is converted into a final tax at a reduced rate (14%, effective MAT rate of 16.3072%, previously 15% where effective MAT rate was 17.472%), with revised rules governing the utilization of existing MAT credits, effective beginning tax year 2026–27.
Indian companies opting for concessional tax regime for the tax year 2026-27 and onwards shall be allowed to set-off MAT credit available as on March 31, 2026, to the extent of 25% of the tax payable for that tax year. The remaining tax credit shall be allowed to be carried forward to subsequent tax years and shall be eligible for set-off up to 15 tax years from the tax year immediately succeeding the tax year in which the credit became allowable.
Under this Budget 2026, the rationalization of the tax treatment on share buy-backs shifts the burden from being taxed as dividend income to as capital gains, aligning buybacks more closely with standard investment taxation principles. However, to prevent promoters from exploiting this change to extract profits in a more tax-efficient manner, the framework introduces an additional tax targeting promoter-level gains.
Per Budget 2026, enacted via the Finance Act 2025 on Dec. 23, 2025, the research and development (R&D) tax credit will increase to 35% along with other minor measures. The credit rate increase maintains Ireland as one of the highest incentive regimes globally. This applies to accounting periods commencing on or after Jan. 1, 2026.
The Department of Finance published the R&D Tax Credit and Innovation Compass, (‘the Compass’) which maps out a pathway on targeted areas to consider for both the R&D tax credit regime and for tax supports on innovation. The Compass identifies several measures that the government will consider, with the objective of ensuring Ireland’s R&D supports continue to evolve in an increasingly competitive global environment.
There are a number of proposed measures flagged for further review to enhance the R&D ecosystem, which can be broadly categorized as follows:
- Qualifying expenditures
- Capital expenditures
- Administration and simplification
- Innovation
- Knowledge Development Box
The R&D credit is available to offset corporate tax or to be repaid over three years.
Read more about the R&D changes enacted by the 2026 Ireland Budget here: Budget 2026: R&D | RSM Ireland
The 2026 Budget Law introduces a new hyper-depreciation incentive, a substantial tax deduction for investments in new Industry 4.0 capital assets made between Jan. 1, 2026, and Sept. 30, 2028. The eligible assets must be produced in EU or European economic area (EEA) countries. The deductibility of purchase costs may reach up to 180% of the investments.
Beginning in 2026, capital gains on business assets must be fully taxed in the year realized, removing installment options. Limited exceptions remain (e.g., business transfers, sports rights).
The 2026 Budget Law amends the dividend exemption and aligns it with the Participation Exemption (PEX) regime. Dividends and qualifying capital gains remain 95% exempt only if the shareholding meets an economic relevance threshold, defined as either a direct participation of at least 5% or a tax basis of at least €500,000; otherwise, dividends are fully taxable. The revised PEX rules apply to capital gains on shareholdings acquired from 2026 onward (applying first in, first out (FIFO)), while the dividend rules apply to distributions approved on or after Jan. 1, 2026. The changes also affect the computation of 2026 tax prepayments, which must be calculated as if the new rules had applied in 2025.
Spain enacted Pillar Two through Law 7/2024 on Dec. 22, 2024, applicable for fiscal years beginning on or after Dec. 31, 2023. The first global information reporting (GIR) and notification filings open April 30, 2026, with UTPR and QDMTT filings due between July 1 and July 25, 2026, under forms approved by Ministerial Order HAC/1198/2025. Spain also implemented public CbC reporting via EU Directive 2021/2101, requiring groups with revenue exceeding €750 million to publish a public CbC report within six months of year‑end. These rules apply to fiscal years beginning on or after June 22, 2024, with first reports related to FY2025 and published by June 2026.
For corporate income tax purposes, Spain removed the 50% limitation on the offset of tax loss carryforwards within tax consolidated groups for tax periods beginning on or after Jan. 1, 2026, allowing 100% utilization of current‑year losses. In addition, for periods beginning on or after Jan. 1, 2026, the participation exemption for dividends and capital gains applies only where a minimum ownership threshold of 5% is met, regardless of whether the acquisition cost exceeds €20 million.
The UK Finance Act 2026 was substantively enacted on March 11, 2026, and received royal assent on March 18, 2026. Accordingly, the provisions of the Act should be reflected in income tax provisions for entities reporting under U.S. generally accepted accounting principles (GAAP) for periods ending on or after March 18, 2026. The most significant enacted changes affecting tax provisions relate to capital allowances (yearly deductions on qualifying fixed assets), transfer pricing and permanent establishment rules.
With respect to capital allowances, the main rate writing‑down allowance, or percentage of remaining value that is deductible each year, is reduced from 18% to 14%, effective April 1, 2026 (April 6 for non‑corporate entities). In addition, from Jan. 1, 2026, a new 40% first‑year allowance applies to qualifying main‑rate expenditures (excluding second‑hand assets and cars) where the 100% full expensing regime is unavailable, including for leased assets and entities outside the corporation tax regime.
In addition, the Act includes transfer pricing reforms effective for accounting periods beginning on or after Jan. 1, 2026, including a conditional exemption from the arm’s‑length standard for qualifying UK‑to‑UK transactions, subject to His Majesty’s Revenue and Customs (HMRC) override or taxpayer election, the repeal of the diverted profits tax regime with replacement rules incorporated into corporation tax, and updates to financing arrangements to align with Organisation for Economic Co-operation and Development (OECD) guidance.
The Permanent Establishment (PE) rules are also updated for periods beginning on or after Jan. 1, 2026, to align more closely with OECD standards and include guidance on when remote working arrangements may give rise to a UK PE.