AVANOS MEDICAL, INC.AVNS
AVANOS MEDICAL, INC. Income Taxes Disclosure
Income Taxes
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Our income taxes are calculated using the asset and liability method of accounting, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
The provision for income taxes includes federal, state and foreign taxes currently payable and those deferred because of net operating losses and temporary differences between the consolidated financial statements and tax bases of assets and liabilities.
The components of loss before income taxes, and the provision (benefit) for income taxes are as follows (in millions):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Loss before income taxes | |||||||||||||||||
| United States | $ | (82.8) | $ | (421.5) | $ | (17.3) | |||||||||||
| Foreign | 16.6 | 18.2 | 9.4 | ||||||||||||||
| Total | (66.2) | (403.3) | (7.9) | ||||||||||||||
| Income tax provision (benefit): | |||||||||||||||||
| Current: | |||||||||||||||||
| United States | 7.3 | 8.8 | 3.7 | ||||||||||||||
| State | 2.6 | 4.8 | 2.4 | ||||||||||||||
| Foreign | 4.6 | 5.3 | 4.0 | ||||||||||||||
| Total | 14.5 | 18.9 | 10.1 | ||||||||||||||
| Deferred: | |||||||||||||||||
| United States | (6.8) | (28.7) | (4.9) | ||||||||||||||
| State | (1.2) | (6.3) | (1.9) | ||||||||||||||
| Foreign | 0.2 | (0.9) | (1.3) | ||||||||||||||
| Total | (7.8) | (35.9) | (8.1) | ||||||||||||||
| Total income tax provision (benefit) | $ | 6.7 | $ | (17.0) | $ | 2.0 | |||||||||||
As of December 31, 2025, we have accumulated undistributed earnings generated by our foreign subsidiaries. Certain earnings were previously subject to tax due to the one-time transition tax of the 2017 Tax Cuts and Jobs Act. Any additional impacts due with respect to the previously-taxed earnings, if repatriated, would generally be limited to foreign withholding tax, U.S. state income tax and the tax effect of certain foreign exchange adjustments. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet U.S. cash needs. At this time, the determination of deferred tax liabilities on the amount of financial reporting over tax basis is not practicable.
As described in Note 1, “Accounting Policies,” we have elected to prospectively adopt the guidance in ASU 2023-09. The following table is a reconciliation of the U.S. federal statutory tax rate of 21.0% to our effective tax rate for the filed year ended December 31, 2025 in accordance with the guidance in ASU 2023-09.
| Year Ended December 31, 2025 | |||||||||||
| Amount | Percent | ||||||||||
| U.S Federal Statutory Tax Rate | $ | (13.9) | 21.0 | % | |||||||
State and Local Income Taxes, Net of Federal Income Tax Effect(a) | 1.0 | (1.5) | |||||||||
| Foreign Tax Effects | |||||||||||
| Other foreign jurisdictions | 1.3 | (2.0) | |||||||||
| Effect of Changes in Tax Laws or Rates | — | — | |||||||||
| Effect of Cross-Border Tax Laws | |||||||||||
| Cross-border (GILTI), net of FTC | 0.4 | (0.6) | |||||||||
| Cross-border (branch), net of FTC | (0.3) | 0.4 | |||||||||
| Tax Credits | |||||||||||
| U.S. Federal Research and Development Credit | (1.5) | 2.3 | |||||||||
| Changes in Valuation Allowances | 0.5 | (0.8) | |||||||||
| Nontaxable or Nondeductible Items | |||||||||||
| Nondeductible goodwill impairment | 16.2 | (24.4) | |||||||||
| Nondeductible officer’s compensation | 2.0 | (3.0) | |||||||||
| Changes in Unrecognized Tax Benefits | — | — | |||||||||
| Other | |||||||||||
| Share based compensation tax shortfall | 1.1 | (1.7) | |||||||||
| Other | (0.1) | 0.2 | |||||||||
| Effective tax rate | $ | 6.7 | (10.1) | % | |||||||
(a)The majority of the tax effect in this category was attributable to state taxes in California, Florida, Georgia, Mississippi and Texas.
