Income Tax Disclosures Under ASU 2023-09: A Pre-IPO Guide

For years, the income tax footnote was one of the more predictable parts of a growing company's financial statements. The rate reconciliation ran a handful of familiar lines — statutory rate, state taxes, permanent differences, a valuation allowance plug — and the taxes-paid disclosure was a single number in the cash flow supplement. ASU 2023-09, Improvements to Income Tax Disclosures, ends that. The standard rebuilds the two disclosures investors and the SEC use most to understand a company's tax profile, and it does so with a level of disaggregation that turns a footnote into a data problem.

For CFOs and controllers at pre-IPO and newly public companies, the timing matters. The standard is landing in first filings now, it interacts with the emerging-growth-company transition rules in ways that are easy to get wrong, and the data it demands — tax by jurisdiction, taxes paid by jurisdiction, reconciling items broken out by nature — is exactly the kind of information a fast-growing company hasn't been tracking. Below is a working guide to what changes, who it applies to and when, and what to build before the disclosure is due rather than during the close.

Why a loss-making company still has a disclosure problem

The most common misread of ASU 2023-09 in the pre-IPO world is that it doesn't apply to companies that don't pay income tax. A pre-commercial software or biotech company with cumulative net operating losses and a full valuation allowance often assumes its tax footnote is immaterial by definition. It isn't.

The rate reconciliation still runs. A company with a full valuation allowance typically shows an effective rate near zero — but it gets there by netting a statutory benefit against an equal-and-opposite valuation allowance charge, plus state effects, plus permanent items like Section 174 capitalization effects, stock-based compensation shortfalls, and nondeductible expenses. ASU 2023-09 requires those movements to be shown separately and quantified, not collapsed into a single "change in valuation allowance" line. A company that has never had to explain why its valuation allowance moved the way it did now has to.

Foreign operations trigger detail early. The moment a company opens a foreign subsidiary — an R&D center, a sales entity, a manufacturing site — it acquires foreign pretax income (or loss) and foreign tax effects that the standard requires to be disaggregated. Companies scale internationally well before they scale profits, so the jurisdictional detail often arrives before the taxable income does.

The rate reconciliation, rebuilt

The centerpiece of the standard is a prescribed, disaggregated effective-tax-rate reconciliation for public business entities. Two things change relative to prior practice: the categories are specified rather than left to management, and material reconciling items have to be broken out.

Eight required categories. Public business entities must present the reconciliation using eight specific categories: state and local income tax (net of the federal effect), foreign tax effects, the effect of changes in tax laws or rates enacted in the period, the effect of cross-border tax laws, tax credits, changes in the valuation allowance, nontaxable or nondeductible items, and changes in unrecognized tax benefits. Both the dollar amount and the percentage have to be shown for each — prior guidance effectively let companies choose one.

The 5% disaggregation threshold. Within several of those categories, any individual reconciling item that is equal to or greater than 5% of the amount computed by multiplying pretax income by the applicable statutory rate must be separately disclosed by its nature. Foreign tax effects that clear the threshold must also be disaggregated by jurisdiction. The 5% test is the mechanism that forces granularity: it's no longer defensible to bury three unrelated permanent differences inside a single "other" line if any of them is individually material against the benchmark.

What this means in practice. A controller can no longer assemble the reconciliation from a rolled-up trial-balance view. Each category has to be built from underlying detail — by legal entity, by jurisdiction, by the nature of each permanent and temporary difference — and the 5% screen has to be run against every line. For a company with even a handful of foreign entities, that is a materially larger workpaper than what most private companies maintain today.

Income taxes paid, now by jurisdiction

The second major change concerns cash taxes. Companies must disclose income taxes paid, net of refunds received, disaggregated between federal, state, and foreign. Beyond that split, taxes paid to any individual jurisdiction that equal or exceed 5% of total income taxes paid (net of refunds) must be disclosed separately.

This is deceptively demanding. Total cash income taxes paid is a number most finance teams can produce; the same number attributed to each taxing jurisdiction, net of refunds, and screened at 5% often is not. Payments flow through estimated-tax vouchers, withholding, extension payments, and prior-year true-ups, frequently managed by an outside preparer whose workpapers were never designed to roll up to this disclosure. Building the disclosure retroactively at year-end, from bank records and tax notices, is where teams lose the most time.

