AAON, INC.AAON
AAON, INC. Income Taxes Disclosure
Income Taxes
Income Tax Provision (Benefit)
The provision for income taxes consists of the following:
| Years Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Current Federal | $ | (10,449) | $ | 36,571 | $ | 40,759 | |||||||||||
| Current State | 459 | 8,067 | 11,299 | ||||||||||||||
| Deferred Federal | 26,221 | (8,182) | (4,064) | ||||||||||||||
| Deferred State | 4,928 | $ | 1,576 | $ | (2,463) | ||||||||||||
| Income tax provision | $ | 21,159 | $ | 38,032 | $ | 45,531 | |||||||||||
The provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate before the provision for income taxes.
Rate Reconciliation
The following table reconciles the U.S federal statutory income tax rate to the Company’s effective income tax rate for the years ended December 31, 2025, 2024, and 2023:
| Years Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||||||||
| Federal statutory rate | $ | 27,007 | 21.0 | % | $ | 43,384 | 21.0 | % | $ | 46,862 | 21.0 | % | |||||||||||||||||||||||
| State income taxes, net of Federal benefit | 5,485 | 4.3 | % | 11,105 | 5.4 | % | 12,740 | 5.7 | % | ||||||||||||||||||||||||||
| State tax credits | (1,997) | (1.6) | % | (1,396) | (0.7) | % | (3,926) | (1.8) | % | ||||||||||||||||||||||||||
| Changes in tax laws in current period | 782 | 0.6 | % | — | — | % | — | — | % | ||||||||||||||||||||||||||
| Excess tax benefits related to | (11,501) | (8.9) | % | (16,393) | (7.9) | % | (8,858) | (4.0) | % | ||||||||||||||||||||||||||
| share-based compensation (Note 15) | |||||||||||||||||||||||||||||||||||
| Work opportunity tax credit | (181) | (0.1) | (218) | (0.1) | % | (241) | (0.1) | % | |||||||||||||||||||||||||||
| Return to provision | 1,309 | 1.0 | % | (269) | (0.1) | % | 455 | 0.2 | % | ||||||||||||||||||||||||||
| OK Amended Returns | — | — | — | — | % | (3,121) | (1.4) | % | |||||||||||||||||||||||||||
| Non-deductible executive compensation | 3,479 | 2.7 | % | 4,281 | 2.1 | % | 3,785 | 1.7 | % | ||||||||||||||||||||||||||
| Research and development tax credits | (2,923) | (2.3) | % | (2,840) | (1.4) | % | (2,570) | (1.2) | % | ||||||||||||||||||||||||||
| Other | (300) | (0.3) | % | 378 | 0.1 | % | 405 | 0.3 | % | ||||||||||||||||||||||||||
| Effective tax rate | 21,159 | 16.4 | % | 38,032 | 18.4 | % | 45,531 | 20.4 | % | ||||||||||||||||||||||||||
The Company had investment tax credit carryforwards with a valuation allowance reserved against them as we did not have sufficient taxable income to utilize the carryforwards, in part because we generated more credit each year than we were able to utilize. Because the Company will not generate additional excess credits after our 2022 tax year, we will be able to use our credit carryforwards against future taxable income and the related valuation allowance was reversed resulting in a one-time benefit of $3.1 million to the income tax provision for the year ended December 31, 2023. As of December 31, 2025, we have investment tax credit carryforwards of approximately $4.0 million. These credits have estimated expirations from the year 2040 through 2041.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.
The significant components of the Company’s deferred tax assets and liabilities are as follows:
| December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Deferred income tax assets (liabilities) | |||||||||||
| Allowance for credit losses and inventory reserves | $ | 1,883 | $ | 1,741 | |||||||
| Warranty accrual | 7,778 | 6,386 | |||||||||
| Other accruals | 6,065 | 8,034 | |||||||||
| Share-based compensation | 10,534 | 8,853 | |||||||||
| Research & development expenses | 1,761 | 29,140 | |||||||||
| Oklahoma investment credit carryforward | 1,925 | 689 | |||||||||
| Tennessee Investment credit carryforward | 1,067 | — | |||||||||
| Federal Net Operating Loss | 11,968 | — | |||||||||
| State Net Operating Loss | 1,118 | — | |||||||||
| Other, net | 5,578 | 3,079 | |||||||||
| Net deferred income tax assets | 49,677 | 57,922 | |||||||||
| Valuation allowance | — | — | |||||||||
| Net deferred income tax assets | 49,677 | 57,922 | |||||||||
| Intangible assets | (6,719) | — | |||||||||
| Property & equipment | (73,271) | (57,086) | |||||||||
| Total deferred income tax liabilities | (79,990) | (57,086) | |||||||||
| Net deferred income tax assets (liabilities) | $ | (30,313) | $ | 836 | |||||||
We also earn research and development tax credits as defined under Section 41 of the Internal Revenue Code. To qualify for the research and development tax credits, we perform annual studies that identify, document, and support eligible expenses related to qualified research and development activities. Eligible expenses include but are not limited to supplies, materials, contractor expenses and internal employee wages.
