COVENANT LOGISTICS GROUP, INC. Income Taxes Disclosure

12.	INCOME TAXES

 

Income before provision for income taxes for the years ended December 31, 2025, 2024, and 2023 is summarized below:

 

		Year Ended				Year Ended				Year Ended
(in thousands)		December 31, 2025				December 31, 2024				December 31, 2023
United States		$	5,591			$	45,897			$	72,240
Income before provision for income taxes		$	5,591			$	45,897			$	72,240

 

Income tax expense for the years ended December 31, 2025, 2024, and 2023 is comprised of:

 

		Year Ended				Year Ended				Year Ended
(in thousands)		December 31, 2025				December 31, 2024				December 31, 2023
Federal, current		$	(1,417	)		$	6,332			$	(1,132	)
Federal, deferred			2,824				2,762				16,624
State, current			350				2,078				2,575
State, deferred			(576	)			(596	)			(456	)
Income tax expense		$	1,181			$	10,576			$	17,611

 

We adopted ASU 2023-09 on a prospective basis beginning with the year ended December 31, 2025. The following table presents income tax expense for the year ended December 31, 2025 after adoption of ASU 2023-09:

 

		Year Ended
(dollars in thousands)		December 31, 2025
Computed "expected" income tax expense		$	1,172				21.0	%
State and local (1)		$	(213	)			(3.8	%)
Effect of changes in tax laws or rates		$	-				0.0	%
Tax credits
Work opportunity tax credit		$	(462	)			(8.3	%)
General business credit		$	(240	)			(4.3	%)
Nontaxable or nondeductible items
Per diem		$	773				13.8	%
Meals and entertainment		$	158				2.8	%
Company owned life insurance		$	(241	)			(4.3	%)
Executive compensation disallowance		$	156				2.8	%
Excess tax benefit on share based compensation		$	(299	)			(5.3	%)
Changes in unrecognized tax benefits		$	-				0.0	%
Other		$	377				6.7	%
		$	1,181				21.1	%

(1)	The state and local jurisdictions that contribute to the majority (greater than 50%) of the tax effect in the category include California, Illinois, Missouri, New Mexico, Pennsylvania, and Tennessee.

 

Income tax expense for the years ended December 31, 2024 and 2023 prior to adoption of ASU 2023-09 is summarized below:

 

		Year Ended								Year Ended
(dollars in thousands)		December 31, 2024								December 31, 2023
Computed "expected" income tax expense		$	9,631				21.0	%		$	15,170				21.0	%
State income taxes, net of federal income tax effect			1,165				2.5	%			1,674				2.3	%
Per diem allowances			852				1.9	%			862				1.2	%
Tax contingency accruals			-				0.0	%			(287	)			(0.4	%)
Tax credits			(496	)			(1.1	%)			(329	)			(0.5	%)
Excess tax benefits on share-based compensation			(975	)			(2.1	%)			(1,811	)			(2.5	%)
Change in prior year estimates			(398	)			(0.9	%)			8				0.0	%
Executive compensation disallowance			1,068				2.3	%			2,370				3.3	%
Other, net			(271	)			(0.6	%)			(46	)			(0.1	%)
Income tax expense		$	10,576				23.0	%		$	17,611				24.4	%

 

The amount of income tax expense allocated to discontinued operations for TFS is $1.0 million, $0.2 million, and $0.2 million for the years 2025, 2024, and 2023, respectively.

 

Income tax expense varies from the amount computed by applying the applicable federal corporate income tax rate of 21% for 2025, 2024, and 2023, to income before income taxes primarily due to state income taxes, net of federal income tax effect, adjusted for permanent differences, the most significant of which are the effects of the per diem pay structure for drivers, executive compensation disallowance, and excess tax benefits on share-based compensation. Drivers who meet the requirements to receive per diem receive non-taxable per diem pay in lieu of a portion of their taxable wages. This per diem program increases our drivers' net pay per mile, after taxes, while decreasing gross pay, before taxes. As a result, salaries, wages, and benefits are slightly lower and our effective income tax rate is higher than the statutory rate. Generally, as pre-tax income increases, the impact of the driver per diem program on effective tax rate decreases, because aggregate per diem pay becomes smaller in relation to pre-tax income, while in periods where earnings are at or near breakeven, the impact of the per diem program on our effective tax rate is significant. Due to the partially nondeductible effect of per diem pay, our tax rate will fluctuate in future periods based on fluctuations in earnings.

