AUTOMATIC DATA PROCESSING INCADP
AUTOMATIC DATA PROCESSING INC Income Taxes Disclosure
INCOME TAXES
Earnings before income taxes shown below are based on the geographic location to which such earnings are attributable.
| Years ended June 30, | 2025 | 2024 | 2023 | |||||||||||||||||
| Earnings before income taxes: | ||||||||||||||||||||
| United States | $ | 4,825.6 | $ | 4,408.0 | $ | 4,091.4 | ||||||||||||||
| Foreign | 484.5 | 464.3 | 346.2 | |||||||||||||||||
| $ | 5,310.1 | $ | 4,872.3 | $ | 4,437.6 | |||||||||||||||
The provision (benefit) for income taxes consists of the following components:
| Years ended June 30, | 2025 | 2024 | 2023 | |||||||||||||||||
| Current: | ||||||||||||||||||||
| Federal | $ | 880.5 | $ | 847.4 | $ | 840.0 | ||||||||||||||
| Foreign | 136.0 | 132.8 | 104.6 | |||||||||||||||||
| State | 176.9 | 177.5 | 161.1 | |||||||||||||||||
| Total current | 1,193.4 | 1,157.7 | 1,105.7 | |||||||||||||||||
| Deferred: | ||||||||||||||||||||
| Federal | 0.7 | (18.7) | (77.4) | |||||||||||||||||
| Foreign | 19.4 | (6.6) | 4.3 | |||||||||||||||||
| State | 16.9 | (12.1) | (7.0) | |||||||||||||||||
| Total deferred | 37.0 | (37.4) | (80.1) | |||||||||||||||||
| Total provision for income taxes | $ | 1,230.4 | $ | 1,120.3 | $ | 1,025.6 | ||||||||||||||
A reconciliation between the Company's effective tax rate and the U.S. federal statutory rate is as follows:
| Years ended June 30, | 2025 | % | 2024 | % | 2023 | % | ||||||||||||||||||||||||||||||||
| Provision for taxes at U.S. statutory rate | $ | 1,115.1 | 21.0 | $ | 1,023.2 | 21.0 | $ | 931.9 | 21.0 | |||||||||||||||||||||||||||||
| Increase/(decrease) in provision from: | ||||||||||||||||||||||||||||||||||||||
| State taxes, net of federal tax benefit | 128.0 | 2.4 | 120.6 | 2.5 | 111.2 | 2.5 | ||||||||||||||||||||||||||||||||
| Foreign rate differential | 39.0 | 0.7 | 41.0 | 0.9 | 33.1 | 0.7 | ||||||||||||||||||||||||||||||||
| Excess tax benefit - Stock-based compensation | (24.3) | (0.4) | (17.1) | (0.4) | (19.0) | (0.4) | ||||||||||||||||||||||||||||||||
| Other | (27.4) | (0.5) | (47.4) | (1.0) | (31.6) | (0.7) | ||||||||||||||||||||||||||||||||
| $ | 1,230.4 | 23.2 | $ | 1,120.3 | 23.0 | $ | 1,025.6 | 23.1 | ||||||||||||||||||||||||||||||
The effective tax rate in fiscal 2025 and 2024 was 23.2% and 23.0%, respectively. The increase in the effective tax rate is primarily due to higher reserves for uncertain tax positions in fiscal 2025 and a valuation allowance release in fiscal 2024 offset by an increase in the excess tax benefit on stock-based compensation in fiscal 2025.
The effective tax rate for fiscal 2024 and 2023 was 23.0% and 23.1%, respectively. The decrease in the effective tax rate is primarily due to a valuation allowance release and an intercompany transfer of certain assets offset by a lower benefit for adjustments to prior year tax liabilities in fiscal 2024.
The significant components of deferred income tax assets and liabilities and their balance sheet classifications are as follows:
| Years ended June 30, | 2025 | 2024 | ||||||||||||
| Deferred tax assets: | ||||||||||||||
| Accrued expenses not currently deductible | $ | 256.7 | $ | 237.4 | ||||||||||
| Stock-based compensation expense | 56.0 | 51.3 | ||||||||||||
| Foreign tax credits | 8.8 | 12.0 | ||||||||||||
| Fixed and intangible assets | 216.8 | 194.9 | ||||||||||||
| Net operating losses | 59.3 | 41.7 | ||||||||||||
| Disallowed business interest expense carryforward | 30.9 | — | ||||||||||||
| Unrealized investment losses, net | 98.4 | 351.4 | ||||||||||||
| Other | 28.5 | 39.1 | ||||||||||||
| 755.4 | 927.8 | |||||||||||||
| Less: valuation allowances | (23.8) | (11.1) | ||||||||||||
| Deferred tax assets, net | $ | 731.6 | $ | 916.7 | ||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Deferred contract costs | $ | 654.0 | $ | 620.7 | ||||||||||
| Prepaid expenses | 103.1 | 88.8 | ||||||||||||
| Prepaid retirement benefits | 53.1 | 40.3 | ||||||||||||
| Tax on unrepatriated earnings | 12.0 | 10.2 | ||||||||||||
| Other | 16.9 | 20.8 | ||||||||||||
| Deferred tax liabilities | 839.1 | 780.8 | ||||||||||||
| Net deferred tax (liabilities)/assets | $ | (107.5) | $ | 135.9 | ||||||||||
There are $56.1 million and $200.2 million of long-term deferred tax assets included in other assets on the Consolidated Balance Sheets at June 30, 2025 and 2024, respectively.