In accordance with the 2017 Tax Cuts & Jobs Act, under Internal Revenue Code Section 174, research and development expenses incurred after December 31, 2021, are required to be capitalized and amortized over fifteen years. The amortization requirements for tax purposes is a mid-year convention, meaning that the tax amortization is 3.33% in the year of acquisition, 6.67% in the following fourteen years, and 3.33% in the final year.
The amount of income tax that we pay annually is dependent on various factors, including the timing of certain deductions. These deductions can vary from year to year and, consequently, the amount of income taxes paid in future years will vary from the amounts paid in prior years.
The Company’s estimated annual 2025 effective tax rate, excluding discrete events, is approximately 22.5%. We file income tax returns in the U.S., state and foreign income tax jurisdictions. We are subject to U.S. income tax examinations for the tax years 2022 to present, and to non-U.S. income tax examinations for the tax years 2021 to present. In addition, we are subject to state and local income tax examinations for tax years 2021 to present. The Company continues to evaluate its need to file returns in various state jurisdictions. Any interest or penalties would be recognized as a component of income tax expense.
Tax Law Changes
On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted, introducing significant amendments to the Internal Revenue Code. In accordance with ASC 740, Income Taxes, the Company recognized the tax effects of the enacted legislation in the period that includes the enactment date.
Impact of Tax Law Changes
The Company measured the effects of the tax law change using the enactment date approach, with a measurement date of June 30, 2025 from the Q2 2025 tax provision calculation as the closest date of measurement for deferred and current values. The measurement resulted in an increase in DTLs of $35.4 million, a decrease in current income tax payable of $36.2 million, and an increase in provision expense of $0.8 million due to the bonus depreciation change effect on Texas Franchise tax and the reduced R&D Tax Credit allowed with the §174A change. Significant provisions of OBBBA affecting the Company include:
•100% Bonus Depreciation: Effective for qualified property acquired after January 19, 2025, including manufacturing equipment, which reverses the previously scheduled phase-down of the bonus depreciation deduction to 40% for 2025 under prior law. This provision increased DTLs by $7.0 million, decreased current payable by $7.0 million, and increased provision expense due to the accelerated tax deductions for capital expenditures made in 2025 and the small provision effect from the change in Texas Franchise Tax and state bonus depreciation. This adjustment also decreased the DTL for the UNICAP inventory calculation by $0.6 million, offset against current income tax payable.
•Permanent Expensing of Domestic R&E Costs (Section 174A): Retroactive to January 1, 2025, resulting in decreased DTAs due to immediate tax deductibility of qualified domestic R&E costs as incurred. This provision decreased DTAs by $3.4 million, decreased current payables by $4.2 million, and increased provision expense by $0.8 million due to the reduction in the R&D tax credit (the Company will revert to the reduced credit method for calculation of the tax credit under the new law).
•Accelerated Deduction of Unamortized Domestic R&E Cost Originally Capitalized in Tax Years 2022, 2023, and 2024 (Section 174A): The Company has elected to deduct the unamortized amounts of Section 174 Costs as of December 31, 2024, fully in tax year 2025, which decreased DTAs and current payables by $25.5 million.
The impact of OBBBA enactment increased the Company’s effective tax rate by 0.7% for the year ended December 31, 2025.
Net Operating Loss
Due to the favorable changes in tax law related to the OBBBA, as of December 31, 2025, the Company generated Federal and State net operating loss (“NOL”) carryforwards of approximately $57.0 million and $22.5 million, respectively. The Federal NOLs have an indefinite carryforward period but are limited to offsetting 80% of taxable income in any given year under current tax law. The State NOLs have varying expiration dates.
The Company has recorded deferred tax assets of $12.5 million (Federal) and $1.1 million (State) related to these NOL carryforwards. Management has evaluated the positive and negative evidence in assessing the need for a
valuation allowance (historical operating results, cumulative losses in recent years, and projected future taxable income) and we believe it is more likely than not that we will recognize the DTA reversals in tax year 2026.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 2, 2026 | Showing above |
| 2024 | Feb 27, 2025 | |
| 2023 | Feb 28, 2024 | |
| 2022 | Feb 27, 2023 | |
| 2021 | Feb 28, 2022 | |
| 2020 | Feb 25, 2021 | |
| 2019 | Feb 27, 2020 | |
| 2018 | Feb 28, 2019 | |
| 2017 | Feb 27, 2018 | |
| 2016 | Feb 23, 2017 | |
| 2015 | Feb 25, 2016 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.