 

The following table presents cash income taxes paid net of refunds for the year ended December 31, 2025:

 

		Year Ended
(in thousands)		December 31, 2025
US federal		$	4,533
US state and local		$	139
		$	4,672

 

The temporary differences and the approximate tax effects that give rise to our net deferred tax liability at December 31, 2025 and 2024 are as follows:

 

(in thousands)		2025				2024
Deferred tax assets:
Insurance and claims		$	10,208			$	9,943
Net operating loss carryovers			19,366				4,756
Tax credits			483				487
Leased liability			9,393				10,640
Finance lease obligation			702				906
State bonus			3,257				3,205
Accrued bonus			2,483				3,146
Intangibles			3,916				1,394
Other			4,044				3,055
Total gross deferred tax assets			53,852				37,532
Valuation allowance			(1,073	)			(42	)
Total deferred tax assets, net of valuation allowance			52,779				37,490
Deferred tax liabilities:
Property and equipment			(99,350	)			(91,226	)
Investment in partnership			(58,879	)			(48,447	)
ROU Asset- leases			(8,898	)			(10,203	)
Other			(197	)			(343	)
Prepaid expenses			(5,180	)			(4,921	)
Total gross deferred tax liabilities			(172,504	)			(155,140	)
Net deferred tax liability		$	(119,725	)		$	(117,650	)

 

The net deferred tax liability of $119.7 million primarily relates to differences in cumulative book versus tax depreciation of property and equipment, partially offset by net operating loss carryovers and insurance claims that have been reserved but not paid. The carrying value of our deferred tax assets assumes that we will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred tax benefits. The Company concluded that there is sufficient positive evidence to recognize existing deferred tax assets, with the exception of an immaterial amount of state attributes that are deemed unrealizable based on the timing of expiration and limited apportionable income.

 

As of December 31, 2025, we had less than $0.1 million of liability recorded for unrecognized tax benefits, which includes interest and penalties of less than $0.1 million. We recognize interest and penalties accrued related to unrecognized tax benefits in tax expense. As of December 31, 2024, we had a $0.1 million liability recorded for unrecognized tax benefits, which included interest and penalties of less than $0.1 million. As of December 31, 2023, we had a $0.1 million liability recorded for unrecognized tax benefits, which included interest and penalties of less than $0.1 million. Interest and penalties recognized for uncertain tax positions provided for de minimus expense in 2025, 2024, and 2023.

 

The following tables summarize the annual activity related to our gross unrecognized tax benefits (in thousands) for the years ended December 31, 2025, 2024, and 2023:

 

		2025				2024				2023
Balance as of January 1,		$	-			$	105			$	392
Decreases related to lapsing of statue of limitations			-				(105	)			(287	)
Balance as of December 31,		$	-			$	-			$	105

 

If recognized, approximately $0.0 million, $0.0 million, and $0.1 million of unrecognized tax benefits would impact our effective tax rate as of December 31, 2025, 2024, and 2023, respectively. Any prospective adjustments to our reserves for income taxes will be recorded as an increase or decrease to our provision for income taxes and would impact our effective tax rate.

 

Our 2022 through 2024 tax years remain subject to examination by the IRS for U.S. federal tax purposes, our major taxing jurisdiction. In the normal course of business, we are also subject to audits by state and local tax authorities. We do not anticipate total unrecognized tax benefits to materially change in the next twelve months.

 

We generated a federal net operating loss of $60.9 million in 2025 which can be carried forward indefinitely. We have $0.7 million of federal tax credits to carry back and offset tax in 2024. Our state operating loss carryforwards and state tax credits of $135.7 million and $0.6 million, respectively, expire beginning in 2025 and 2033 based on jurisdiction.

 

The American Rescue Plan Act of 2021 (the "ARPA") includes several provisions meant to stimulate the U.S. economy. Of relevance to the Company, ARPA extended the reach of IRC Section 162(m) to include compensation paid to the eight highest-paid individuals other than the chief executive officer and chief financial officer (rather than the three highest), however, this change is not effective until 2027. There is no material impact to the financial statements at this time.

 

We do not anticipate the Inflation Reduction Act (the "IRA") will have a significant impact on income tax expense or on other taxes. One of the most impactful provisions of the IRA includes the establishment of a Corporate Alternative Minimum Tax ("CAMT"). However, this tax only applies to corporations with three-year average earnings in excess of $1.0 billion. We will continue to monitor the CAMT each year to determine if we will become an applicable corporation. Additionally, the IRA enacted an excise tax on stock buybacks, which imposes a 1% tax on stock buybacks, subject to netting provisions regarding stock awarded to employees as part of their compensation. This did not have a material impact on our stock repurchase programs.

 

The Organization for Economic Co-operation and Development ("OECD") has released the Base Erosion and Profit Shifting framework 2.0 ("Pillar Two") to introduce a global minimum corporate tax of 15% for companies with global revenues and profits above certain thresholds. As of December 31, 2025, we have no recorded effects for Pillar Two due to our operational jurisdiction being wholly domestic. The United States has not yet enacted legislation to adopt Pillar Two. We will continue to monitor the impact of this legislation going forward.

 

The One Big Beautiful Bill Act of 2025 ("OBBBA"), among other things, includes provisions that permanently restored 100% bonus depreciation, reinstated current deductibility of domestic research and development under Section 174, eased the Section 163(j) interest limitation through a return to earnings before interest, taxes, depreciation, and amortization, and rolled back certain alternative energy credits. We have considered the effects of OBBBA in our 2025 provision, which was particularly relevant for fixed assets, Section 163(j), and Section 174.