ASU 2023-09 Income Tax Disclosures: The 2026 Guide to Effective Dates, Rate Reconciliation and Examples

If you're a calendar-year private company, ASU 2023-09 applies to the financial statements for the year that began January 1, 2026.

If you're a calendar-year public company, your first ASU 2023-09 footnote was in your 2025 annual financial statements (the 10-K, for SEC filers), unless you adopted early.

ASU 2023-09 is the FASB's Improvements to Income Tax Disclosures. This guide covers the effective dates for both groups, the rate reconciliation with a worked example, the income taxes paid disclosure with a worked example, what changed for private companies, and how the standard compares with IAS 12.

Key takeaway: ASU 2023-09 changes ASC 740 disclosures only. Public business entities apply it to annual periods beginning after December 15, 2024. All other entities apply it one year later, to annual periods beginning after December 15, 2025. Public business entities must present a tabular rate reconciliation in eight categories, with certain items broken out when they reach 5% of pretax income times the statutory rate. Every entity, public or private, must disclose income taxes paid by federal, state and foreign jurisdiction, with any jurisdiction at 5% or more of the total shown separately. Recognition and measurement do not change.

What is ASU 2023-09?

ASU 2023-09 is Accounting Standards Update No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, issued by the FASB on December 14, 2023. It makes the income tax footnote more specific. It does not change how you calculate a dollar of tax expense.

Investors asked for it. They wanted to see why a company's effective tax rate differs from the statutory rate, and how much cash tax a company pays in each jurisdiction.

The standard does four things:

• Rate reconciliation. Public business entities present it in a table, in dollars and percentages, in eight specified categories. Other entities describe it in words.
• Income taxes paid. Every entity discloses taxes paid, net of refunds, by federal, state and foreign jurisdiction, and by individual jurisdiction at 5% or more.
• Pretax income and tax expense. Every entity splits pretax income between domestic and foreign, and income tax expense among federal, state and foreign (ASC 740-10-50-10A and 50-10B).
• Removals. Two old disclosures go away, covered below.

The official text is on the FASB's site: ASU 2023-09 (FASB). PwC's Viewpoint guide and Deloitte's Heads Up on adoption walk through the same requirements.

When is ASU 2023-09 effective? The official dates

ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024, and for all other entities for annual periods beginning after December 15, 2025. Early adoption is permitted for both groups. The dates apply to annual periods only.

"Beginning after" is the phrase to watch. A June 30 year-end public company whose year began July 1, 2024 started before the cutoff, so its first covered year is the one that began July 1, 2025.

Prospective or retrospective? Both are allowed.

Prospective is the default under the ASU, and retrospective is a permitted election. A public company that went retrospective in its 2025 10-K had to rebuild the prior-year tables in the new categories.

What does the ASU 2023-09 rate reconciliation require?

Public business entities must present the effective tax rate reconciliation as a table, in both reporting currency amounts and percentages, using eight specified categories (ASC 740-10-50-12A). The categories 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
5. Tax credits
6. Changes in valuation allowances
7. Nontaxable or nondeductible items
8. Changes in unrecognized tax benefits

A reconciling item that fits none of the eight is shown separately, by nature, if it meets the 5% threshold. Smaller items like that are grouped on an "other adjustments" line.

The 5% threshold. Within some of the categories, individual reconciling items are shown on their own line when their effect is at least 5% of pretax income (loss) from continuing operations multiplied by the applicable statutory rate of the jurisdiction of domicile. The item-level test applies in four categories, foreign tax effects, effect of cross-border tax laws, tax credits, and nontaxable or nondeductible items, and to items that fall outside all eight (ASC 740-10-50-12A(b)). For foreign tax effects, the breakout is by jurisdiction and by nature. For a U.S. company at the 21% federal rate, the threshold works out to 1.05% of pretax income.

State and local taxes. The state category isn't broken out line by line. Instead you describe in words the states that together make up more than 50% of the category (ASC 740-10-50-12B). Start with the largest state and add states in descending order until the total passes 50%.

Explanations. Where it isn't otherwise evident, you explain individual reconciling items, including their nature, effect and underlying causes, and the judgment used to categorize them (ASC 740-10-50-12C).

Materiality still applies. A required category or an item over the threshold can be left out if it is immaterial (ASC 105-10-05-6).

What does an ASU 2023-09 rate reconciliation look like? A worked example

Here is a rate reconciliation for a hypothetical U.S. public company. The numbers are invented for illustration. Pretax income from continuing operations is $80.0 million, the federal rate is 21%, and amounts are in thousands. The example is for the year ended December 31, 2026.

The threshold is 5% × ($80,000 × 21%) = 5% × $16,800 = $840.

