Clearwater Analytics Holdings, Inc.CWAN

Clearwater Analytics Holdings, Inc. Income Taxes Disclosure

10-KFiled Feb 18, 20268 min read
Income Taxes
As part of the Up-C structure, Clearwater Analytics Holdings, Inc. owns a portion of CWAN Holdings, which contains all operations of the business and is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, CWAN Holdings is generally not subject to U.S. federal, state, and local income taxes. Any taxable income or loss generated by CWAN Holdings is passed through to and included in the taxable income or loss of its members in accordance with the terms of the operating agreement of CWAN Holdings. CWAN Holdings’ international wholly-owned subsidiaries are subject to taxes in foreign jurisdictions.
Clearwater Analytics Holdings, Inc. is taxed as a corporation and pays corporate federal, state, and local taxes on income allocated to it from CWAN Holdings based on Clearwater Analytics Holdings, Inc.’s economic interest held in CWAN Holdings. While the Company consolidates CWAN Holdings for financial reporting purposes, the Company will not be taxed on the earnings attributed to the non-controlling interests. As a result, the income tax burden on the earnings attributed to the non-controlling interests is not reported by the Company in its consolidated financial statements.
The components of loss before income taxes were as follows (in thousands):
Year Ended December 31,
202520242023
Domestic$(37,688)$(1,860)$(11,383)
Foreign(11,984)(28,203)(11,483)
Total$(49,672)$(30,063)$(22,866)
The components of provision for (benefit from) income taxes for all periods presented were as follows (in thousands):
Year Ended December 31,
202520242023
Federal$— $— $— 
State209 336 761 
International3,104 2,048 1,121 
Total current income tax expense$3,313 $2,384 $1,882 
Federal$(369)$(350,567)$— 
State(10,742)(105,060)(7)
International(1,620)(4,405)(1,658)
Total deferred income tax benefit$(12,731)$(460,032)$(1,665)
Federal(369)(350,567)— 
State(10,533)(104,725)754 
International1,484 (2,356)(537)
Total provision for (benefit from) income taxes$(9,418)$(457,648)$217 
A reconciliation of the provision for (benefit from) income taxes to the amount computed by applying the 21% U.S. federal income tax rate to income (loss) before income taxes after the adoption of ASU 2023-09 is as follows (in thousands, except percentages):
Year Ended December 31,
2025
Tax at U.S. federal statutory rate$(10,431)21.0%
Domestic federal reconciling Items
Tax credits
Research and development credits(1,519)3.1%
Nontaxable and nondeductible items, net
Executive compensation deduction limitations17,627 (35.5%)
Share-based payment awards(6,142)12.4%
Non-controlling interest329 (0.7%)
Other867 (1.7%)
Other reconciling items(122)0.2%
Domestic state and local income taxes, net of federal effect(1)
(10,227)20.6%
Foreign reconciling items
France
Foreign rate differential(351)0.7%
Changes in valuation allowance1,847 (3.7%)
Other(288)0.5%
United Kingdom
Share-based payment awards(771)1.6%
Other18 0.0%
Other foreign jurisdictions435 (0.9%)
Worldwide changes in prior year unrecognized tax benefits(690)1.4%
Effective tax rate$(9,418)19.0%
(1) The state and local jurisdictions that contribute to the majority of the tax effect in this category include New York State, New York City, and California.
A reconciliation of the provision for (benefit from) income taxes to the amount computed by applying the 21% U.S. federal income tax rate to income (loss) before income taxes for years prior to the adoption of ASU 2023-09 is as follows (in thousands, except percentages):
Year Ended December 31,
20242023
Tax at U.S. federal statutory rate$(6,313)$(4,802)
Non-controlling interest(768)349 
State taxes1,498 (1,583)
Foreign rate differential(320)16 
Executive compensation deduction limitations10,876 10,985 
Share-based payment awards(3,860)(1,604)
Permanent items(9)185 
Nondeductible TRA payments6,983 — 
Tax credits and incentives(2,749)(3,442)
Return to provision1,393 70 
Changes in tax law6,552 (3,303)
Changes in prior year unrecognized tax benefits(2,260)(487)
Valuation allowance(468,549)3,804 
Other(122)29 
Total$(457,648)$217 
Effective tax rate1522.3%(0.9%)
Deferred income taxes result from differences in the recognition of amounts for tax and financial reporting purposes, as well as operating loss and tax credit carryforwards. Significant components of our deferred income tax assets and liabilities are as follows (in thousands):
Year Ended December 31,
20252024
Investment in Partnership$485,193 $513,945 
Loss and tax credit carryforwards214,059 92,670 
Equity-based compensation14,813 12,465 
Lease liability5,305 4,061 
Other1,271 1,938 
Total deferred tax assets$720,641 $625,079 
Valuation allowance(14,110)(13,973)
Net deferred tax asset$706,531 $611,106 
Intangible assets$(4,756)$(5,171)
Right of use asset(5,203)(3,964)
Revenue(829)(735)
Other— (46)
Total deferred tax liabilities$(10,788)$(9,916)
Net deferred tax assets $695,743 $601,190 
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. The realization of tax benefits of net deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. We review the likelihood that we will realize the benefit of our deferred tax assets and, therefore, the need for a valuation allowance at each reporting period. As of December 31, 2025, the valuation allowance of $14.1 million was primarily related to U.S. losses that are capital in nature, certain state loss and credit carryforwards, and net operating losses in France. We will maintain this valuation allowance until there is sufficient evidence to support the reversal of all or a portion of the valuation allowance.
