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
- Rate Reconciliation
Nonprofit entities that recognize income tax expense must disclose an effective tax rate (ETR) reconciliation, presented in percentages and amounts.
Unlike public business entities, nonprofits are not required to use standardized categories; however, material reconciling items must be disclosed and explained. Common nonprofit 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.
- 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.
- 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
- Potential changes in UTBs within the next 12 months
- Statute of limitation information
These disclosures are particularly relevant for nonprofits with complex UBTI determinations or multi-state filing obligations.
Effective Date and Transition
- Effective for annual periods beginning after December 15, 2024 for public entities and December 15, 2025 for non-public entities.
- 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.
Have questions about how ASU 2023-09 could affect you and your business? Contact our Calibre team.
Article Prepared By:
Lila Leno | Partner
