CADENCE DESIGN SYSTEMS INCCDNS
CADENCE DESIGN SYSTEMS INC Income Taxes Disclosure
INCOME TAXES
Cadence’s income before provision for income taxes included income from the United States and from foreign subsidiaries for fiscal 2025, 2024 and 2023, was as follows:
| 2025 | 2024 | 2023 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| United States | $ | 535,551 | $ | 600,088 | $ | 533,442 | |||||||||||
| Foreign subsidiaries | 986,492 | 795,731 | 748,484 | ||||||||||||||
| Total income before provision for income taxes | $ | 1,522,043 | $ | 1,395,819 | $ | 1,281,926 | |||||||||||
Cadence’s provision for income taxes was comprised of the following items for fiscal 2025, 2024 and 2023:
| 2025 | 2024 | 2023 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 133,235 | $ | 281,674 | $ | 156,495 | |||||||||||
| State and local | 67,323 | 50,430 | 15,933 | ||||||||||||||
| Foreign | 146,549 | 136,968 | 104,866 | ||||||||||||||
| Total current | 347,107 | 469,072 | 277,294 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 31,079 | (130,490) | (87,851) | ||||||||||||||
| State and local | 8,805 | (5,127) | 25,440 | ||||||||||||||
| Foreign | 26,164 | 6,880 | 25,899 | ||||||||||||||
| Total deferred | 66,048 | (128,737) | (36,512) | ||||||||||||||
| Total provision for income taxes | $ | 413,155 | $ | 340,335 | $ | 240,782 | |||||||||||
During fiscal 2025, the United States enacted the One Big Beautiful Bill Act (“OBBBA”). The OBBBA includes significant provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act, modifications to the international tax framework and the restoration of favorable tax treatment for certain business provisions including the immediate expensing of United States research and development expenditures. The legislation has multiple effective dates, with certain provisions effective in fiscal 2025 and others effective from fiscal 2026. Cadence’s consolidated net deferred tax assets as of December 31, 2025 and December 31, 2024 were $870.2 million and $951.7 million, respectively. The decrease was principally due to the immediate expensing of United States research and development expenditures.
During fiscal 2024, the State of California enacted legislation that, for a three-year period beginning in fiscal 2024, will limit Cadence's utilization of California research and development tax credits to $5 million annually and provides the ability to receive a refund of credits that would have otherwise been used to reduce the California tax liability. The legislation increased the cash paid for income taxes and long-term receivables for fiscal 2024 by approximately $33 million and $21 million, respectively.
During fiscal 2023, Cadence recognized a tax benefit of approximately $24.8 million due to the recognition of previously unrecognized tax benefits from the expiration of the applicable statute of limitations and a tax benefit of approximately $14.0 million primarily related to a change in R&D expenses that were capitalized in fiscal 2022.
The following table presents required disclosures pursuant to ASU 2023-09 and reconciles the provision computed at the U.S. federal statutory income tax rate to the provision for income taxes for fiscal 2025.
| 2025 | |||||||||||
| (In thousands) | (%) | ||||||||||
| Provision computed at federal statutory income tax rate | $ | 319,629 | 21.0 | % | |||||||
State and local income tax, net of federal tax effect* | 68,258 | 4.5 | % | ||||||||
Foreign tax effects | |||||||||||
Ireland | |||||||||||
| Statutory tax rate difference between Ireland & United States | (45,716) | (3.0) | % | ||||||||
Other | (16,302) | (1.1) | % | ||||||||
Other foreign jurisdictions | 66,259 | 4.4 | % | ||||||||
Effect of cross-border tax laws | |||||||||||
Global intangible low-taxed income | 131,254 | 8.6 | % | ||||||||
Foreign-derived intangible income | (7,342) | (0.5) | % | ||||||||
Subpart F | 22,040 | 1.4 | % | ||||||||
Tax credits | |||||||||||
Research and development tax credits | (20,556) | (1.4) | % | ||||||||
Foreign tax credits | (110,079) | (7.2) | % | ||||||||
Change in deferred tax asset valuation allowance | (11) | — | % | ||||||||
Nontaxable or nondeductible items | |||||||||||
Stock based compensation | (29,013) | (1.9) | % | ||||||||
Settlements with BIS and the DOJ | 26,994 | 1.8 | % | ||||||||
Acquisition-related costs | 14,105 | 0.9 | % | ||||||||
Decrease in unrecognized tax benefits | (4,837) | (0.3) | % | ||||||||
Other | (1,528) | (0.1) | % | ||||||||
| Provision for income taxes | $ | 413,155 | 27.1 | % | |||||||
_____________
*State taxes in California make up the majority (greater than 50 percent) of the tax effect in this category.