As of December 31, 2025, we had gross net operating loss carryforwards of approximately $625 million for federal income tax purposes, a small portion of which will begin to expire in 2036, if unused. We had gross net operating loss carryforwards of approximately $613 million for state income tax purposes, a small portion of which will begin to expire in the year 2026, if unused. We had gross net operating loss carryforwards of approximately $27 million for foreign income tax purposes, which do not expire and can be carried forward indefinitely.
As of December 31, 2025, we also had research and development credit carryforwards of approximately $10.0 million for federal income tax and $2.0 million for state income tax purposes. The research and development tax credits will begin to expire in 2036 and 2034 for federal and state purposes, respectively, if unused.
The federal and state net operating loss carryforwards may be subject to significant limitations under Section 382 and Section 383 of the Code and similar provisions under state law. The Tax Reform Act of 1986 contains provisions that limit the federal net operating loss carryforwards that may be used in any given year in the event of special occurrences, including significant ownership changes. We have completed a Section 382 review and determined that none of our operating losses will expire solely due to Section 382 limitation(s).
We indefinitely reinvest earnings from our foreign subsidiaries and therefore no deferred tax liability has been recognized on the basis difference created by such earnings. We have not provided foreign withholding taxes for any undistributed earnings of our foreign subsidiaries.
A reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows (in thousands):
Year Ended December 31,
202520242023
Balance - Beginning of Year$7,032 $6,865 $3,932 
Increases related to current year's tax positions1,929 2,497 2,423 
Increases related to business combinations3,194 — 666 
Increases (decreases) related to prior year's tax positions(93)(39)182 
Decreases related to lapse of statute(617)(2,291)(487)
Increases related to exchanges— — 149 
Balance - End of Year$11,445 $7,032 $6,865 
To the extent taxes are not assessed with respect to uncertain tax positions, approximately $9.9 million of the tax benefits included in the balance of unrecognized tax benefits as of December 31, 2025 would affect the effective tax rate if recognized. The remainder would have no impact as the unrecognized tax benefits are recorded as reductions of deferred tax assets which are fully reduced by a valuation allowance.
We recognize interest and penalties related to unrecognized tax benefits as income tax expense. During the years ended December 31, 2024, and 2023, we did not recognize any interest and penalties for income taxes. Interest and penalties recognized for income taxes was immaterial for the year ended December 31, 2025.
We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign jurisdictions. As of December 31, 2025, all of the years remain open to examination by the federal and state tax authorities for three or four years from the later of when the return is filed or the tax year in which net operating losses or tax credits are utilized. We believe that an adequate provision has been made for any adjustments that may result from tax examinations.
The amounts of cash income taxes paid by the Company after the adoption of ASU 2023-09 were as follows (in thousands):
Year Ended
December 31, 2025
U.S. Federal$— 
Domestic state and local
New York City, New York175
Other254
Foreign
India1,943 
Hong Kong680
United Kingdom319
Other115
Total$3,486 
The amount of cash income taxes paid by the Company during the years ended December 31, 2024 and 2023 was $2.0 million and $2.4 million, respectively.
Tax Receivable Agreement Liability
In connection with the IPO and related transactions, we entered into a TRA that, prior to the TRA Amendment, provided for the payment by us of 85% of the amount of any tax benefits that we realized, or in some cases were deemed to realize, as a result of Tax Attributes, as defined in the Tax Receivable Agreement. Tax receivable agreement expenses relates payments we made, or to be made, under the TRA prior to or in connection with the TRA Amendment.
On November 4, 2024, the Company entered into the TRA Amendment which amended the TRA to provide for one-time settlement payments in a gross amount of approximately $72.5 million. The settlement payments were made in the last
quarter of 2024 and the first quarter of 2025. The Company has no further payment obligations (past, current, or future) to
the TRA Parties under the TRA.
A reconciliation of the beginning and ending balance of the TRA liability is as follows (in thousands):
Year Ended December 31,
202520242023
Balance - Beginning of Year$35 $18,894 $12,200 
Tax receivable agreement expense— 11,545 14,396 
TRA bonus expense— 557 694 
Tax receivable agreement expense due to TRA Amendment— 41,636 — 
TRA bonus expense due to TRA Amendment— 2,009 — 
Payments(35)(74,606)(8,396)
Balance - End of Year$— $35 $18,894 
Tax receivable agreement expense$— $53,181 $14,396 
TRA bonus expense in operating expenses— 2,566 694 
Total expense$— $55,747 $15,090 

Historical Timeline

Fiscal YearFiled
2025Feb 18, 2026Showing above
2024Feb 26, 2025
2023Feb 29, 2024
2022Mar 3, 2023
2021Mar 16, 2022

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.

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