EY talks tax: US corporate income tax compliance (April 22, 2026)

Welcome to EY Talks Tax, a podcast series in which EY tax professionals and thought leaders explore the latest tax developments and their practical implications for today's businesses. In each episode, we bring you a lively discussion of a significant tax topic delivered by subject matter professionals who deal with these issues day in and day out. In this episode, panelists discuss how companies can navigate an evolving tax compliance landscape as they prepare for tax year 2025 and beyond. Hi, everyone, and welcome. Thank you for joining today's presentation on corporate income tax compliance. We have a number of great topics and presenters today that will help you prepare for your 2025 tax compliance season. My name is Randy Carpenter. I'm a tax partner in Los Angeles and also EY's business tax compliance transformation leader. I'll be your moderator today. Let's jump into the agenda and our list of distinguished speakers. First, we have Ray Beeman, Washington Counsel. We have Stephanie Mangold, Global Compliance and Reporting. John Spisto, State and Local Tax. Kristen Chauvin, International Tax. Tommy Rinaldo, U.S. Business Tax Compliance Operations Leader. Connie Zhao, Tax Technology and Transformation. Nick D'Antoni, International Tax, and Caroline Flowers, Global Compliance and Reporting. Let's look at our agenda for the day. We have a number of great topics to cover from international, state, and federal tax. We also have updates on technology transformation and an exciting demo of EY's latest technology that is available today. now let's move on to the first presenter ray beeman on an update from washington council all right thanks a lot randy and uh welcome back everyone i'm sure it's not a surprise to say that washington is now in the middle of the mid-2026 midterm election cycle everything being viewed through that lens, more so perhaps than some policy matters. And right now, Congress has still got some unfinished business to do. Of course, this week, next week is going to be focusing on trying to get the Department of Homeland Security reopened, now the longest government shutdown of any sort in history. And that's kind of where everything's focused. And what the Republicans are doing in order to reopen is running a second reconciliation bill. The first one, of course, being the One Big Beautiful Bill Act last year. So Reconciliation 2.0 that has been in the news is going to be focused specifically on reopening ICE, Immigration and Customs Enforcement, and CBP, the Border Patrol and Customs Agencies of DHS. There's been some speculation that other things could get added to this reconciliation bill. I think the leadership in the House and Senate are trying to keep this bill very skinny and focused on those issues with a notional deadline of June 1st to get that done. And as part of those conversations, what often happens in Washington is a promise to cover other issues in the next so-called next tax bill. So we're already starting to see some discussion about a reconciliation 3.0 tax bill after they are able to process 2.0. If they are able to get that started, that would probably take place later in June and July. It's going to be a very heavy lift. It's going to be a heavy lift to get 2.0 done, given how narrow the Republican majorities are in the House and Senate right now. It's going to probably be even tougher to get a third reconciliation bill through, particularly if there's not a primary catalyst for getting that done, like we saw in OB3 with the tax cliff at the end of 2025 that they're trying to avoid. But nevertheless, they potentially will take a run at that, and it's something we're going to want to watch for because there are some tax issues out there that members want to deal with, ranging from some of the extenders that didn't get taken care of in OB-3. For example, the work opportunity tax credit, we get asked about that a lot. And some of the things that were done in OB3 that people want to maybe undo, the 90% gambling loss deduction limitation, for example, and some of the international provisions. But we'll see how that plays out. Again, not putting great odds on another tax bill, at least before the midterm elections. A lot of people are also saying that following the midterm elections, as this current Congress winds down in November, December, that this is called a lame duck session where you have members of Congress who are going to be leaving office in January but still have voting cards and potentially doing more legislation. And we have seen that happen on tax matters in the past. Typically, when we had the bigger extenders in years past, those often were taken care of during that lame duck session. So staying on watch for a 3.0 reconciliation bill, like I said, 2.0, probably nothing beyond reopening DHS and then potentially further out in the year. These are really the drivers for the election, the issues set that we've identified. I'll drill down in tax a little bit more, but I'd say these other issues, the House and Senate, for example, have both passed their versions of a housing bill, housing affordability bill, not really anything on tax. but they are different and it is running into some issues. Healthcare, we saw last year the debate which caused the first government shutdown over extending the Enhanced Affordable Care Act. Premium tax credits, which did not get extended, so it's become kind of a political issue. Tariffs, of course, has been a very prominent issue and all of these could probably fit under the affordability issue, for example, and so that seems to be the principal theme going into the election, at least something that certainly Democrats are pushing on, but Republicans are doing that as well. I'd say Republicans on the tax side just generally have been really driving towards promoting the One Big Beautiful Bill Act, particularly during the filing season, as we saw some of those tax benefits coming through and refunds and whatnot. So that is kind of where Republicans are versus new starters, really. We'll kind of turn to the actual midterm elections, again, very close margins in the House and Senate, very close to Republican majorities, historically close in the House in particular. It seems like the House is trending towards Democrats reclaiming control. Republicans aren't, again, working from a large margin, and Democrats have a lot of opportunities, although not many. If you look at the bottom, you see overall in the nation, there's not a lot of so-called toss-up races. And so when I say not many, it's really not many toss ups or lean other way in a way of election. These are not the only races that that get pulled into the debate. So I think on the House side, as we sit here today on the 22nd of April, Democrats are feeling pretty good in the House. Republicans pretty nervous. The Senate is a much bigger uphill climb for Democrats just because of geography. really. They have to reclaim at least four seats to really take control because the vice president would be a tie-breaking vote if it was a 50-50 Senate. We saw that during the Biden administration at various times. And really, they would have to maintain their own seats that are up for re-election and then flip for other seats beyond Maine and North Carolina, which seems to be winnable for them. They'd have to get into some pretty red territory, places like Texas and Ohio and Alaska in order to get that majority. But again, we have a long way to go before the midterms. I'm sure a lot will happen to change momentum many, many times over. We've also got a very unique environment with redistricting happening mid-decade. We just saw a vote yesterday in Virginia to redistrict. And so that fight continues. I would say that's going to be pretty much a wash. I don't think that's going to determine who's going to control the House next Congress, I think it's going to be these