The following table presents the required disclosures prior to the adoption of ASU 2023-09 and reconciles the provision computed at the U.S. federal statutory income tax rate to the provision for income taxes for fiscal 2024 and fiscal 2023.
| 2024 | 2023 | ||||||||||
| (In thousands) | |||||||||||
| Provision computed at federal statutory income tax rate | $ | 293,122 | $ | 269,205 | |||||||
| State and local income tax, net of federal tax effect | 50,130 | 40,304 | |||||||||
| Intercompany transfers of intangible property rights | 7,833 | 23,826 | |||||||||
| Foreign income tax rate differential | (62,798) | (54,210) | |||||||||
| Foreign-derived intangible income deduction | (13,344) | (14,253) | |||||||||
| U.S. tax on foreign entities | 144,222 | 113,011 | |||||||||
| Stock-based compensation | (6,181) | (26,805) | |||||||||
| Change in deferred tax asset valuation allowance | 11,441 | 9,077 | |||||||||
| Tax credits | (135,344) | (130,383) | |||||||||
Non-deductible acquisition-related costs | 11,770 | 6,709 | |||||||||
| Withholding taxes | 20,175 | 15,300 | |||||||||
| Tax settlements, foreign | — | 4,034 | |||||||||
| Increase (decrease) in unrecognized tax benefits | 9,061 | (19,660) | |||||||||
| Other | 10,248 | 4,627 | |||||||||
| Provision for income taxes | $ | 340,335 | $ | 240,782 | |||||||
| Effective tax rate | 24 | % | 19 | % | |||||||
The components of deferred tax assets and liabilities consisted of the following as of December 31, 2025, and December 31, 2024:
| As of | |||||||||||
| December 31, 2025 | December 31, 2024 | ||||||||||
| (In thousands) | |||||||||||
| Deferred tax assets: | |||||||||||
| Tax credit carryforwards | $ | 125,267 | $ | 110,031 | |||||||
| Reserves and accruals | 110,634 | 103,731 | |||||||||
| Intangible assets | 472,393 | 487,947 | |||||||||
| Capitalized research and development expense for income tax purposes | 305,835 | 368,085 | |||||||||
| Operating loss carryforwards | 12,801 | 9,781 | |||||||||
| Deferred income | 84,309 | 79,195 | |||||||||
| Capital loss carryforwards | 16,601 | 16,861 | |||||||||
| Stock-based compensation costs | 38,610 | 34,045 | |||||||||
| Depreciation and amortization | 33,759 | 17,228 | |||||||||
| Investments | 22,826 | 20,757 | |||||||||
| Lease liability | 39,606 | 33,341 | |||||||||
| Total deferred tax assets | 1,262,641 | 1,281,002 | |||||||||
| Valuation allowance | (104,782) | (90,603) | |||||||||
| Net deferred tax assets | 1,157,859 | 1,190,399 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Intangible assets | (139,761) | (107,251) | |||||||||
| Undistributed foreign earnings | (92,954) | (76,045) | |||||||||
| ROU assets | (39,606) | (33,341) | |||||||||
Investments | (11,422) | (14,171) | |||||||||
| Other | (3,950) | (7,869) | |||||||||
| Total deferred tax liabilities | (287,693) | (238,677) | |||||||||
| Total net deferred tax assets | $ | 870,166 | $ | 951,722 | |||||||
During fiscal 2025, 2024 and 2023 Cadence maintained valuation allowances of $104.8 million, $90.6 million, and $79.2 million, respectively, on certain federal, state and foreign deferred tax assets because the realization of these deferred tax assets requires future income of a specific character or amount that Cadence considered uncertain. The valuation allowance primarily relates to the following:
•Tax credits in certain states that are accumulating at a rate greater than Cadence’s capacity to utilize the credits and tax credits in certain states where it is likely the credits will expire unused;
•Federal, state and foreign deferred tax assets related to investments and capital losses that can only be utilized against gains that are capital in nature; and
•Foreign tax credits that can only be fully utilized if Cadence has sufficient income of a specific character in the future.
The valuation allowance increased by $14.2 million and $11.4 million during fiscal 2025 and fiscal 2024, respectively, and decreased by $9.1 million during fiscal 2023. The valuation allowance activity was primarily related to state research and development tax credits and certain foreign tax credits.
