CHOICE HOTELS INTERNATIONAL INC /DECHH
CHOICE HOTELS INTERNATIONAL INC /DE Income Taxes Disclosure
Income Taxes
The Company's income before income taxes, classified by source of income, was as follows:
| Year Ended December 31, | |||||||||||||||||
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| U.S. | $ | 324,611 | $ | 370,395 | $ | 303,337 | |||||||||||
| Outside the U.S. | 132,280 | 25,250 | 33,619 | ||||||||||||||
| Income before income taxes | $ | 456,891 | $ | 395,645 | $ | 336,956 | |||||||||||
The provision for income taxes, classified by the timing and the location of payment, was as follows:
| Year Ended December 31, | |||||||||||||||||
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Current tax expense | |||||||||||||||||
| Federal | $ | 45,262 | $ | 89,716 | $ | 60,493 | |||||||||||
| State | 10,890 | 21,518 | 16,890 | ||||||||||||||
| Foreign | 4,568 | 2,609 | 1,593 | ||||||||||||||
| Deferred tax expense (benefit) | |||||||||||||||||
| Federal | 17,330 | (18,378) | (2,022) | ||||||||||||||
| State | 4,343 | (2,908) | (1,874) | ||||||||||||||
| Foreign | 4,552 | 3,423 | 3,369 | ||||||||||||||
| Income tax expense | $ | 86,945 | $ | 95,980 | $ | 78,449 | |||||||||||
The net deferred tax assets were as follows:
| December 31, | |||||||||||
| (in thousands) | 2025 | 2024 | |||||||||
| Deferred tax assets: | |||||||||||
| Accrued compensation | $ | 21,571 | $ | 20,958 | |||||||
| Deferred revenue | 36,209 | 40,946 | |||||||||
| Receivable, net | 13,888 | 12,345 | |||||||||
| Tax credits | 34,615 | 24,663 | |||||||||
| Operating lease liabilities | 27,872 | 28,455 | |||||||||
| Partnership interests | 2,896 | 5,130 | |||||||||
| Capitalized research and experimental expenditures | 35,253 | 44,946 | |||||||||
| Foreign net operating losses | 7,651 | 7,870 | |||||||||
| Non-U.S. intellectual property | 7,555 | 11,333 | |||||||||
| Other | 5,015 | 7,235 | |||||||||
| Total gross deferred tax assets | 192,525 | 203,881 | |||||||||
| Less: Valuation allowance | (33,542) | (29,660) | |||||||||
| Deferred tax assets | $ | 158,983 | $ | 174,221 | |||||||
| Deferred tax liabilities: | |||||||||||
| Property, equipment and intangible assets | $ | (87,465) | $ | (42,895) | |||||||
| Operating lease ROU assets | (18,601) | (20,016) | |||||||||
| Other | (2,849) | (3,002) | |||||||||
| Deferred tax liabilities | (108,915) | (65,913) | |||||||||
| Net deferred tax assets | $ | 50,068 | $ | 108,308 | |||||||
The Company assesses all positive and negative evidence to estimate whether sufficient future taxable income will be generated to use its deferred tax assets. Based on this evaluation, the Company recorded a net change to its valuation allowance of $3.9 million due to state tax credits and foreign NOLs.
The Company has $28.0 million of state income tax credit carryforwards as of December 31, 2025. It is unlikely that the Company will realize these benefits. Accordingly, the Company has provided a full valuation allowance against these carryforwards.
As of December 31, 2025, the Company had gross foreign net operating losses ("NOLs") of $28.3 million, all of which have indefinite carryforward lives. The Company has recorded a tax-effected valuation allowance of $2.4 million for these NOLs, primarily related to Australia and India. In addition, the Company has a Dutch deferred tax asset of $7.6 million, for which it has recorded a valuation allowance of $3.0 million. The Dutch valuation allowance did not change during the year ended December 31, 2025.
The following table presents a reconciliation of the statutory U.S. federal income tax rate to the effective income tax rate for continuing operations, in accordance with ASU 2023-09 for the year ended December 31, 2025. Refer to Note 1 for more information on the adoption of ASU 2023-09.