bigger trends. And speaking of bigger trends, historically, history is also not on Republican side. If you go all the way back to Lyndon Johnson's administration, the president in power, the party in power in the White House has lost seats in the House every election, every midterm election, going all the way back to Lyndon Johnson, with the exception of George W. Bush in 2002, which was fairly close after 9-11, Bill Clinton in 1998. So the historical trend alone isn't really great for Republicans right now. But again, we'll have to kind of see how this all plays out over the next several months. Let's drill down into the tax issues. Like I said, the bigger picture for the midterms, Republicans are pretty focused on promoting what they enacted in OB-3 last year. Democrats are obviously pointing out their issues with that bill. But what we are seeing in terms of trends that are happening right now, patterns, Democrats has begun to introduce a number of bills similar to what we've seen in the past, wealth taxes and millionaire taxes. What's a little interesting, you look at some of these bills, Bernie Sanders, Ben Holland, Cory Booker, is that they are pairing those tax increases at the high end with tax cuts at the low end. In the past, it was more just tax increases on the high end. And so there's a kind of a give and take. Again, these are all messaging. These are not bills that are going to get enacted this year, probably not in the near future, but they are definitely the messaging that Democrats are engaging in right now on the tax front. And I think we're going to see more of that. So sort of familiar from prior elections, but also this interesting tax-cutting thread that's running through these Democratic bills. On the Republican side, like I said, not really putting out any new starters there, but just mainly focusing on OB3. That said, there's a tried-and-true idea that's been around literally since the 1980s around indexing on capital gains. So you're indexing your basis when you compute capital gains to take into account, for example, inflation. There's been a debate in Washington for decades over whether that's something that has to be legislated or is it something that Treasury could actually implement on its own. There's an old memo, I believe, from the first Bush administration saying that would take legislation. That is something you're going to continue to see surface. There's actually been some chatter about throwing that into one of these reconciliation bills. I don't necessarily see that happening, but it's something that conservative activists have been pushing on for a long time. And we may see more discussion of that. And then, of course, the IRS and Treasury have been very busy. So we haven't seen a lot of tax legislation, but we've seen a lot of administrative guidance ranging from implementing the OB-3 provision, certainly not as probably a heavy lift as TCJ was. But there was some work for Treasury to do in implementing some of these new starters, the Trump ideas on no tax on tips over time, Trump accounts, things like that. And then also the second big bucket of guidance is really the administration's deregulatory agenda. And so you've seen a lot of guidance come out and doing guidance that was put out by the Biden administration, most notably on CAMTI. We've seen, I think, five notices now. What we'll probably see as we get towards the end of the year is a lot of these preliminary guidance items, notices and things get turned into actual proposed regulations. I know on CAMPTI, the administration has a goal of getting proposed regulations out by the end of the year, maybe first part of next year. They've been hearing from folks that they'd prefer maybe to have that actually come out the first part of next year rather than right at the end of the fiscal year. So that is kind of what we're seeing on tax right now. And then finally, something that's really hanging out in the background on the government's fiscal position here. And you see it's not great. The trajectory going across is the revenue number, but you're also seeing vertically the spending number. And if you look all the way out to the last bar, you'll see as we break these spending numbers out that even if you zeroed out all of the government, if you shut down the government forever, revenues will barely cover mandatory spending, the various buckets of mandatory spending and interest on the debt, which is becoming a bigger issue. So this is going to grow over the next, the remaining part of this Congress in the next Congress as something that's going to influence legislation. And I'd say maybe the next big tax bill, the catalyst for the next big tax bill may not be any cliffs or anything because we've got so much permanence from OB3, but maybe a fiscal discussion where revenues have to get put on the table. Not something in the near term, I think, from the standpoint of corporate tax rates and other provisions that were made permanent were in pretty good shape. But I do think at some point that is where I think we're going to come back to tax legislation in that context. Thank you, Ray. A lot of really good, interesting discussion there. I mean, the trick is nobody knows, right? And so we follow it and we've got to stay close to it and really try to understand what's happening in the context of what can happen with the various midterms and whatnot. So thanks for that update. And just a note to the audience, stay close to this, stay close to our webcast. We put out regular updates and it's important to your organization. So with that, we'll move over to Stephanie, who's going to jump into a federal update. Thanks, Randy. Okay, let's dive into federal tax and accounting methods. We're going to cover what's new, what's complex, and where teams should focus to avoid late surprises. So for all you taxpayers out there thinking about your tax accounting methods, and for those of you thinking about adopting new methods, this is the section for you. So a common theme you'll hear is that many of these provisions, particularly those enacted with OB-3, are not simple mechanical changes. They introduce new definitions, elections, modeling considerations, and documentation requirements, which interact with several other federal and state provisions. Because of the complexity of all these different types of provisions, we strongly recommend early planning and consultation and avoid waiting late until the return prep process to taking a look at some of these items. So we're going to start with the OB-3 enacted favorable bonus depreciation changes, which included a new provision under Section 168N. 8N. This new provision allows for accelerated depreciation for certain non-residential real property, and so it takes you from a traditional 39-year recovery period to full expensing in year one. But you can only take advantage of this provision if very specific requirements are met. So the new provision introduces qualified production property, or QPP, which is real property used in manufacturing, production, or refining activities. Eligibility hinges on several tests, including whether the property is used as an integral part of a qualified production activity, whether the activity results in substantial transformation, and whether construction and placed in service dates fall within narrow statutory windows. So as a reminder, construction on QPP needs to begin after January 19, 2025 and before January 1, 2029. An important note, which is clarified in interim guidance, is that QPP is limited to the portion of the building that's actually used for the manufacturing, production, or refining activities only. So, space of the building that's used for offices, administration, R&D, parking, etc. is explicitly exclude it from this provision. The notice also provides clarification related to used property, improvements to existing property, and certain leasing agreements. It's important to keep