Top 10 pain points for the 2025 year-end income tax provision

The adoption of ASU 2023-09 introduced expanded requirements for rate reconciliation and income taxes paid disclosures, with a focus on jurisdictional transparency. While conceptually straightforward, implementation and adoption have proven to be challenging.

Many organizations have not historically tracked cash taxes paid at a sufficiently disaggregated level. For example, a multinational company may historically track total foreign taxes paid but lack visibility into country-specific payments required under the new disclosure rules. This becomes problematic when attempting to disclose taxes paid to individual jurisdictions exceeding the 5% threshold.

Similarly, rate reconciliation categories must now be more detailed and standardized. A company that previously grouped multiple reconciling items into a broad “other” category may now need to separately identify items such as foreign tax rate differentials, global intangible low-taxed income (GILTI) impacts and non-deductible expenses. An additional disclosure requires listing the state jurisdictions making up the majority (greater than 50%) of total state and local income taxes. This can be challenging for companies calculating their state tax accrual using a composite state tax rate.

The result is a need for process redesign, enhanced data collection and stronger internal controls—all of which place strain on tax departments during year-end close.

One common pain point reported as companies provided their disclosures to the audit team, some tax professionals (and auditors) struggled with the inability to easily track valuation allowance movement within the effective tax rate (ETR) report. This resulted, for example, in the new disclosure requirement to limit the change in valuation allowance category of the tabular rate reconciliation to the Federal (national) change in valuation allowance only. Under the ASU the state valuation allowance impact is now included in the state taxes net of the federal benefit category. Similar treatment exists for change in foreign valuation allowance which is now included in the foreign tax effects category.

With the transition year in 2025 or 2026, it’s best practice to ensure you’re connecting with your auditors for alignment ahead of your year-end close, as compiling the new disclosures may take longer than expected.

Equity compensation remains a frequent source of book-tax differences and provision volatility. Under ASC 718, book expense is recognized based on grant-date fair value, while tax deductions are based on the intrinsic value at vesting or exercise.

Consider a company that grants stock options with a fair value of $1 million, recognized as expense over the vesting period. At exercise, however, the intrinsic value may be $1.5 million, resulting in an excess tax deduction. This creates a “windfall” tax benefit that flows through the ETR reconciliation as a permanent, discrete item in the quarter vested or exercised.

From a provision standpoint, this creates several challenges. Deferred tax assets must be initially recorded based on the book expense but then adjusted upon realization of the tax deduction. If not tracked properly, this can result in misstatements in deferred balances or unexpected impacts on the effective tax rate. In recording deferred tax assets as book compensation is recorded, it is important to be mindful of the section 162(m) highly compensated employee rule that generally limits deductible compensation to $1 million for covered employees. For example, if it is expected that a covered employee will have taxable compensation in excess of $1 million in the year of vesting or exercise of an award, it is likely that at least a portion of such award will not be deductible. As such in recording book compensation expense, no deferred tax asset should be recorded for the anticipated non-deductible compensation expense. Beginning in 2027, this covered employee group expands to include an additional five highest-paid employees, making this tracking exercise a more time-consuming exercise and a greater risk of misstatement.

In addition, tracking these differences across multiple jurisdictions and equity award types adds operational complexity, particularly for companies with decentralized HR and payroll systems.

The Organisation for Economic Co-operation and Development’s (OECD) Pillar Two framework introduces a global minimum tax of 15%, fundamentally altering how multinational companies evaluate tax exposure.

One key challenge is calculating Global Anti-Base Erosion (GloBE) income, which differs from both local taxable income and financial statement income. For example, certain permanent differences and timing adjustments must be recalculated under Pillar Two rules, requiring a separate layer of computation.

A company operating in a low-tax jurisdiction with a 10% effective tax rate may be subject to a 5% top-up tax. Determining whether this applies requires analyzing covered taxes, deferred tax adjustments and jurisdictional blending rules.

From an ASC 740 perspective, companies must also determine how to account for these taxes. While current guidance generally treats Pillar Two as a period cost rather than a deferred tax, interpretation continues to evolve.

The lack of standardized processes and the need for new data sets make this one of the most resource-intensive areas of the provision. Baker Tilly International’s global network assists companies with navigating peculiar Pillar Two tax compliance requirements in most of the international jurisdictions.

Reconciling income taxes payable remains a deceptively complex task. The process requires aligning tax return balances, refunds, cash payments, and general ledger accounts, often across multiple jurisdictions and systems.

Issues arise when prior-year adjustments are not clearly tracked or when payments are recorded in different systems than the provision. In some cases, tax payments may be posted to suspense accounts or misclassified, leading to reconciliation discrepancies.

A common struggle tax teams experience is when state (non-income) tax payments or refunds are comingled within a state income tax payable account. From a finance perspective, we commonly see that refunds from states are deposited and booked to state income taxes payable accounts. Sometimes the alignment of a general state refund does not occur until the tax team gets involved.

These challenges often result in manual proofs, late adjustments and increased audit scrutiny.

Auditor inquiries about deferred tax scheduling have increased significantly. If it has not occurred for your company yet, be prepared (or beware).

Deferred tax accounting requires not only identifying temporary differences but also understanding when those differences will reverse in the future.