| Year Ended December 31, | |||||||||||
| 2025 | |||||||||||
| (in thousands, except percentages) | Amount | Percent | |||||||||
| U.S. federal statutory tax rate | $ | 95,989 | 21.0 | % | |||||||
State and local income taxes, net of federal income tax effect (1) | 11,996 | 2.6 | |||||||||
| Foreign tax effects: | |||||||||||
| Canada: | |||||||||||
| Federal statutory tax rate difference between Canada and U.S. | (6,137) | (1.3) | |||||||||
| Non-taxable gain | (15,026) | (3.3) | |||||||||
| Netherlands | 1,169 | 0.3 | |||||||||
Other foreign jurisdictions (2) | 2,130 | 0.4 | |||||||||
| Effects of cross-border tax laws | (903) | (0.2) | |||||||||
| Tax credits | |||||||||||
| Research & development tax credits | (4,861) | (1.1) | |||||||||
| Other | (3,107) | (0.7) | |||||||||
| Nontaxable or nondeductible items: | |||||||||||
| Expenses related to compensation, net | 5,271 | 1.2 | |||||||||
| Other | 927 | 0.2 | |||||||||
| Changes in unrecognized tax benefits | (455) | (0.1) | |||||||||
| Other | (48) | — | |||||||||
| Effective income tax rate | $ | 86,945 | 19.0 | % | |||||||
(1) State taxes in Minnesota, California, New York, Illinois, Georgia, Florida, Tennessee, and Wisconsin made up the majority (greater than 50%) of the tax effect of this category.
(2) All other foreign jurisdictions do not exceed the 5% threshold at the jurisdiction level in total or for individual reconciling items of the same nature within each jurisdiction.
The Company's effective income tax rate from continuing operations was 19.0% for the year ended December 31, 2025.
The effective income tax rate for the year ended December 31, 2025 was lower than the U.S. federal income tax rate of 21.0% primarily due to the impact of a $100.0 million non-taxable gain from an acquisition of a joint venture and federal income tax credits, which were partially offset by the impact of state income taxes and tax expense related to compensation.
The following table presents a reconciliation of the statutory U.S. federal income tax rate to the effective income tax rate for continuing operations as previously disclosed for the years ended December 31, 2024 and 2023, prior to the adoption of ASU 2023-09.
| Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Statutory U.S. federal income tax rate | 21.0 | % | 21.0 | % | |||||||
| State income taxes, net of federal tax benefit | 3.5 | % | 3.2 | % | |||||||
| Expenses related to foreign operations | 0.7 | % | 0.3 | % | |||||||
| Expenses related to compensation, net | 1.3 | % | 1.0 | % | |||||||
| Unrecognized tax positions | (0.8) | % | 0.5 | % | |||||||
| Tax credits | (2.4) | % | (2.4) | % | |||||||
| Valuation allowance | 0.6 | % | 0.6 | % | |||||||
| Other | 0.4 | % | (0.9) | % | |||||||
| Effective income tax rate | 24.3 | % | 23.3 | % | |||||||
The Company's effective income tax rates from continuing operations were 24.3% and 23.3% for the years ended December 31, 2024 and 2023, respectively.
The effective income tax rates for the years ended December 31, 2024 and 2023 were higher than the U.S. federal income tax rate of 21.0% primarily due to the impact of state income taxes and tax expense related to compensation, which were partially offset by federal income tax credits.
For the years ended December 31, 2025, 2024, and 2023, the Company’s gross unrecognized tax benefits totaled $5.8 million, $6.9 million, and $13.4 million, respectively. After considering the deferred income tax accounting impact, it is expected that approximately $3.5 million of the total as of December 31, 2025 would reduce the effective income tax rate if resolved in the Company’s favor.
The following table presents a reconciliation of the beginning and ending amounts of the unrecognized tax benefits:
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Balance, January 1 | $ | 6,914 | $ | 13,434 | $ | 11,876 | |||||||||||
| Changes for tax positions of prior years | 91 | (776) | 2,338 | ||||||||||||||
| Increases for tax positions related to the current year | 1,400 | 1,516 | 1,670 | ||||||||||||||
| Settlements and lapsing of statutes of limitations | (2,573) | (7,260) | (2,450) | ||||||||||||||
| Balance, December 31 | $ | 5,832 | $ | 6,914 | $ | 13,434 | |||||||||||
The Company files income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions. The Company's federal income tax returns for the 2022, 2023, 2024, and 2025 tax years are subject to examination by the Internal Revenue Service.
The Company's policy is to recognize interest and penalties related to income tax matters in the provision for income taxes. The Company did not incur any material interest or penalties during the years ended December 31, 2025, 2024, and 2023. The Company had no accrued interest and penalties as of December 31, 2025. The Company had $0.3 million of accrued interest and penalties as of December 31, 2024.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 19, 2026 | Showing above |
| 2024 | Feb 20, 2025 | |
| 2023 | Feb 20, 2024 | |
| 2022 | Mar 1, 2023 | |
| 2021 | Feb 24, 2022 | |
| 2020 | Feb 26, 2021 | |
| 2019 | Mar 2, 2020 | |
| 2018 | Feb 26, 2019 | |
| 2017 | Mar 1, 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.