in mind that this benefit comes with a 10-year recapture period. So a later change in how the property is used can trigger depreciation recapture. So it's important to remember that this is not a set it and forget it provision Here how we can think about this in practice Accelerated depreciation can provide meaningful tax benefits There also flexibility in electing QPP on a property basis and there is safe harbor guidance out there that can help reduce compliance risk when dealing with these technical provisions. That said, there are still areas of uncertainty. The interim guidance leaves room for interpretation around the concepts like what's an integrated facility, substantial transformation, and critically, how to reasonably allocate basis between the eligible and ineligible portions of the property. The guidance right now allows for any reasonable method for this basis allocation, but also explicitly disallows other methods. So this is an area where analysis and documentation is going to be key. From an action standpoint, organizations should be reviewing current and planned capital investments now, understanding construction and place-in-service timelines within your organization, and working with your engineering teams to confirm whether these assets could qualify as QPP. We'll focus on the mechanics for actually making the QPP election, which is just as important as the technical eligibility. The QPP must be made on a timely filed original return, including extensions, for the year in which the property is placed in service. There's no automatic relief if an election is missed and the election is generally irrevocable. The guidance specifies about what you need to include in the election statement that will be attached with your federal return, and taxpayers will need to provide detail, including information for each qualified production property being placed in service, including address, description of property, total basis, allocated basis, and the amount of QPP. Missing or incomplete disclosures can jeopardize your election, so it's important to plan ahead and take time when gathering the information needed to actually make the election. Switching gears to the Corporate Alternative Minimum Tax, or CAMT, as Ray mentioned earlier, the IRS has issued several notices. A new one was issued earlier this year, 2026-7, which provides modifications on some of the prior interim guidance issued and add several new adjusted financial statement income or AFSI adjustments and clarifications. The guidance continues the trend of aligning CAMT more closely with regular tax treatment. The important takeaway related to CAMT is that modeling is critical. Taxpayers will need to consider whether to adopt new AFSI adjustments and understand the impact these adjustments will have on compliance as well as tax accounting and forecasting. We've summarized some of the key clarifications related to AFSI adjustments addressed in this notice, which includes Section 197 intangibles allowing for adjustments to be made related to tax amortization of goodwill and other intangibles that may not be amortized for book purposes. AFSI adjustments related to domestic 174 costs from the TCJA era for the costs that have been required to be capitalized over the past few years. Adjustments related to outbound intangibles and other adjustments related to tax deductible repairs, qualified production costs, and other items. The key takeaway here is that the notice continues to expand and refine the AFSI adjustment framework and can affect both current and future year CAMT. So again, careful consideration should be given to the modeling out these changes well in advance to allow time for taxpayers to understand the impacts on all parts of the federal return. Switching gears now to Section 174, OB-3 enacted many favorable changes to 174 research and development expenditures. The headline here is that domestic R&E can again be deducted immediately, but foreign R&E is still required to be capitalized and amortized over 15 years. This is not a new provision, but there is a critical reminder here that the determination on whether 174 costs are foreign or domestic is determined by where the work is physically performed. So keep that in mind and don't default to looking towards the location of the entity paying for the services when making that important classification between domestic or foreign. From a planning perspective, taxpayers have lots of optionality related to domestic 174 costs, including the option to immediately expense current year domestic costs, as well as immediate expensing of prior year unamortized domestic costs. Alternatively, taxpayers can elect to accelerate the deduction of prior year unamortized costs over a two-year period. They can continue to amortize the prior year domestic capitalized costs over their remaining useful life. Or they could even elect to continue capitalizing domestic costs in the current year and in the future. Taxpayers should keep in mind that there's optionality when determining if you're going to elect to capitalize current year domestic costs. And you have two avenues to capitalize those costs under Section 174 or Section 59E. Treasury issued RevProc 2025-28, which outlines the procedural roadmap for adopting or changing your accounting method under revised 174 rules. From a planning perspective, you should be prepared to compute and model out the impact of each of these scenarios to understand the downward impact it will have on many other federal and state provisions. As an example, the various options for 174 can also impact your Section 163J interest limitation. Under OB-3, capitalized R&D costs that are amortized will increase your ATI due to the new EBITDA provisions. However, if you're going to deduct 174 when incurred, you do not get that preferential ATI adjustment. Your 174 methods can also impact other parts of your federal return, including NOLs, FDII, and tax credits. There also can be a very dramatic impact on cash tax timing, especially for large taxpayers. The state conformity also varies widely, so state-by-state impacts might also need to be modeled separately. The key takeaway here is that domestic expensing is favorable, but Section 174 remains highly technical and can greatly impact other federal provisions. So early planning and modeling is essential. So that summarizes the federal tax and accounting method updates. I hope everyone is as energized and excited as I am about this compliance season and all the modeling that we're going to be undertaking over the next few months. Thank you, Stephanie. Great update. When I think about what you just said, what really hits home is we got the guidance from OB3 and everybody started to model it out. And then you accounted for it on your tax provision. And now you really have to sharpen your pencil for your tax return. There's a lot of nuances and there's interdependencies that are applicable with other sections of the tax code. So do spend some time on these new ones and really get ahead of it. Don't wait till the end and use these rules to your advantage to really model out and help your organization get value from the tax function. So with that, we will move on to the next section. John on state and local tax. Great. Thank you. And thank you, Stephanie, for that perfect reference as we dive into this. So let's focus on the states. First, we're going to focus on the states and how they're reacting to OB-3 and what that means for 2025 compliance. compliance, as Stephanie mentioned here, is going to require coordination across your teams. So big picture here, we're going to just show the map. The big picture on states is that this map drives everything that we're going to discuss for the states in OB3. It's internal revenue code, IRC conformity. So states fall into three buckets, rolling conformity, fixed date conformity, and some are selective or hybrid approaches of that. The key