Custom Truck One Source, Inc.CTOS
Custom Truck One Source, Inc. Income Taxes Disclosure
Note 15: Income Taxes
We are subject to taxation in all jurisdictions in which we operate within the United States and Canada. The provision for income tax expense (benefit), including the amount of domestic and foreign loss before taxes, is as follows:
| Year Ended December 31, | |||||||||||||||||
| (in $000s) | 2024 | 2023 | 2022 | ||||||||||||||
| Components of income (loss) before tax: | |||||||||||||||||
| Domestic | $ | (31,429) | $ | 56,000 | $ | 44,214 | |||||||||||
| Foreign | 2,242 | 2,076 | 2,518 | ||||||||||||||
| Total income (loss) before tax | (29,187) | 58,076 | 46,732 | ||||||||||||||
| Current tax expense (benefit): | |||||||||||||||||
| Federal | — | 62 | — | ||||||||||||||
| Foreign | 40 | (6) | 161 | ||||||||||||||
| State | 875 | 3,325 | 772 | ||||||||||||||
| Total current tax expense (benefit) | 915 | 3,381 | 933 | ||||||||||||||
| Deferred tax expense (benefit): | |||||||||||||||||
| Federal | (4,967) | 12,971 | 6,262 | ||||||||||||||
| Foreign | (1,266) | 523 | (1,829) | ||||||||||||||
| State | (27) | 1,484 | 4,963 | ||||||||||||||
| Total deferred tax expense (benefit) | (6,260) | 14,978 | 9,396 | ||||||||||||||
| Expense (benefit) from change in valuation allowance | 4,813 | (10,995) | (2,502) | ||||||||||||||
| Total tax expense (benefit) | $ | (532) | $ | 7,364 | $ | 7,827 | |||||||||||
A reconciliation between the federal statutory income tax rate and our actual effective income tax rate is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Expected federal statutory income tax rate | 21.0% | 21.0% | 21.0% | ||||||||||||||
| Tax effect of differences: | |||||||||||||||||
| Foreign operations | 6.0% | 1.2% | (3.3)% | ||||||||||||||
| Share-based payments | — | — | (1.0)% | ||||||||||||||
| Effect of state income taxes, net of federal income tax (expense) benefit | (6.0)% | 5.6% | 9.8% | ||||||||||||||
| Nontaxable income on warrants | — | — | (8.4)% | ||||||||||||||
| Change in valuation allowance | (12.8)% | (17.4)% | (3.3)% | ||||||||||||||
| Nondeductible officer compensation | (5.8)% | 3.4% | — | ||||||||||||||
| Other | (0.6)% | (1.1)% | 1.9% | ||||||||||||||
| Effective income tax rate | 1.8% | 12.7% | 16.7% | ||||||||||||||
The Company's effective tax rate differs from the U.S. federal statutory tax rate of 21% and is affected by a number of factors, such as the relative amounts of income we earn in differing tax jurisdictions, certain non-deductible expenses, such as compensation disallowance and mark-to-market adjustments on derivative financial instruments, and changes in the valuation allowance we establish against deferred tax assets. The rate is also affected by discrete items that may occur in any given year, such as legislative enactments and changes in our corporate structure that may occur.