Read the table in three steps:

• Three items cleared $840. Ireland ($880), the FDDEI deduction ($960) and the research credits ($1,360) each get their own line. The other foreign effects ($160) and the other cross-border effects ($400) did not, so each is grouped on an "other" line within its category. The nontaxable or nondeductible items ($160) stay on the category line. Placing the FDDEI deduction in cross-border tax laws is a judgment the FASB acknowledges for FDII, the deduction's former name (ASU 2023-09, paragraph BC30), so document it under ASC 740-10-50-12C.
• The state line has no breakout. The footnote adds a sentence naming the states that make up more than half of the $2,000. Here, say California and New York.
• It foots. 16,800 + 2,000 − 880 − 160 + 80 − 960 + 400 − 1,360 + 240 + 160 + 320 + 80 = 16,720. And 16,720 ÷ 80,000 = 20.9%.

Items are presented gross, with two permitted exceptions (ASC 740-10-50-12A(b) and (c)(2)(ii) and (c)(3)). A current-year unrecognized tax benefit may be netted with its related tax position, and a cross-border tax may be netted with its related foreign tax credit. This example nets neither. It shows the research credits on their own line and all unrecognized tax benefit changes on the UTB line.

Every reconciling item now needs a category, and most need a threshold test. That is the new work.

What must companies disclose about income taxes paid?

Every entity discloses income taxes paid, net of refunds received, disaggregated by federal (national), state and foreign taxes. Within each of those, any individual jurisdiction that makes up 5% or more of total income taxes paid, net of refunds, is shown separately. The test runs against total income taxes paid, net of refunds, so a jurisdiction with large expense but small payments may not qualify.

Here is the same hypothetical company's disclosure, in thousands. The total is $13,200, so the threshold is $660.

Percentages are rounded.

Ireland is the one to notice. At $700 it clears $660 by a small margin. If next year's total grows or its payment shrinks, it may drop out.

Cash taxes don't equal tax expense, and readers will ask why. In the example the company paid $13,200 against $16,720 of expense. Timing of installments, deferred taxes, refunds and settlements all explain a gap like that. Be ready to say which.

Materiality applies here too. A jurisdiction at 5% or more can be omitted if the amount isn't material.

What else did ASU 2023-09 change?

It also removed two disclosures and added the pretax income and tax expense splits already mentioned. The two removals:

• The nature and estimate of the range of reasonably possible change in unrecognized tax benefits in the next 12 months.
• The cumulative amount of each type of temporary difference when a deferred tax liability isn't recognized because of the subsidiary and corporate joint venture exceptions.

Check the footnote you carried forward last year before you copy it again. One caution: Topic 275 on risks and uncertainties can still require similar information on its own terms.

What changed for private companies?

Entities other than public business entities don't have to present the tabular rate reconciliation. They describe it in words instead (ASC 740-10-50-13). They still have to produce the income taxes paid disclosure and the pretax income and tax expense splits, in full.

Most summaries compress this into "private companies are exempt." The relief is narrower than that.

What the relief covers. Instead of the table, a private company discloses qualitatively the nature and effect of the specific categories of reconciling items, and the individual jurisdictions, that cause a significant difference between the statutory rate and the effective rate. A sentence for the example company could read: the effective rate of 20.9% is close to the 21% federal statutory rate because state income taxes, mainly in California and New York, were largely offset by research credits, the foreign-derived deduction eligible income deduction, and lower tax rates on Irish earnings.

What the relief does not cover. The income taxes paid table above applies to every entity, and so do the domestic and foreign split of pretax income and the federal, state and foreign split of tax expense. Only the income taxes paid disclosure carries the 5% jurisdiction test.

Why the cash tax table is the hard part. The rate reconciliation turns into a narrative you can draft. Income taxes paid turns into a data problem. Cash tax payments are often tracked at a level that doesn't separate federal from state, or one state from another, particularly when payments go through a combined return or net against refunds. Rebuilding a year of payment detail in the middle of an audit is much harder than coding it correctly during the year.

What to do before year-end:

1. Pull a full year of cash tax payments and test whether you can split them by federal, state and country, net of refunds.
2. Run the 5% jurisdiction test against last year's numbers to see which jurisdictions need their own line.
3. Check the domestic and foreign split of pretax income. It's the same data question in a different report.
4. Draft the qualitative rate reconciliation narrative with last year's figures. The structure will hold.
5. Decide who signs off on what counts as a significant difference, and document it.
6. Talk to your auditor about expectations before fieldwork.

What did public companies learn in year one?

BDO's observations from working with clients in year one start with materiality. BDO cites SEC Chief Accountant Kurt Hohl's March 2026 remarks that the rules carry an "overriding premise of materiality," and concludes that an item meeting the 5% threshold need not be disclosed if it isn't material to a reasonable investor (BDO, August 2026).