takeaway is simple. The same federal change is going to land very differently dependent on that state's internal revenue code conformity. So just to go back to what Ray was speaking about here, for state policy purposes, TCGA was viewed as a base expansion and a federal rate reduction. So again, for state policy purposes, OB-3 was viewed by the states as taxpayer-friendly. So you couple that with the acute or real state budget pressures that you can see, depending on where you live, maybe seeing it in the newspaper more than you care about. But most states have decoupled or are actively working to decouple from OB-3's provisions. So while states are still building off of federal taxable income, We are a year behind, if you will. So think about the state legislative branches that have to work now in 2026 to update their laws for OB-3 passed last year. So as we speak, while we're preparing for 2025 compliance, they are enacting provision changes that are going to impact our compliance prep as we go. So just to highlight on the map here, Virginia was a rolling conformity state. They followed the Internal Revenue Code. OB-3 comes along, and now they have reverted to fixed date conformity in order to decouple from OB-3. Now, if you also note here, Texas is a change as well. We're going to cover Texas at the end. This is a very significant change for some of our clients, and we want to make sure we cover that in a little more detail at the end, so I'll put a pin in that for the moment. Practically speaking, takeaway here, you can't do state compliance in isolation anymore. It's going to be critical that you're working across your teams. So let's get into some of the details on that. So these are the decoupling trends we're seeing across the states. The states are legislatively decoupling from OB-3, as we said here, but particularly expensing 163J and R&E. In a lot of cases, states are intentionally sticking to pre-OB-3 TCJ era rules. Now, as Stephanie mentioned here on R&E, 163J specifically, this is a major teeming point. States are decoupling from immediate expensing. They're decoupling from federal elections, and they're changing how those amounts are going to flow through to state taxable income base. And I'm going to take you through that in a moment. Lastly, we are seeing increased focus on foreign income. So as we mentioned, not all states will follow OB-3, changes to Guilty and Fiddy, but more importantly, states are reconsidering how much and what kinds of foreign income they want to tax. Often, this is going to be through a state-only calculation. So some of this may hit in 26, but we'll use Texas at the end to give you an example of what that might look like. So takeaway here, divergence. States are not moving in lockstep, and that divergence is going to create potential planning. But today, the goal is to highlight the immediate 2026 impact that we need to be working together to get those 25 returns correct today, as well as make sure we're tracking carry forward impacts of those. So let me just kind of spend a moment to just cover how state tax calculates. But this is going to be important to highlight where decoupling actually shows up. So for those that prepare state and local returns, you're right. Most of those additions and subtraction modifications are going to capture those decoupling. But there are more jurisdictions that are evaluating changing that starting point. So right in that federal taxable income starting point, particularly separate company states, we're going to now not just look at that modification line, but that pro forma is now going to need to be reflecting that starting point that's going to be different. So let's just show you an example of that, a very concrete example of how the different states are going to operationalize decoupling. I'm going to use 163J as an example here. Pennsylvania tells taxpayers that they need to recompute federal taxable income. the starting point based on the earlier version of the Internal Revenue Code. That needs to be reflected in the pro forma federal taxable income starting point. But if you look at Michigan, by contrast, they're going to use the addition, subtraction, modification section, and that's going to require separate tracking of that interest carry forward. So same federal provision, two different paths for state compliance prep, and that's exactly why documentation and coordination is going to be key for the 2025 compliance and beyond here. Okay. I want to just finally spend a minute here on R&E and Stephanie layered in how complex this is. And in addition, this is also one of the most complex item for state now as well. So some states are going to remain pre-TCJA. Other states followed TCJA. So now, of course there's even a new bucket some are going to conform to ob3 but maybe for domestic r&e only not foreign lastly we have to mention here that there are state regimes that end or state-only elections because there's always going to be you know the exceptions to the rules here so the practical message is simple r&e now creates material state-only attributes roll forward schedules, elections, coordination with related provisions like 280C and 5090. It's no longer optional. It's necessary in order to file accurate state returns, especially states like California. There may be state level opportunities to mitigate some of the impact in that jurisdiction, but we want to reinforce the earlier points. You're going to need to be working across federal, state, and international teams to get this right. Okay. We're going to move to the next section here. I want to spend a moment on some of the state of state comments here, and we're going to hit this at a high level. So we'll move quickly through this here. And always special thanks to our state policy and Quest teams. They do a great job to cover our EY SALT updates, and we cover this on our quarterly webcasts. I want to highlight a few themes here. Single sales factor, we continue to see that trend. There are several states that make single sales factor mandatory in 2025. So as you can see on the bottom of this map here, we've got a couple of states that are going to now flip. So you may have put that in your provision, but now you're going to see it hit the tax returns, as well as we've got some maps there on market sourcing and economic nexus. Those are still very common themes that we see jurisdictions taking a look at here. So as Ray mentioned, there's a lot going on at the federal level and the states. There is a ton of activity. We are in the middle of it now. Our state policy team is in their busy season. So I want to touch on a few points in case you're not seeing this in the alerts. Aside from OB-3, we are seeing a lot of state policy activity to address budget shortfalls. These could be temporary fixes. These could be structural changes. Recently, while it's not a corporate level income tax, Washington has enacted its first personal income tax. We have states like New Jersey, the governor, talking about proposed NOL suspensions with a $1 million cap, which is almost half a billion dollars of funding. California is having hearings that they're looking at proposing to repeal the Water's Edge election. Lastly, Governor Shapiro talking about proposing mandatory combined reporting. I think they've done that a few times before. We will see where that moves, but there is a lot of activity. And even digital taxes, property taxes, as well as taxation of data centers, all very hot topics, all moving as we speak. So that being said, we're going to spend a little time on New York and California. So let's wrap this up in those two states. Great. Thank you. Before we get to Texas, I want to spend a moment on New York. It's my home state and it's actually a lot going on right now. For New York State and City, we're watching a few things very closely as the budget moves through Albany, OB3, New York State continues to propose decoupling. So