For instance, a company with accelerated tax depreciation may have a significant deferred tax liability. However, without a clear reversal schedule, it becomes difficult to assess the impact on future taxable income or evaluate valuation allowance positions. Scheduling approaches that emphasize simplicity over complexity and consistency stand-up better to audit scrutiny.

Companies need to be aware of the reversals of temporary differences depending on which source of income they are using to analyze the need for a valuation allowance. Using the reversal of existing taxable temporary differences scheduling is not the same as future taxable income exclusive of reversing temporary differences. The timing and amount do not match between the two methods and should be carefully reviewed to ensure proper treatment.

Many organizations still rely on spreadsheet-based schedules, which are time-consuming to maintain and may create additional risk.

Multinational tax provisions require aligning local statutory or International Financial Reporting Standard (IFRS) results with U.S. Generally Accepted Accounting Principles (GAAP) reporting under ASC 740. This often involves adjusting for differences in accounting standards, tax treatment, and reporting timelines.

For example, a foreign subsidiary may prepare statutory financial statements under local GAAP or IFRS, recognizing certain expenses differently than under U.S. GAAP. These differences must be adjusted in the tax provision to ensure consistency.

Some corporate tax departments are not able to clearly identify the local statutory reporting to U.S. GAAP adjustments. This creates the potential for variances in the current income tax provision calculation if U.S. GAAP to statutory (STAT) adjustments are not properly identified. In addition, there may be challenges with foreign currency conversion methodologies used for book versus tax purposes, resulting in further deferred tax adjustments. Understanding materiality levels is important in assessing the degree of precision required. In addition, gaining comfort that any nonmaterial differences are purely differences in timing from period to period is key.

In practice, inconsistencies in data quality and timing across jurisdictions can lead to delays and increased reliance on estimates, particularly during tight reporting deadlines.

Valuation allowance assessments require determining whether deferred tax assets are more likely than not to be realized. This involves significant judgment and reliance on future projections.

For example, a company with cumulative losses in a jurisdiction may need to record a valuation allowance against its deferred tax assets for net operating loss carry forwards and other future deductible temporary differences. However, if forecasts, based on core earnings, indicate a return to profitability, the company may partially or wholly release the valuation allowance.

The challenge lies in supporting these conclusions. Forecasts must be consistent with broader financial plans, and tax planning strategies must be both feasible and prudent. With a detailed scheduling of deferred tax asset and liability reversal timing, complex implications of recent tax law changes (Tax Cuts and Jobs Act and the One Big Beautiful Bill Act-not to mention state conformity tracking), saying that there are multiple moving pieces within this analysis is an understatement.

Auditors are increasingly focused on the quality of evidence, requiring detailed documentation and sensitivity analyses. Small changes in assumptions can have a material impact on the provision.

Many of the challenges described above are rooted in data, information, and systems limitations. Tax departments often operate across multiple platforms, including enterprise resource planning (ERP) systems, tax provision software and spreadsheets.

For example, a company may extract trial balance data from its ERP system, manipulate it in Excel or possibly Alteryx, and then upload it into a tax provision tool. Each step introduces the potential for error and inconsistency.

Similarly, when a company completes an acquisition, attaining the opening balance sheet analysis is critical for proper tax accounting treatment. Aligning on opening valuations, agreed upon values for tax allocation purposes, and acquired tax basis can create hurdles for tax and finance teams.

The lack of integration also makes it difficult to respond to new requirements, such as ASU 2023-09 disclosures or Pillar Two calculations. Data may need to be re-collected or restructured, adding time and complexity to the process.

Improving data governance and investing in integrated technology solutions are becoming critical priorities for tax functions. Companies should consider updates and changes to their processes, technology and controls.

The effective tax rate (ETR) is a key metric for stakeholders, but it is increasingly difficult to manage and explain.

Consider a company that experiences a significant windfall from stock-based compensation, reducing its ETR in one period. In the following period, the absence of such a benefit may result in a higher ETR, creating apparent volatility.

Similarly, changes in geographic earnings mix, such as increased profits in low-tax jurisdictions, can impact the ETR in ways that are not immediately intuitive.

Tax departments must not only calculate the ETR accurately but also provide clear explanations of the underlying drivers. This is particularly important in light of enhanced disclosure requirements (ASU 2023-09), which require more detailed rate reconciliations. In this transition period (2025 for public companies and 2026 on the horizon for non-public companies), it is critical to provide the users of these reports valuable transparency. This will also require companies to plan and manage its tax profile or expect questions from management and stakeholders.

Underlying all of these challenges is the reality that tax departments are often operating with limited resources. Increasing complexity, combined with tighter reporting timelines, places significant pressure on teams.

For example, the tax department responsible for global provisions may have only a small team to manage data collection, validation, technical analysis, and reporting. This can lead to long hours, reliance on manual processes, and increased risk of error.

At the same time, expectations from stakeholders continue to grow. Tax functions are being asked to provide real-time insights, support strategic decision-making, and adapt to evolving regulatory requirements. Tax departments are considering ways AI tools can be implemented to create greater efficiency, time savings and greater accuracy in results.

This dynamic is driving a shift toward automation, outsourcing, and co-sourcing models to augment internal capabilities. Companies are also moving away from pure legacy Excel-based models, reducing spreadsheet risk and scalability constraints, in favor of dedicated tax provision software.