Archrock, Inc. Income Taxes Disclosure

23. Income Taxes

Tax Provision and Payments

The following table presents income before income taxes:

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The following table presents our provision for income taxes:

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The following table presents income taxes paid, net:

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The following table reconciles the U.S. Federal statutory tax rate to our effective tax rate:

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Deferred income tax balances are the direct effect of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the taxes are actually paid or recovered. The tax effects of our temporary differences that gave rise to deferred tax assets and deferred tax liabilities were as follows:

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Tax Attributes and Valuation Allowances

The following table presents changes in our valuation allowance:

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Pursuant to Section 382 and Section 383 of the Code, utilization of loss and credit carryforwards are subject to annual limitations due to any ownership changes of 5% stockholders. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a rolling three–year period. We do not currently expect that any loss carryforwards or credit carryforwards will expire as a result of any Section 382 or Section 383 limitations. Our ability to utilize loss carryforwards and credit carryforwards against future U.S. federal taxable income and future U.S. federal income tax may be limited in the future if we have a 50% or more ownership change in our 5% stockholders.

We record valuation allowances when it is more-likely-than-not that some portion or all of our deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions in the future. If we do not meet our expectations with respect to taxable income, we may not realize the full benefit from our deferred tax assets, which would require us to record a valuation allowance in our tax provision in future years. As of each reporting date, we consider new evidence to evaluate the realizability of our deferred tax assets by assessing the available positive and negative evidence. Changes to the valuation allowance are reflected in our consolidated statement of operations.

The amount of our deferred tax assets considered realizable could be adjusted if projections of future taxable income are reduced or objective negative evidence in the form of a three–year cumulative loss is present or both. Should we no longer have a level of sustained profitability, excluding nonrecurring charges, we will have to rely more on our future projections of taxable income to determine if we have an adequate source of taxable income for the realization of our deferred tax assets, namely NOL, interest expense limitation, and tax credit carryforwards. This may result in the need to record a valuation allowance against all or a portion of our deferred tax assets.

As of December 31, 2025, we recorded a valuation allowance of $0.9 million on our deferred tax asset associated with our investment in ECOTEC.

As of December 31, 2025, we had U.S. federal and state NOL carryforwards of $648.6 million and $271.7 million, respectively, included in our NOL deferred tax asset that are available to offset future taxable income. The U.S. federal NOL carryforwards have no expiration.  If not used, the state NOL carryforwards will begin to expire in 2026, although $174.3 million of the state NOL carryforwards have no expiration date. In connection with the state NOL deferred tax asset, we recorded a valuation allowance of $0.6 million and $0.5 million as of December 31, 2025 and 2024, respectively.

As of December 31, 2025, we had a U.S. federal tax credit carryforward of $1.7 million. If not used, the federal tax credit carryforward will begin to expire in 2039.

As of December 31, 2025, we had U.S. federal and state interest expense limitation carryforwards of $113.7 million and $36.5 million, respectively, included in our interest expense limitation deferred tax asset that are available to offset future taxable income. These carryforwards have no expiration.

Unrecognized Tax Benefits

The following table presents changes in our unrecognized tax benefits, including discontinued operations:

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We had $31.3 million, $19.5 million and $19.5 million of unrecognized tax benefits at December 31, 2025, 2024 and 2023, respectively, of which $9.5 million, $(0.6) million and $1.1 million, respectively, would affect the effective tax rate, if recognized. For each of the years ended December 31, 2025, 2024 and 2023, $7.9 million would be reflected in income from discontinued operations, net of tax, if recognized.

We recorded potential interest expense and penalties related to unrecognized tax benefits associated with uncertain tax positions, including discontinued operations, in our consolidated balance sheets of $2.8 million, $2.7 million and $2.5 million as of December 31, 2025, 2024 and 2023, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as reductions in income tax expense. We recorded potential interest expense and penalties in our consolidated statements of operations of $0.1 million, $0.3 million and $0.3 million during the years ended December 31, 2025, 2024 and 2023, respectively.

Subject to the provisions of our tax matters agreement with Exterran Corporation, both parties agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin–off, including any ongoing or future amendments and audits for these returns, for the portion of the tax liability, including interest and penalties, that relates to their respective operations reported in the filing. As of both December 31, 2025 and 2024, we recorded an indemnification asset, including penalties and interest, of $7.9 million, which is related to unrecognized tax benefits in our consolidated balance sheets. See Note 26 (“Discontinued Operations”) for further details.

We and our subsidiaries file consolidated and separate income tax returns in the U.S. federal and state jurisdictions. U.S. federal and state income tax returns are generally subject to examination for a period of three to five years after filing the returns. The state impact of any U.S. federal audit adjustments and amendments remains subject to examination by various states for up to one year after formal notification to the states. Due to our NOL carryforwards, our U.S. federal and state income tax returns can be examined back to the inception of our NOL carryforwards; therefore, expanding our examination period beyond 20 years. We are not currently involved in federal nor any state income tax audits.

Impact of New Legislation

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OB3 Tax Law

The OB3 Tax Law made permanent certain key elements of the Tax Cuts and Jobs Act, including reinstating: the add-back for depreciation and amortization in the business interest expense limitation, the allowance for 100% bonus depreciation, and a full expensing option for domestic research and experimental expenditures. These certain key elements allow for acceleration of certain deductions, which could reduce cash tax payments in future periods. The OB3 Tax Law did not have a material impact on our consolidated balance sheet as of December 31, 2025, or on our consolidated statement of operations for the year ended December 31, 2025.

Pillar 2

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The Pillar 2 framework establishes a global minimum corporate income tax rate and has been enacted in certain jurisdictions.  We evaluated the potential impact of Pillar 2 and related enacted legislation on our operations, including our interests in unconsolidated affiliates, and have determined that Pillar 2 does not have a material impact on our consolidated financial statements.