that's sort of business as usual. But New York City, as expected, is proposing further decoupling. So 163J, 179. I highlight that because intrastate compliance burden is actually just going to be increased. So you can't just take that New York State return and think it's going to flip over to New York City. It is actually two different calculations, two different returns, you know, based upon the way the legislation is moving. Further, in the news, you can see New York City pushing for tax increases. So we're watching this play out as we speak. It does seem at the moment that they may land on the pied-à-terre surcharge. So that may keep away the rate increases that were being discussed, but we see where that goes I want to spend the moment because we want to just give you an update the audit and the commissioner office here and talk about New York City So New York City the Department of Finance has brought in a new commissioner Jeffrey Scheer EY has a great relationship. We do believe his initial focus will be on formally adopting the New York City draft regulations. I want to make sure we highlight that and you take a look at those rules. They could impact your tax return prep. we certainly are seeing them come up on audit even though they're in draft form we saw this before with the new york state draft regs popping up on on audit before passage so want to make sure we put you know your eyes and ears on that lastly if anyone's been under audit with new york city they have been going through some resource issues but we are seeing them they filled their conciliator role i think carl wollenbaum has now been on boarded and they've replenish the ranks of the audit. So we are seeing things start to move forward and hopefully you're seeing the same. Bottom line, New York State and City remain very complex and we expect further complexity once the budget passes through Albany this spring. As mentioned here, I'm going to close with Texas. Depending on your profile, this could be one of the most significant OB3 state shifts for 2025 compliance. The map that we showed in the beginning here, now Texas didn't necessarily change its law. Starting with the 2026 Texas Franchise Report, which is the 2025 return, the Texas Comptroller's position is now that total revenue is tied to the current internal revenue code. So not a law change, but an interpretation or policy. So in the past, the view may have been that that was the 2007 code, but the Texas return for 2025 that you're preparing think of that as now tied to the current Internal Revenue Code, unless the statute explicitly says otherwise. So this has real consequences. So as we mentioned on the earlier slide around foreign income or non-U.S. income, GILTI and FITI, which are renamed under OB-3, are treated as neither dividends nor royalties for Texas purposes. So that's going to affect the inclusions and the subtractions. But second, on top of that, if you are a taxpayer that uses the COGS deduction to calculate your Texas margin tax, Texas is aligning its Texas-specific COGS depreciation rules with OB-3 bonus depreciation. So this is, for those that are not familiar, Texas cost-of-good-sold deduction, the Texas COGS is not the same as the federal COGS cost-of-good-sold deduction. So the return is going to be changed. Texas expects that this adjustment may be so significant for taxpayers, but Texas is actually going to allow a carry forward of any unused portion. So that means that the state is expecting that this will reduce the Texas margin below zero. They're going to change the forms for this, and you will now have a carry forward in the event that that does apply for you. So good news on that. Texas recognizes this shift. I do think it's going to come out of the pockets of some other taxpayers that end up paying more, but at least on this COGS depreciation and your potential federal approach to some of the bonus depreciation, maybe Texas is not going to hurt you as much on the COGS and you won't lose that attribute. So basically at this point in time, hopefully that clears up that point, but it does remind you that for Texas is something you need to get in front of early. This is not something I would want to be doing while I'm preparing the Texas return in the middle of busy season. This is something you can get in front of earlier on and try to get that work paper set up to cover this. It's going to be a big exercise for your state team. So I think that's my time. All right. So with that, I'll hand it off to Kristen. Great. Thanks, Ron. So today we're going to get into some of the main OB3 updates talking through compliance, but let's kind of let's level set. So we've got OB3 changes, some evolving pillar two, and shifts in global trade and tariff policies going on. So it's really requiring all of our multinationals to revisit their structures as these changes can have an impact on cash taxes, ETR, and operating models. So similar to Stephanie and John, modeling is just as important as ever when we get into the international. So just wanted to orient with a few quick points on the landscape that everyone should be mindful of. So OB3 has enacted the favorable treatment of international income for U.S. multinationals. So permanent, guilty, and FDII rates remain materially lower than both the U.S. headline corporate rates and much of the rest of the world. So that's your 15% QDMTT tax. Higher U.S. tariffs are putting pressure on top-line margins for import-reliant businesses. We've got the side-by-side safe harbor, which allows multinational groups headquartered in qualifying jurisdictions to treat top-up taxes deemed zero for their IIR and UTPR purposes across both domestic and foreign operations if the group satisfies the eligibility criteria and makes the ballot election. But again, all of these things can have a real impact on M&A, capital formation, how everything gets structured, and how clients are going to think about this going forward. So everyone should be keeping this in mind. We're really going to orient with what the main OB3 updates are and the key items to look out for for both your 25 and onward compliance. So first on the list, we're going to see 174. So both Stephanie and John kind of alluded to there are some big changes going on in R&E, but it's important that on the foreign side, the 15-year amortization period still remains for the foreign. So the biggest impact is going to be in the U.S. side of what's coming through the foreign tax credit calculations. Next on the list here, we have Section 163J. So this, for tax years beginning after December 31st, 2024, ATI, so adjusted taxable income, is back to being calculated on an earnings before income taxes, depreciation, and amortization approach. But it's important to note that for tax years after December 31st, 2025, there's going to be some additional changes which eliminate the CFC adjusted the taxable income roll-up and a new ordering rule, which requires taxpayers' 163j limitation to be calculated prior to any interest capitalization rules. Then at the bottom here, we've got the Section 250, the FIDI updates. It's important to note that the effective dates for these provisions are beginning after December 31st, 2025, with the exception of sales and disposition carve-out provisions, which are effective after June 16, 2025. The $250 deduction is reduced to 33.34% from the current 37.5%, which will result in an effective tax rate approximately 14% before factoring in any expense apportionment changes. The deemed tangible income return, which is defined by that's your 10% of your qualified business asset investment or your QBI return is eliminated, which will increase the overall FDII deduction in many circumstances. The removal of the DTIR for QBI could really provide significant FDII benefits for companies with material tangible property in the U.S. Lastly, and this is a big one, is the elimination of the allocation of interest