ASU 2023-09 — Income Taxes (Topic 740): Improvements to Income Tax Disclosures

In December 2023, the FASB issued ASU 2023-09, which amends ASC 740, Income Taxes, to enhance the transparency and disaggregation of income tax disclosures. While many nonprofit organizations are tax-exempt under IRC Section 501(c) and therefore do not recognize income tax expense, the amendments are relevant to nonprofits with unrelated business taxable income (UBTI), taxable subsidiaries, or state and foreign tax exposure.
The ASU is disclosure-only and does not change recognition or measurement under ASC 740.

Applicability to Nonprofits
     ASU 2023-09 applies to nonprofit entities that:

• Recognize current or deferred income taxes related to UBTI,
• Have taxable for-profit subsidiaries that are consolidated or reported under ASC 740,
• Are subject to state, local, or foreign income taxes, or
• Have uncertain tax positions related to income tax matters.

Nonprofits with no income tax expense, deferred taxes, or uncertain tax positions will generally have minimal or no impact, though disclosures should be evaluated annually.

Key Disclosure Requirements

1. Rate Reconciliation
     Public Business Entities (PBEs), including nonprofits that meet the PBE definition (for example, through publicly traded or publicly offered conduit debt with publicly available financial statements), must disclose a tabular effective tax rate (ETR) reconciliation, presented in both percentages and reporting currency amounts, using prescribed standardized categories and additional disaggregation thresholds.
Nonprofit entities that are not PBEs are not required to provide a tabular rate reconciliation. Instead, non-PBEs must provide qualitative disclosures explaining the nature and significant categories of reconciling items that cause differences between the statutory tax rate and the effective tax rate.

For nonprofits, common reconciling items may include:

• Differences between exempt activities and UBTI
• State income tax effects
• Permanent differences related to tax-exempt income
• Changes in valuation allowances on deferred tax assets related to UBTI
• Tax credits, if applicable

Significant reconciling items must be described qualitatively, including changes from prior periods.

2. Pretax Income (or Loss) from Continuing Operations
     Nonprofits within the scope of ASC 740 must disclose pretax income (or loss) from continuing operations, disaggregated between:
• Domestic
• Foreign
This disclosure applies only to taxable activities subject to ASC 740 and does not include results from tax-exempt operations.

3. Income Tax Expense (or Benefit) from Continuing Operations
     Nonprofits must disclose income tax expense (or benefit) from continuing operations, disaggregated by:
• Federal (national)
• State
• Foreign
If an organization has no income tax expense or benefit for a category, the disclosure may reflect zero or indicate that it is not applicable.

4. Income Taxes Paid
     Nonprofits must disclose income taxes paid (net of refunds received), disaggregated by:
• Federal
• State
• Foreign (if applicable)
Additionally, income taxes paid to individual jurisdictions exceeding 5% of total income taxes paid must be disclosed separately. This requirement applies even if total taxes paid are relatively small.
This disclosure focuses on cash payments, not tax expense, and may require coordination between accounting and tax functions.

5. Uncertain Tax Positions (UTPs)
     ASU 2023-09 removes certain less-useful disclosure requirements related to unrecognized tax benefits (UTBs); however, nonprofits must continue to disclose:

• The nature of uncertain tax positions, including those related to UBTI
• Statute of limitation information

These disclosures are particularly relevant for nonprofits with complex UBTI determinations or multi-state filing obligations.

Effective Date and Transition

• Public Business Entities (PBEs): Effective for annual periods beginning after December 15, 2024
• For entities other than PBEs (including most nonprofits): Effective for annual periods beginning after December 15, 2025
• Early adoption permitted
• Transition: Prospective (retrospective application permitted)

Practical Considerations for Nonprofits

• Evaluate whether UBTI tracking is sufficiently detailed to support enhanced disclosures.
• Assess whether taxable subsidiaries have systems in place to provide jurisdiction-level cash tax data.
• Update financial statement disclosure checklists and audit documentation.
• Communicate changes to audit committees and boards, particularly where new disclosures may draw attention to taxable activities.