Applied Digital Corp.APLD
Applied Digital Corp. Income Taxes Disclosure
Income Taxes
Income tax expense for the fiscal years ended May 31, 2025, 2024, and 2023 consisted of the following (in thousands):
| May 31, 2025 | May 31, 2024 | May 31, 2023 | |||||||||||||||
| Current expense (benefit) | |||||||||||||||||
Federal | $ | — | $ | — | $ | — | |||||||||||
Foreign | — | — | — | ||||||||||||||
State | 102 | 96 | 18 | ||||||||||||||
Total current expense | 102 | 96 | 18 | ||||||||||||||
| Deferred expense (benefit) | |||||||||||||||||
Federal | — | — | (540) | ||||||||||||||
Foreign | — | — | — | ||||||||||||||
State | — | — | — | ||||||||||||||
Total deferred (benefit) expense | — | — | (540) | ||||||||||||||
Total income tax (benefit) expense | $ | 102 | $ | 96 | $ | (523) | |||||||||||
The following table reconciles the statutory rate to our effective tax rate for the fiscal years ended May 31, 2025, 2024, and 2023:
| May 31, 2025 | May 31, 2024 | May 31, 2023 | |||||||||||||||
| Expected income tax rate at the U.S. statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| Stock-based compensation | (0.9) | % | 2.0 | % | (6.0) | % | |||||||||||
| State income taxes, net of federal tax benefit | — | % | (0.1) | % | — | % | |||||||||||
| Convertible debt instruments | (12.1) | % | (2.1) | % | — | % | |||||||||||
| Change in valuation allowance | (7.5) | % | (19.8) | % | (13.0) | % | |||||||||||
| Other, net | (0.5) | % | (1.1) | % | (0.8) | % | |||||||||||
| Effective income tax rate | — | % | (0.1) | % | 1.2 | % | |||||||||||
Deferred income taxes reflect the temporary differences between the amounts at which assets and liabilities are recorded for financial reporting purposes and the amounts utilized for tax purposes. The primary components of the temporary differences that gave rise to the Company's deferred tax assets and liabilities for the fiscal years ended May 31, 2025 and 2024 are as follows (in thousands):
| May 31, 2025 | May 31, 2024 | ||||||||||
| Deferred tax assets | |||||||||||
| Net operating loss | $ | 59,963 | $ | 42,810 | |||||||
| Stock-based compensation | 2,006 | 2,758 | |||||||||
| Capitalized research and development | 13,088 | 4,039 | |||||||||
| Interest expense | 12,759 | 4,854 | |||||||||
| Convertible debt instruments | — | 3,101 | |||||||||
| Lease liability | 17,587 | 29,508 | |||||||||
| Other | 824 | 662 | |||||||||
| Deferred tax assets, gross | 106,227 | 87,732 | |||||||||
| Less: valuation allowance | (65,856) | (47,005) | |||||||||
| Total deferred tax assets, net | 40,371 | 40,727 | |||||||||
| Deferred tax liabilities | |||||||||||
| Property and equipment | (18,887) | (6,202) | |||||||||
| Right of use assets | (21,484) | (34,525) | |||||||||
| Other | — | — | |||||||||
| Total deferred tax liability, net | (40,371) | (40,727) | |||||||||
| Net deferred tax asset | $ | — | $ | — | |||||||
The Company had $399.6 million, $284.8 million, and $114.8 million of federal and state tax net operating losses as of May 31, 2025, 2024, and 2023, respectively. At May 31, 2025, $346.5 million is available indefinitely to offset future income. The remaining carryforward amounts expire at varying dates beginning in 2028.
A valuation allowance is provided when it is more likely than not that some portion or the entire net deferred tax asset will not be realized. The Company has recorded an increase in the valuation allowance of $18.9 million and $31.3 million as of May 31, 2025 and 2024, respectively.
The valuation allowance is primarily attributable to deferred tax assets for net operating losses that management believes are more likely than not to expire prior to being realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (i.e., capital or ordinary) during the period in which the temporary differences become deductible. Management considers, among other things, the scheduled reversals of deferred tax liabilities and the history of positive taxable income in evaluating the realizability of the deferred tax assets. Management believes that it is not likely that the results of future operations will generate sufficient taxable income to
realize its deferred tax assets. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership, including a sale of the Company or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss carryforwards that could be used annually to offset future taxable income.
The Company is subject to U.S. federal and various state and local income tax. Tax years ending May 31, 2022 through May 31, 2025 are open to examination by the major taxing jurisdictions to which the Company is subject, as carryforward attributes generated in these years may still be adjusted upon examination by the Internal Revenue Service ("IRS") or other authorities if they have or will be used in a future period. The Company is not currently under examination by the IRS or any other taxing jurisdictions for any tax years.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Jul 30, 2025 | Showing above |
| 2024 | Aug 30, 2024 | |
| 2023 | Aug 2, 2023 | |
| 2022 | Aug 29, 2022 | |
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.