expense and R&E expense to the deduction-eligible income, so the DEI. These changes to expense allocation, especially for R&E previously allocated to FITI, are expected to result in significant benefits for taxpayers. And these reductions in the expenses apportioned to DEI should generally increase the FITI deduction across the board. So continuing on, we've got first the changes to Section 951 CAFE, so GILTI, which is now referred to as Net CFC Tested Income, or NCTI. These updates have an effective date of tax years beginning after December 31st, 2025. This is the Section 250 deduction is reduced from 50% to 40%, and the foreign tax credit haircut is reduced from 20% to 10%. So combined, these increase the effective tax rate from approximately 13.125% to 14%, and taxpayers would expect to have no residual U.S. tax on GILTI inclusion who have at least a 14% foreign ETR, setting aside any taxpayer expense apportionment that would ultimately go into your foreign tax credit calculation. Now, similar to FIDI, the net deemed tangible income returns, that 10% of QBI is also eliminated, and interest and R&E expenses are no longer getting allocated to the GILTI basket. These changes to expense apportionment appear intended to prevent, at a minimum, the allocation and apportionment of most interest expense to the GILTI category. Now, interest expense is often the largest expense apportioned to the GILTI category. under current law, other than the Section 250 deduction. So this reallocation of interest expense from GILTI to U.S. source could really significantly increase a company's ability to claim their GILTI foreign tax credits and increase their FSI sitting in their GILTI basket. Next, we've got the repeal of the one-month deferral election for determining a CFC's year-end under 898. So under prior law, Section 898 , you are permitted to have a CFC elect a year beginning one month earlier than the U.S. shareholders year. OB-3 goes ahead and repeals this one month deferral election. So what that means, and this is important for the 25 tax return, but there's going to be a transition rule that requires that you have now a stub short period return that has to be filed. So for anyone who had an 1130 year end, you will now have a December 1st, 2025 to a December 31st, 2025 tax return. In addition to the December 1st, 2024 to 1130, 2025 return, you are already filing for your compliance season. Because these all do have an effective date for tax years beginning after November 30th, 2025. Moving on to the bottom of this tab, we did just want to include some additional provisions that everyone should be aware of. So first is the repeal of the scheduled BEEP rate increase, which was set to rise from 10% to 12.5%, but instead OB-3 has permanently instated it to be the 10.5%. It does modify that the BEEP rules to preserve the current treatment of BEEP-favored credits, which was also set to change under TCJA for 2025. Next on here is an item that was living in a temporary world for a while. So we've got the 954C6, the CFC look-through exception. This was previously set to expire for tax years beginning on or after January 1st, 26th, but it is now permanently extended and effective beginning December 31st, 2025. And then we have the Section 958B4 is reinstated to preclude downward attribution from a foreign person to a U.S. person in determining CFC status. Next, we've got the 951CAPB that causes certain foreign corporations to be treated as CFCs for inclusion purposes. But again, all of this is just intended to note that there's a lot of things going on, especially that impact your footprint. and the modeling is really important here. So here we've got the foreign tax credit comparison. So you can see here prior loss of TCJA to OB3. We have something similar to compare the NCTI and the FIDI rules under OB3 and the rates. And then I think with that, we close out this section. Thank you, Kristen. Really nice summary. And with that, we'll turn it over to Tommy to cover some unique updates in the tax organization space. Thank you, Randy. Hello, everyone. Now we'll shift away from technical updates and discuss the tax compliance operating model. What's changing in how tax compliance work gets done and what that means for staffing process and technology strategy? It's a little different than our technical updates. So let me start with what I think is the big headline. Tax compliance is changing quietly but fundamentally. Leaders are reconsidering how work gets done and who does which parts and what the internal team is really there to own. The 2025 EYTFO survey points to how far this trend has already moved. One data point is that 69% of routine tax activities are performed by external providers, which highlights just how common external delivery models have become. The point is this. This shift is not about outsourcing because it's trendy. It's about navigating complexity, volatility, and talent constraints while still getting the return filed accurately and on time. So why is this happening now, and why is it accelerating? So this four factors shaping the tax function. First, the rules are getting more complex, obviously, and more interconnected and more unpredictable. Second, skilled talent is harder to find and even harder to keep. Third, budgets are constrained and expectations continue to rise. We are all being asked to do more with less. And four, technology is no longer just nice to have. It's foundational to compliance, and it's increasingly expensive to maintain. So none of this is new on its own. We've all heard this stuff before. But what is new is that they're all happening at the same time, and that combination is forcing a change in how tax departments operate. To understand why compliance feels so much harder today, it helps to look back at the last few years as a series of inflection points. The first one was the TCJA. The Tax Cuts and Jobs Act introduced significant new complexity across federal, state, and international tax. Tax departments had to upskill quickly, do more analysis, and support the business in real time, not just at filing. At the same time, many departments were expected to absorb that shift without proportional increases in headcount or budget. So the takeaway is simple. With TCJA, what once felt like an advanced tax work became the new baseline for everyday compliance. So then COVID hit, and it pushed an already stretched system past its limits. We had new relief legislation, the CARES Act, the compressed timelines, and unprecedented uncertainty. Technology costs also went up as remote work became mainstream and the operating model had to adapt quickly. At the same time, the talent pool shrank further as the boomers retired and burnout increased. What many tax departments discovered was that they no longer had enough capacity or enough redundancy to absorb shocks. COVID didn't create these cracks. It exposed them. And that brings us to the talent equation. The reality is that many tax departments were designed for a labor market that simply isn't there anymore. You're competing for fewer people, and the bar for the skill set keeps rising. This shift goes beyond volume and complexity. Today's tax professionals are expected to bring tax knowledge, technology, data, and process skills, not just technical expertise. So the demand for tax skills now exceeds what traditional tax departments can realistically supply. The other major change is scope. The job is bigger than it used to be. Recent years introduced items like AMT, transferable renewable energy credits, and as John pointed out, the ever-evolving state and local and nexus landscape. And those rules are just examples of how compliance just keeps expanding. On top of that, taxes increasingly ask to forecast effective tax rates and cash taxes, not just report history. Legislation and political volatility raise the stakes because the tax outcomes extend beyond technical accuracy and actively