The domestic/foreign split and other line-item detail

ASU 2023-09 also codifies presentation detail that was inconsistently applied. Companies must disaggregate income (or loss) from continuing operations before income tax expense between domestic and foreign, and disaggregate income tax expense from continuing operations between federal, state, and foreign. For a purely domestic company this is trivial. For a company with international operations — again, common well before profitability — it requires a clean mapping of pretax results and current/deferred provision by geography, reconciled to the consolidated totals.

What the standard removes

The standard is not purely additive. It eliminates a few older requirements, which is worth knowing so teams don't spend effort maintaining disclosures that no longer apply. It removes the requirement to disclose the nature and estimate of the range of the reasonably possible change in unrecognized tax benefits over the next twelve months (or to state that an estimate cannot be made), and it removes the requirement to disclose the cumulative amount of certain undistributed foreign earnings for which no deferred tax liability has been recognized. These deletions are modest relative to what's added, but they do let teams retire a couple of the more judgment-heavy narrative disclosures.

Effective dates and the emerging-growth-company question

For public business entities, ASU 2023-09 is effective for annual periods beginning after December 15, 2024 — meaning calendar-year 2025 annual reports, filed in early 2026, are the first to reflect it. For entities other than public business entities, it's effective for annual periods beginning after December 15, 2025. The standard is applied prospectively, with retrospective application permitted, and early adoption is allowed.

The EGC nuance that trips companies up. An emerging growth company that has elected to use the extended transition period for new or revised accounting standards follows the private-company effective date — annual periods beginning after December 15, 2025 — even though it files with the SEC. That election, made at the time of the IPO and disclosed in the registration statement, is irrevocable. The practical consequence: two otherwise similar newly public companies can have different first-year adoption dates for this standard depending on a check-the-box decision made in their S-1. Confirm which transition status applies before you assume a deadline, and make sure the tax team and the SEC reporting team agree on the answer.

The S-1 dimension. A company registering during this window has to think about how the disclosure will appear across the comparative periods in its filing and whether early adoption produces a cleaner, more consistent presentation than adopting mid-stream as a public company. That's a decision worth making deliberately, with the auditors, rather than defaulting into.

This is a data project, not a footnote edit

The through-line across every part of the standard is granularity: by category, by jurisdiction, by the nature of each reconciling item, screened at 5%. None of that can be produced at the eleventh hour from a consolidated provision. The companies that will handle ASU 2023-09 cleanly are the ones that treat it as a data-infrastructure task in the year before it's due — mapping the provision and cash tax payments to legal entity and jurisdiction, building the reconciliation from that detail rather than from a rolled-up rate, and running the 5% screens as a standing part of the tax provision process rather than a year-end scramble.

The new income tax disclosures don't reward the company with the lowest effective rate. They reward the company that can explain, line by line and jurisdiction by jurisdiction, exactly how it got there — and that explanation has to be built from data the company started capturing long before the footnote was due.

What to do in the next two quarters

Three moves separate the teams that adopt smoothly from the ones that don't. First, confirm your effective date — pin down whether you're a public business entity on the 2025 timeline or an EGC on the extended-transition timeline, and get tax and SEC reporting aligned on it in writing. Second, run a dry-run reconciliation against the new format using the most recent full year, including the 5% disaggregation and the by-jurisdiction taxes-paid schedule, so you find the data gaps while there's still time to close them. Third, fix the source data — get your provision and cash-tax records structured by legal entity and jurisdiction so the disclosure assembles from the workpapers instead of being reverse-engineered at year-end.

Most of this is achievable well ahead of the first required filing if it's started early. The failure mode is discovering, during the year-end close, that taxes paid can't be split by jurisdiction and the valuation allowance movement was never tracked by its underlying drivers. If you're working through ASU 2023-09 adoption, want a dry run of the new reconciliation before your auditors see it, or need to sort out the EGC transition question ahead of an S-1, we'd be glad to help.

This article is for general informational purposes and should not be relied on as accounting, tax, or legal advice for any specific transaction. Please consult with your advisors.