BDO also saw:

• Unrecognized tax benefits. For current-year positions the standard uses "may," so companies can net them into the related category or show them on the UTB line. Many used a single line.
• Reclassifications out of "Other" drew auditor scrutiny, even when the underlying economics hadn't changed.
• Consistency. BDO's view is that a jurisdiction or line item shown separately in the rate reconciliation in year one should keep appearing, even below 5%, until it cycles out of the three-year comparative window. This is a consistency practice, not an ASU requirement, and the three-year window applies to filers presenting three years of income statements.
• Timing. Footnote preparation can't be the last step of close anymore.

A private company can use all of this. The judgment calls are the same, and a year of public-company precedent already exists. The next disclosure standard on the calendar is ASU 2024-03 on expense disaggregation, which public business entities first apply in 2027.

How does ASU 2023-09 compare with IAS 12?

ASU 2023-09 moves US GAAP closer to IAS 12 on rate reconciliation detail, but the two still differ on structure, thresholds and taxes paid. IAS 12 asks entities applying full IFRS for a numerical reconciliation. US GAAP asks for one from public business entities only, and now prescribes the categories.

For a company reporting under both frameworks, ASU 2023-09 is more prescriptive on the table and on taxes paid. IAS 12 still asks for the aggregate temporary differences on subsidiary investments, which US GAAP dropped, though US GAAP keeps the unrecognized deferred tax liability amount for foreign subsidiaries when practicable. IAS 12 also has Pillar Two disclosures (IAS 12.88A to 88D) that US GAAP does not.

How Gaapio helps with ASU 2023-09

Gaapio is an AI-powered technical accounting platform built by CPAs. For ASU 2023-09, that means working through the ASC 740 disclosure items with the Codification reference attached, and drafting the footnote disclosures with each requirement linked to the Codification paragraph it comes from, so your reviewer can click through to the source.

The judgment stays with you. You decide the categories, the threshold calls and the sign-off. Gaapio drafts from the amounts your team provides and shows its sources.

If you're preparing a first-year ASU 2023-09 footnote, request a demo and bring the draft. We'll walk through it.

ASU 2023-09 asks you to document judgment calls you already make. Do it before year-end, and the footnote is manageable. Wait for fieldwork, and it's a fire drill. Which of your reconciling items would you struggle to explain to your auditor today?

Frequently asked questions

What is ASU 2023-09?

ASU 2023-09 is the FASB's Improvements to Income Tax Disclosures, issued December 14, 2023. It expands the ASC 740 footnote with a more detailed rate reconciliation, income taxes paid by jurisdiction, and a domestic and foreign split of pretax income and tax expense.

When is ASU 2023-09 effective?

It is effective for public business entities for annual periods beginning after December 15, 2024, and for all other entities for annual periods beginning after December 15, 2025. A calendar-year public company first applied it for 2025. A calendar-year private company first applies it for 2026. Early adoption is permitted.

Does ASU 2023-09 apply to private companies?

Yes. Entities other than public business entities adopt it one year later. They give a qualitative rate reconciliation instead of the table, and they must provide the income taxes paid disclosure and the pretax income and tax expense splits.

What are the eight rate reconciliation categories under ASU 2023-09?

State and local income tax net of federal effect, foreign tax effects, effect of changes in tax laws or rates enacted in the current period, effect of cross-border tax laws, tax credits, changes in valuation allowances, nontaxable or nondeductible items, and changes in unrecognized tax benefits. Public business entities present them in a table (ASC 740-10-50-12A).

What is the 5% threshold in ASU 2023-09?

There are two 5% tests. In the rate reconciliation, certain items are shown separately when their effect is at least 5% of pretax income from continuing operations times the statutory rate of the jurisdiction of domicile. For a U.S. company at 21%, that's 1.05% of pretax income. For income taxes paid, any jurisdiction at 5% or more of the total, net of refunds, is shown separately.

Is ASU 2023-09 prospective or retrospective?

Prospective is the default, and retrospective application is permitted. Under prospective adoption, prior years in the statements stay in the old format.

Which disclosures did ASU 2023-09 remove?

Two. The nature and estimate of the range of reasonably possible changes in unrecognized tax benefits in the next 12 months, and the cumulative amount of each type of temporary difference when a deferred tax liability isn't recognized under the subsidiary and corporate joint venture exceptions.

How does ASU 2023-09 differ from IAS 12?

IAS 12 requires a numerical rate reconciliation from every entity but doesn't prescribe categories or a threshold, and it doesn't require taxes paid by jurisdiction. ASU 2023-09 prescribes eight categories and 5% tests for public business entities, and asks every entity for taxes paid by jurisdiction.

Does ASU 2023-09 change how much income tax we record?

No. It is a disclosure standard. It changes what you tell readers about income taxes and leaves recognition and measurement under ASC 740 alone.

Sources: FASB Accounting Standards Update No. 2023-09, issued December 14, 2023; PwC Viewpoint, Financial statement presentation guide, section 16.6; Deloitte Heads Up, May 20, 2025; BDO, "Lessons learned from the first year of reporting under ASU 2023-09," August 2026. The worked examples use invented numbers. This article is general information, not accounting advice for a specific entity.