shape business decisions. So the tax function is being pulled upstream into forecasting, into modeling, and into business decision-making. Outsourcing and co-sourcing are not just about getting the work done. They're what enables tax professionals to meet these rising demands and elevate the function overall. Now, when leaders respond to all of this pressure, one of the most common moves is outsourcing. The point of outsourcing is not to give up responsibility It to shift the execution of routine work so individual teams can focus on higher value activities such as planning controversy transactions and supporting the business. External professionals can manage the compliance end-to-end, which reduces execution risk and reduces the single point of failure problem that many tax departments are facing. And providers like EY bring standardized processes, advanced technology, AI, and scale that most companies cannot economically replicate in-house. So outsourcing shifts the burden, but it doesn't require losing control. So outsourcing is not one-size-fits-all, and that really matters. Some organizations rely almost entirely on external providers for day-to-day compliance. Others keep a small in-house team and collaborate externally on preparation and review. And even large departments outsource meaningful parts of the compliance, not because they can't do it themselves, but because they want to free up capacity for strategic priorities. So the right model depends less on company size and more on where you want your best people spending their time and what you want your internal team to be accountable for. For many tax leaders, the model that feels most compelling is co-sourcing. Co-sourcing is a middle ground that allows companies to retain control over selected components of compliance, for example, international only or state and local only. A very common structure is in-house computations with an external team handling the review and processing of the forms. For example, the company calculates the book tax differences in their apportionment, while the provider reviews those calculations and populates and reviews the forms. The benefit is that you can avoid hiring, training, and technology investments while still maintaining visibility and governance. And co-sourcing feels like a partnership, not a delegation. You're designing the system together, and you still own the outcomes. Once you start thinking in terms of co-sourcing, the model becomes modular. Federal, state, and international compliance can be split strategically. Some companies, for instance, may outsource international forms, such as 5471 or the GILTI-related work streams, while retaining other pieces in-house. And importantly, the arrangement can evolve and change over time as priorities, staffing, or complexity change. So the best operating models are designed to flex, not to lock you in. Now let's talk about what leaders gain when they design the right model. First, they gain confidence and accuracy in risk management. Second, access to the latest technology and AI solutions without the ever-increasing ownership costs. Third, the ability to redeploy internal talent towards strategic, business-facing work. And finally, the comfort of knowing a trusted advisor is directly involved and fully aligned with you. We're in the boat with you, right? This is as much about peace of mind as it is about efficiency, because the pressure and the stakes have increased, and leaders want a model that holds up on the real-world conditions. I will close with this takeaway. The pressures tax departments are facing are not temporary. Outsourcing and co-sourcing are no longer short-term fixes. They are operating model choices, and the organizations that get this right elevate tax from a cost center or a compliance factory into a strategic asset. So the question is no longer whether the tax operating model will change. The question is whether you will design it deliberately or let the circumstances design it for you. I'll pass it back to Randy. Thank you. All right. We'll go to our final section with Caroline, Connie, and Nick. Thank you, Randy. Talking about external pressures and internal pressures, I'm sure everyone has heard a lot about technology. AI need to reduce your time of returns and have more automations. What we want to bring you on the technology side is something that's meaningful and tactful. How can it help you to make sure you have your return accuracies? And then also giving you some planning ideas, analytics, and making sure we're using the right data for that. So without further ado, Nick and Caroline will show you our latest XML tools, our catalysts. All right. With this technology, we really focused on tax return review. two areas, quality and insights, want to get it right, want to bring ideas and manage risks, take advantage of opportunities, and want to do that fast. For all the reasons Tommy mentioned, tax reform, technology, et cetera, tax returns can be thousands of pages. It's really daunting and hard as a reviewer to sort of get your side-by-side prior to your current year together and make heads or tails of where you should start looking. So we came up with this technology and we've been working on it with our clients. And what it basically does is do a series of strategies, technology strategies. We gather information off of draft tax returns before you file all the way through the process. And we organize them in a way that will facilitate faster review, driving better quality and more insights. We do that in two formats. Use cases, primary one is for tax compliance review, strategy insights. You're going to be doing that as you prepare the tax return. EY, our clients can also gain access to this. Talk to the EY team if you're interested. But through the process, you'll have these reports and these visuals up and facilitate your review. You could also mimic audits on the back end if the IRS comes in and is poking around on matters. You can run these reports, look at these visuals to see if there's any soft spots in your return. Again, the biggest driver is cutting down time it takes to drive quality and insights. And with the time savings, you're going to focus on higher order matters or other matters that you otherwise wouldn't get to if you're wrestling with how to look at the data. So we have a pretty comprehensive library spanning federal and international. Form 1120s, that goes at the separate member level plus the consolidation. International foreign informational forms that ultimately all hit page one for the reasons Kristen mentioned, the 5471 to 8858s. flow through forms, forms such as 8865, hitting at the U.S. shareholder level, GILTI U.S. shareholder, CFC analysis, and then all the 1118 and FDII analyzers in the library. Library's living is growing. We've gotten a really good demand signal with NEY and with some of the clients we've been working with on this matter. I'm going to show the 5471 analyzer And then Caroline's going to jump in and talk a little bit about the 1120 analyzer. But there's a flat file behind all these schedules that drives all of the data that's in this workbook. These blue tabs follow. This is a 5471 analyzer. Follow the schedules on a 5471. really helpful if you're in the process of just sort, search, and filter on any given line within any given schedule. You can hit pretty much every form 5471, highest to lowest materiality on any given line across any given schedule immediately. Helps you sort of zero in on where you want to focus materiality-wise. Then what we do from a pattern perspective is we take all of the data that's on the schedules, and we run it through a series of diagnostics or rules. And I've got here uncollapsed the diagnostic count. You'll see there's 88 CFCs in this sanitized fact pattern. We hit 3,256 review points, and you can see here if I zoom out, it's a little bit of a Christmas tree format stoplight chart. The way