The following table is a reconciliation of the U.S. federal statutory tax rate of 21.0% to our effective tax rate for the years ended December 31, 2024 and December 31, 2023 prior to the adoption of the guidance in ASU 2023-09.
| Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| U.S Federal Statutory Tax Rate | 21.0 | % | 21.0 | % | |||||||
| State and Local Income Taxes, Net of Federal Income Tax Effect | 0.3 | (4.1) | |||||||||
| Statutory Rate Other than U.S. Statutory Rate | — | (11.8) | |||||||||
| Nondeductible Goodwill Impairment | (17.6) | — | |||||||||
| Changes in Valuation Allowances | — | (0.1) | |||||||||
| Nondeductible Officer’s Compensation | (0.3) | (21.2) | |||||||||
| U.S. Federal Research and Development Credit | 0.5 | 22.6 | |||||||||
| Share Based Compensation Tax Shortfall | (0.2) | (7.2) | |||||||||
| Other, net | 0.5 | (24.5) | |||||||||
| Effective tax rate | 4.2 | % | (25.3) | % | |||||||
The following is a summary of the significant components of the Company’s deferred tax assets and liabilities (in millions):
| As of December 31, | ||||||||||||||
| 2025 | 2024 | |||||||||||||
| Deferred tax assets | ||||||||||||||
| Accrued liabilities | $ | 12.6 | $ | 9.4 | ||||||||||
| Stock-based compensation | 5.6 | 6.2 | ||||||||||||
| Net Operating Losses | 7.1 | 8.4 | ||||||||||||
| Section 174 Research Capitalization | 28.6 | 23.8 | ||||||||||||
| Foreign Tax Credits | 4.0 | 3.4 | ||||||||||||
| Federal Research Tax Credits | 0.4 | 0.4 | ||||||||||||
| Inventories | 1.2 | — | ||||||||||||
| Operating Lease Obligations | 4.6 | 6.1 | ||||||||||||
| Other | 2.8 | 1.5 | ||||||||||||
| 66.9 | 59.2 | |||||||||||||
| Valuation allowance | (4.7) | (3.9) | ||||||||||||
| Total deferred tax assets | 62.2 | 55.3 | ||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Intangibles, net | 22.9 | 26.2 | ||||||||||||
| Operating Lease Right of Use Assets | 4.6 | 6.0 | ||||||||||||
| Inventories | — | (1.8) | ||||||||||||
| Property, plant and equipment, net | 3.3 | 5.0 | ||||||||||||
| Other | 4.4 | 0.5 | ||||||||||||
| Total deferred tax liabilities | 35.2 | 35.9 | ||||||||||||
| Net deferred tax assets (liabilities) | $ | 27.0 | $ | 19.4 | ||||||||||
Valuation allowances increased $0.8 million during the year ended December 31, 2025. Valuation allowances at the end of 2025 and 2024 primarily relate to tax credits and income tax loss carryforwards.
Realization of income tax loss carryforwards is dependent on generating sufficient taxable income prior to expiration of these carryforwards. Although realization is not assured, we believe it is more likely than not that all of the deferred tax assets, net of applicable valuation allowances, will be realized. The amount of the deferred tax assets considered realizable could be reduced or increased due to changes in the tax environment or if estimates of future taxable income change during the carryforward period.
At December 31, 2025, we have credit carryforwards for federal income tax purposes of $2.3 million, all of which will expire between 2029 and 2038. We also have net operating loss carryforwards for federal income tax purposes of $6.7 million, of which all are available for carryforward indefinitely.
At December 31, 2025, we have credit carryforwards for state income tax purposes of $0.4 million, which will expire between 2026 and 2027. We also have net operating loss carryforwards for state income tax purposes of $99.6 million, some of which will expire between 2026 and 2045 and others that will remain available for carryforward indefinitely. We also have certain foreign subsidiaries with net operating loss carryforwards for income tax purposes of $2.0 million, of which all are available for carryforward indefinitely.
We did not have any unrecognized tax benefits during the years ended December 31, 2025 and 2024.
Federal and state income tax returns are generally subject to examination for a period of three to five years after filing of the respective returns. The state effect of any changes to filed federal positions remains subject to examination by various states for a period of up to two years after formal notification to the states.
The following table presents the income taxes disaggregated by foreign, domestic and state taxes with further disaggregation by jurisdiction in accordance with the guidance in ASU 2023-09.
| Year Ended December 31, 2025 | |||||
| Federal | $ | 1.2 | |||
| State | 4.1 | ||||
| International | |||||
| Canada | 3.3 | ||||
| Japan | 1.8 | ||||
| Belgium | 0.9 | ||||
| United Kingdom | 0.8 | ||||
| Other | 2.0 | ||||
| Total cash paid for income taxes (net of refunds) | $ | 14.1 | |||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 24, 2026 | Showing above |
| 2024 | Feb 26, 2025 | |
| 2023 | Feb 21, 2024 | |
| 2022 | Feb 21, 2023 | |
| 2021 | Feb 23, 2022 | |
| 2020 | Feb 19, 2021 | |
| 2019 | Feb 25, 2020 | |
| 2018 | Feb 26, 2019 | |
| 2017 | Feb 27, 2018 | |
| 2016 | Feb 27, 2017 | |
| 2015 | Feb 29, 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.