Income taxes have not been provided on undistributed earnings of certain foreign subsidiaries in an aggregate amount of approximately $55.2 million as the Company considers such earnings to be permanently reinvested outside of the United States. As of June 30, 2025, it is not practicable to estimate the unrecognized tax liability that would occur upon distribution.
The Company has estimated foreign net operating loss carry-forwards of approximately $117.3 million as of June 30, 2025, of which $17.8 million expire through the year ending June 30, 2045 and $99.5 million have an indefinite utilization period. As of June 30, 2025, the Company has approximately $107.3 million of federal net operating loss carry-forwards from acquired companies. The net operating losses have an annual utilization limitation pursuant to section 382 of the Internal Revenue Code, of which $16.4 million expire through the year ending June 30, 2036 and $90.9 million have an indefinite utilization period.
The Company has state net operating loss carry-forwards of approximately $109.2 million as of June 30, 2025, which expire through the year ending June 30, 2045. The Company has recorded valuation allowances of $23.8 million and $11.1 million at June 30, 2025 and 2024, respectively, to reflect the estimated amount of domestic and foreign deferred tax assets that may not be realized.
Income tax payments were approximately $1,198.0 million, $1,185.2 million, and $1,080.7 million for fiscal 2025, 2024, and 2023, respectively.
As of June 30, 2025, 2024, and 2023 the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were $163.0 million, $126.9 million, and $116.9 million, respectively. The amount that, if recognized, would impact the effective tax rate is $119.0 million, $91.8 million, and $83.6 million, respectively. The remainder, if recognized, would principally impact deferred taxes.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| 2025 | 2024 | 2023 | ||||||||||||||||||
| Unrecognized tax benefits at beginning of the year | $ | 126.9 | $ | 116.9 | $ | 98.1 | ||||||||||||||
| Additions for tax positions | 29.5 | 17.2 | 11.3 | |||||||||||||||||
| Additions for tax positions of prior periods | 26.7 | 17.8 | 16.8 | |||||||||||||||||
| Reductions for tax positions of prior periods | (1.8) | (12.8) | (5.0) | |||||||||||||||||
| Settlement with tax authorities | (0.1) | (9.0) | (1.8) | |||||||||||||||||
| Expiration of the statute of limitations | (17.5) | (2.9) | (1.0) | |||||||||||||||||
| Impact of foreign exchange rate fluctuations | (0.7) | (0.3) | (1.5) | |||||||||||||||||
| Unrecognized tax benefit at end of year | $ | 163.0 | $ | 126.9 | $ | 116.9 | ||||||||||||||
Interest expense and penalties associated with uncertain tax positions have been recorded in the provision for income taxes on the Statements of Consolidated Earnings. During the years ended June 30, 2025, 2024, and 2023, the Company recorded interest expense of $4.3 million, $5.7 million, and $9.1 million, respectively. Penalties recorded during fiscal years 2025, 2024, and 2023 were not significant.
At June 30, 2025 and June 30, 2024, the Company had accrued interest of $36.9 million and $32.6 million, respectively, recorded on the Consolidated Balance Sheets within other liabilities. At June 30, 2025 the Company had accrued penalties of $0.3 million recorded on the Consolidated Balance Sheets within other liabilities. At June 30, 2024, the Company had no accrued penalties recorded on the Consolidated Balance Sheets.
The Company is routinely examined by the IRS and tax authorities in foreign countries in which it conducts business, as well as tax authorities in states in which it has significant business operations. The tax years currently under examination vary by jurisdiction. Examinations in progress in which the Company has significant business operations are as follows:
| Taxing Jurisdiction | Fiscal Years under Examination | ||||||||||
| U.S. (IRS) | 2023 - 2025 | ||||||||||
| Arizona | 2016 - 2020 | ||||||||||
| Massachusetts | 2016 - 2022 | ||||||||||
| Michigan | 2020 - 2023 | ||||||||||
| New Jersey | 2020 - 2022 | ||||||||||
| New York City | 2016 - 2021 | ||||||||||
| New York State | 2019 - 2021 | ||||||||||
| India | 2014 - 2022 | ||||||||||
The Company regularly considers the likelihood of assessments resulting from examinations in each of the jurisdictions. The resolution of tax matters is not expected to have a material effect on the consolidated financial condition of the Company, although a resolution could have a material impact on the Company's Statements of Consolidated Earnings for a particular future period and on the Company's effective tax rate.
If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may increase or decrease for all open tax years and jurisdictions. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known.Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Aug 6, 2025 | Showing above |
| 2024 | Aug 7, 2024 | |
| 2023 | Aug 3, 2023 | |
| 2022 | Aug 3, 2022 | |
| 2021 | Aug 4, 2021 | |
| 2020 | Aug 5, 2020 | |
| 2019 | Aug 9, 2019 | |
| 2018 | Aug 3, 2018 | |
| 2017 | Aug 4, 2017 | |
| 2016 | Aug 5, 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.