The components of the deferred tax assets and liabilities are as follows:
| (in $000s) | December 31, 2024 | December 31, 2023 | |||||||||
| Deferred tax assets | |||||||||||
| Accounts receivable | $ | 3,540 | $ | 4,382 | |||||||
| Inventory | 18,877 | 19,859 | |||||||||
| Transaction and debt issuance costs | 2,274 | 3,521 | |||||||||
| Compensation and benefits | 4,472 | 6,273 | |||||||||
| Net operating loss carryforwards | 215,303 | 214,697 | |||||||||
| Section 163j interest disallowance carryforwards | 58,855 | 46,053 | |||||||||
| Operating lease liabilities | 24,171 | 9,861 | |||||||||
| Foreign tax credits, accrued expenses, and other | 2,365 | 1,069 | |||||||||
| Total deferred tax assets | 329,857 | 305,715 | |||||||||
| Less: valuation allowance | (72,418) | (67,605) | |||||||||
| Total deferred tax assets, net | 257,439 | 238,110 | |||||||||
| Deferred tax liabilities | |||||||||||
| Financing receivable | — | (7,498) | |||||||||
| Rental equipment and other property and equipment | (209,119) | (202,391) | |||||||||
| Goodwill and other intangibles | (54,265) | (50,344) | |||||||||
| Operating lease assets | (23,814) | (9,648) | |||||||||
| Prepaid expenses and other items | (1,642) | (1,584) | |||||||||
| Total deferred tax liabilities | (288,840) | (271,465) | |||||||||
| Net deferred tax liability | $ | (31,401) | $ | (33,355) | |||||||
As a result of the Acquisition, the Company expects to be able to amortize for U.S. tax purposes, a portion of the goodwill recognized from the Acquisition. For U.S. income taxes, the Acquisition was partly a taxable acquisition and partly a non-taxable acquisition. Accordingly, the taxable component is expected to give rise to increases in the tax bases for a portion of the net assets acquired, while the non-taxable component will result in a carryforward of pre-acquisition tax bases (referred as, “carryover basis”) for a portion of the net assets acquired. The differential between the fair values of the assets acquired and the carryover basis has been recognized as a net deferred tax liability as of the closing date of the Acquisition (the “Closing Date”). Additionally, certain federal and state net operating loss and interest expense carryforwards were acquired in the Acquisition and the utilization of these is subject to limitations prescribed by U.S. Internal Revenue Code Section 382 (“Section 382”). The aforementioned net deferred tax liabilities recognized in connection
with the assignment of the purchase price from the Acquisition include deferred tax assets from the tax deduction carryforwards, and were reduced by a valuation allowance as of the Closing Date.
We record a valuation allowance against deferred tax assets when we determine that it is more likely than not that all or a portion of a deferred tax asset will not be realized. The valuation allowance primarily relates to federal and state net operating loss carryforwards. While the Acquisition resulted in a significant increase in deferred tax liabilities, these tax liabilities, which give rise to future taxable income against which tax carryforwards may be applied, are subject to limitations. Federal and state income tax limitation rules are expected to limit the application of our carryforwards and, accordingly, we record a valuation allowance to reduce our deferred tax assets to amounts expected to be realized.
The following presents changes in the valuation allowance:
| Year Ended December 31, | |||||||||||||||||
| (in $000s) | 2024 | 2023 | 2022 | ||||||||||||||
| Valuation allowance - beginning of year | $ | (67,605) | $ | (78,600) | $ | (84,577) | |||||||||||
| Assigned in purchase accounting | — | — | 3,475 | ||||||||||||||
| Charged to benefit (expense) | (4,813) | 10,995 | 2,502 | ||||||||||||||
| Valuation allowance - end of year | $ | (72,418) | $ | (67,605) | $ | (78,600) | |||||||||||
As discussed above, the Company acquired certain federal and state net operating loss and interest expense carryforwards in connection with the Acquisition, the utilization of which is subject to limitations prescribed by Section 382. Accordingly, a portion of the carryforwards is expected to expire prior to being utilized. As of December 31, 2024, we had net operating loss carryforwards of approximately $911.3 million for U.S. federal income tax purposes, $397.9 million for state income tax purposes, and $10.6 million for foreign income tax purposes. As of December 31, 2023, we had net operating loss carryforwards of approximately $909.9 million for U.S. federal income tax purposes, $397.2 million for state income tax purposes and $15.3 million for foreign income tax purposes. The net operating loss carryforwards expire at various dates commencing during 2035 through 2037 for U.S. federal income tax purposes, 2025 through 2042 for state income tax purposes, and 2038 through 2042 for foreign income tax purposes.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”), which, among other things, implements a 15% minimum tax for certain large corporations, a 1% excise tax on net stock repurchases, and several tax incentives to promote clean energy. The IRA is effective for tax years beginning after December 31, 2022. The IRA does not have a material effect on the Company’s consolidated financial statements.
The Organization for Economic Cooperation and Development (“OECD”) has issued “Pillar Two” model rules introducing a new global minimum tax of 15% intended to be effective on January 1, 2024. While the US has not yet adopted the Pillar Two rules, various other governments around the world are enacting legislation to do so. As currently designed, Pillar Two will ultimately apply to our worldwide operations. Considering we do not have material operations in jurisdictions with tax rates lower than the Pillar Two minimum, these rules are not expected to materially increase our global tax costs. We will continue to monitor US and global legislative activities related to Pillar Two for potential impacts.
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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.