As of December 31, 2025, Cadence’s operating loss carryforwards were as follows:
| Amount | Expiration Periods | ||||||||||
| (In thousands) | |||||||||||
| Federal | $ | 41 | 2033 | ||||||||
| California | 31,209 | from 2026 through 2046 | |||||||||
| Other states (tax effected, net of federal benefit) | 164 | from 2028 through indefinite | |||||||||
| Foreign (tax effected) | 10,334 | indefinite | |||||||||
As of December 31, 2025, Cadence had tax credit carryforwards of:
| Amount | Expiration Periods | ||||||||||
| (In thousands) | |||||||||||
| Federal* | $ | 60,773 | from 2031 | ||||||||
| California | — | indefinite | |||||||||
| Other states | 10,261 | from 2034 through 2045 | |||||||||
| Foreign | 54,234 | from 2045 through indefinite | |||||||||
_____________
*Certain of Cadence’s foreign tax credits have yet to be realized and as a result do not yet have an expiration period.
Examinations by Tax Authorities
Taxing authorities regularly examine Cadence’s income tax returns. As of December 31, 2025, Cadence’s earliest tax years that remain open to examination and the assessment of additional tax include:
| Jurisdiction | Earliest Tax Year Open to Examination | |||||||
| United States – Federal | 2020 | |||||||
| United States – California | 2020 | |||||||
| Ireland | 2021 | |||||||
| Israel | 2017 | |||||||
Unrecognized Tax Benefits
The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2025, 2024 and 2023 are as follows:
| 2025 | 2024 | 2023 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Unrecognized tax benefits at the beginning of the fiscal year | $ | 107,388 | $ | 94,311 | $ | 126,073 | |||||||||||
Gross amount of the increase (decrease) in unrecognized tax benefits of tax positions taken during a prior year* | 232 | 10,109 | (1,401) | ||||||||||||||
| Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year | 4,118 | 6,669 | 2,565 | ||||||||||||||
| Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes | (6,598) | — | (8,000) | ||||||||||||||
| Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations | (4,118) | (3,173) | (24,768) | ||||||||||||||
| Effect of foreign currency translation | (81) | (528) | (158) | ||||||||||||||
| Unrecognized tax benefits at the end of the fiscal year | $ | 100,941 | $ | 107,388 | $ | 94,311 | |||||||||||
| Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence’s effective tax rate | $ | 99,944 | $ | 106,420 | $ | 93,398 | |||||||||||
_____________
* Includes unrecognized tax benefits of tax positions recorded in connection with acquisitions
The total amounts of interest, net of tax, and penalties recognized in the consolidated income statements as provision for income taxes for fiscal 2025, 2024 and 2023 were as follows:
| 2025 | 2024 | 2023 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Interest | $ | $ | $ | ||||||||||||||
| Penalties | |||||||||||||||||
The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of December 31, 2025, and December 31, 2024, were as follows:
| As of | |||||||||||
| December 31, 2025 | December 31, 2024 | ||||||||||
| (In thousands) | |||||||||||
| Interest | $ | 9,050 | $ | 9,010 | |||||||
| Penalties | 891 | 1,261 | |||||||||
Cash Taxes Paid
Cadence adopted ASU 2023-09 on a prospective basis for the year ended December 31, 2025. Total income taxes paid (net of refunds) for fiscal 2025 include:
| 2025 | |||||
| (In thousands) | |||||
U.S. Federal | $ | 76,724 | |||
| U.S. State & Local | 29,980 | ||||
| Foreign | 140,663 | ||||
| Total | $ | 247,367 | |||
Individual jurisdictions equaling 5% or more of the total income taxes paid (net of refunds) for fiscal 2025 include U.S. Federal at $76.7 million, California at $13.1 million, China at $27.2 million, India at $23.6 million, Israel at $22.4 million, and Taiwan at $18.3 million.
Cash paid for income taxes, net of refunds, for fiscal 2024 and 2023 were $510.0 million and $253.7 million, respectively.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 19, 2026 | Showing above |
| 2024 | Feb 21, 2025 | |
| 2023 | Feb 14, 2024 | |
| 2022 | Feb 22, 2022 | |
| 2021 | Feb 22, 2021 | |
| 2019 | Feb 24, 2020 | |
| 2018 | Feb 27, 2019 | |
| 2017 | Feb 20, 2018 | |
| 2016 | Feb 18, 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.