you would use this in users' hands is you would go to any given entity here. So, for example, this entity, Company 108, it would say to look at Schedule C. You would find the review item, and you would consider in this example whether or not this foreign currency translation gain or loss is subpart F. The analyzer doesn't tell you the answer. It just tells you you might want to think about it. That's a subpart F consideration. Now, one more example, and then I'm going to turn it over to Kristen. This company here on Schedule B, Part 2 of the 5471, Company 229, is there a change in the first tier U.S. shareholder of the CFC? The answer to that is yes. So there's a whole host of transactional considerations that you need to think about hitting the form. Hopefully by this point the preparers have already caught it. If not, reviewer on the back end is going to catch it. Everyone in the process from prep to final review can use it, and you can do it as you start to finalize 5471s, 1120s at the beginning of your tax return journey. you're not doing this at the end of the process when you've got limited time to hit the e-file button. Caroline, turn it over to you. Yes, thank you, Nick. And the way I think about this tool, it's almost as if you gave your return to the most detailed reviewer on your team, and then they went and applied over 700 rules and diagnostics to that return and gave you a nice list. So I think this tool is actually going even a little bit further than that. But again, it's a great tool just from a viewer perspective, both on the analytics side, but also, too, just what you can do with it. It's really it's transforming all this data that lives in that thousand page PDF return, but it's bringing it into a format, which is Excel, which we all know and love, which you can do so much with it. You can either compare it to your work papers. You can build your own analytics. The sky's the limit when you have it in Excel. But what you're seeing here is the 1120 version of what Nick showed. And this year-over-year comparison is really nice because it does a year-over-year comparison both by amount and by percentage of major schedules of your return. So, for example, we're looking at 1120 page 1, and you can see the year-over-year variance both by amount and by percentage. And what this might mean is, okay, maybe I have an error in my return if I see a big variance, or maybe I just need to make a mapping change because I want more comparability. It really just kind of helps elevate your review. And also, it's not just the amounts that it does that comparison. It even does the more presentational schedules as well, like your Schedule K. A lot of us don't love sifting through Schedule K and comparing it to last year, but this tool actually does it for you. So anywhere you see that it says OK, that means that the current year Schedule K item is the same as the prior year Schedule K. So again, going back to that really detailed reviewer analogy, that's very front and center in this tool. Another tab I really like is the e-file attachments. Again, it's really, really hard to go through that huge return and find all your e-file attachments. This just brings them into a nice table. So maybe you can compare it to your control list, or you know that in this case I have 115 statements or attachments, and those are all here. And again, this pulls from your XML data, so it ensures that what you're filing with the IRS is what is actually being reviewed. This, though, this is where it gets really neat. This is the analyzer, and this actually is applying all of those validations that Nick talked about. So, again, in this case, I had 777 diagnostics that I applied, and 775 of them passed, and there are 39 of them that I need to review. And it does do the different schedules. So, for example, it goes through page one and says, OK, does page one depreciation tie to my 4562 or my 4797? Again, all those critical checks. And it does the same thing for Schedule C. So do my Schedule C inclusions tie to my GILTI, my 8992 and my 8993? And it even looks at the balance sheet. Like, for example, it'll compare your total assets from prior year to current year and see any major fluxes. But as Nick mentioned, just because it's highlighting that flux, it doesn't mean that it's wrong. right it just brings it to your attention maybe you had an acquisition in the current year so you would expect that you have a lot of new assets you have a lot of increase in your assets so in that case you can just say yes and then it's going to prompt me to write a note and at least it not only does it highlight it for your review but it allows you to document your review as well and then these other schedules these are just different excel versions of different schedules of the return in a more table-like format, which, again, is just easier for you to either compare to your current work papers or you can create your own analytics, really whatever you want to do. But this tool's already turned it into a nice Excel table for you. So with that, I'll hand it back over to Nick. Thanks, Caroline. Good job. The last thing we'll show is the visuals. These really help as you're going through strategy sessions, either internally within the organization or with any advisor, UI included. It helps you work at the speed of the meeting, lays out all the challenges, opportunities, tax liabilities, care for its tax attributes, foreign tax credits, key intercompany flows, and the character of those intercompany flows. And then off of the lead sheet here, can really start to drill in, and you can take this pretty darn deep. It goes to levels that are down to the white paper schedule statements, but each one of these little plus buttons here have various details that you can drill into and get more information. And there's three, four tiers in some cases. I just clicked on foreign taxes. There was 79 million of them in this company's back pattern. how many were creditable, non-creditable, how many credits are you converting versus not converting, what's the character of the credits, what's the character of the non-credit. You can do it by consolidated legal entity view. Jump in here to a couple others that I like, and then I'm going to turn it back over to Randy. 11-18s takes all the 11-18s that love this one that are on disparate schedules. A lot of pages, stitches all together by gross income deductions, gets you down to your net separate limit income, runs through 904, et cetera. All of that to trace it. And when you're in meetings and need to make quick decisions while you've got groups together, to stoke an insight, very helpful to just pull through an opportunity or manage a risk. Last one, intercompany analyzer. This has been really powerful for me as thinking about organizations in the advisor role. Where do you have sales, services, purchases? All these come from Schedule M's. It shows the whole intercompany relationship, big picture-wise, how things are falling out. And again, you can drill in as much as you want on any of these categories of income and any of the counterparties. It's all reported in the U.S. income tax return, and you can start to glean a lot of insights. Lots in here, don't have enough time to go through it. Very powerful technology. Back to Tommy's point, you've got to find time somewhere. Technology's a place to help you find it. And without this in your hands, not sure you can drive as great of quality or insights. Certainly not at the speed at which this can do it. So, Randy, I think that's the end of this segment. Well, the last thing also about this is if you are interested, reach out to your EY tax advisor and they can give you more information. So thanks, everyone. Have a great rest of your day. Thanks for tuning in to the EY Talks Tax Podcast. For more insights on tax developments, trends and policy, and for timely webcasts on this and other tax topics, visit EY.com. Thank you.