Dolby Laboratories, Inc.DLB
Dolby Laboratories, Inc. Income Taxes Disclosure
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and unrecognized tax benefits reflect management's best assessment of estimated current and future liabilities. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.
Income Tax Provision
The following two tables present the components of our income before provision for income taxes by geographic region and the portion of our provision for income taxes classified as current and deferred (in thousands):
| Fiscal Year Ended | |||||||||||
| September 26, 2025 | September 27, 2024 | September 29, 2023 | |||||||||
| United States | $ | 102,907 | $ | 89,505 | $ | 44,136 | |||||
| Foreign | 200,578 | 222,974 | 205,917 | ||||||||
| Total income before income taxes | $ | 303,485 | $ | 312,479 | $ | 250,053 | |||||
| Fiscal Year Ended | |||||||||||
| September 26, 2025 | September 27, 2024 | September 29, 2023 | |||||||||
| Current: | |||||||||||
| Federal | $ | (35,095) | $ | 702 | $ | (1,053) | |||||
| State | 581 | 1,124 | 1,023 | ||||||||
| Foreign | 76,520 | 68,013 | 66,776 | ||||||||
| Total current | 42,006 | 69,839 | 66,746 | ||||||||
| Deferred: | |||||||||||
| Federal | 4,369 | (21,357) | (16,949) | ||||||||
| State | (25) | 43 | (356) | ||||||||
| Foreign | 643 | (362) | (1,032) | ||||||||
| Total deferred | 4,987 | (21,676) | (18,337) | ||||||||
| Provision for income taxes | $ | 46,993 | $ | 48,163 | $ | 48,409 | |||||
Repatriation of Undistributed Foreign Earnings
As a result of the Tax Cuts and Jobs Act ("Tax Act"), foreign accumulated earnings that were subject to the mandatory Transition Tax as of December 31, 2017, can be repatriated to the U.S. without incurring further U.S. federal tax. The Tax Act changed to a modified territorial tax system through the provision of a 100% dividend received deduction for the foreign-source portions of dividends received from controlled foreign subsidiaries. As a result, we have reevaluated our historical assertion and determined that we no longer consider a vast majority of these earnings to be indefinitely reinvested. During fiscal 2025, we repatriated $160 million of foreign subsidiary earnings which were exempt from foreign withholding tax. As of September 26, 2025, the total undistributed earnings of our foreign subsidiaries were approximately $420 million. The Company does not record any deferred tax liability on the portion of these foreign undistributed earnings considered indefinitely reinvested.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using enacted tax rates in effect for the year in which the differences are expected to reverse. A summary of the tax effects of the temporary differences were as follows (in thousands):
| Fiscal Year Ended | ||||||||
| September 26, 2025 | September 27, 2024 | |||||||
| Deferred income tax assets: | ||||||||
| Investments | $ | 5,435 | $ | 7,410 | ||||
| Inventories | 3,195 | 5,359 | ||||||
| Net operating loss | 1,426 | 2,294 | ||||||
| Accrued expenses | 14,427 | 13,245 | ||||||
| Stock-based compensation | 17,483 | 17,223 | ||||||
| Revenue recognition | 3,000 | 4,394 | ||||||
| Depreciation and amortization | 142,408 | 139,228 | ||||||
| Lease liability | 7,675 | 15,657 | ||||||
| Research and development credits | 42,488 | 47,830 | ||||||
| Foreign tax credits | 20,565 | 28,777 | ||||||
| Deemed repatriated earnings tax benefit | 14,587 | 9,881 | ||||||
| Other | 3,648 | 6,067 | ||||||
| Total gross deferred income tax assets | 276,337 | 297,365 | ||||||
| Less: valuation allowance | (51,015) | (56,922) | ||||||
| Total deferred income tax assets | 225,322 | 240,443 | ||||||
| Deferred income tax liabilities: | ||||||||
| Right of use asset | (4,981) | (15,889) | ||||||
| Intangible assets | (5,980) | (4,796) | ||||||
| Deferred income tax assets, net | $ | 214,361 | $ | 219,758 | ||||
Net Operating Losses and Tax Credit Carryforwards
As of September 26, 2025, the NOL carryforwards for U.S. federal and California were $0.9 million and $1.3 million, respectively, and will start to expire in fiscal 2034 and 2029, respectively. Additionally, we had foreign NOL carryforwards of $5.0 million as of September 26, 2025, which will carry forward indefinitely. As of September 26, 2025, we had foreign tax credit and federal R&D tax credit carryforwards of $20.7 million and $28.8 million, respectively, which will start to expire in fiscal 2029 and fiscal 2035, respectively. We had California R&D tax credits of $48.6 million and foreign R&D tax credits of $7.7 million, which will carry forward indefinitely.
Valuation Allowance. As of September 26, 2025, a $36.2 million valuation allowance was recorded against California deferred tax assets, a $3.7 million valuation allowance was recorded against federal tax credit deferred tax assets, and a $11.1 million valuation allowance was recorded against foreign deferred tax assets for which ultimate realization of its future benefits is uncertain.
Effective Tax Rate
Each period, the combination of multiple different factors can impact our effective tax rate. These factors include both recurring items such as tax rates and the relative amount of income earned in foreign jurisdictions, as well as discrete items that may occur in, but are not necessarily consistent between periods. A reconciliation of the federal statutory tax rate to our effective tax rate on income from continuing operations was as follows:
| Fiscal Year Ended | |||||||||||
| September 26, 2025 | September 27, 2024 | September 29, 2023 | |||||||||
| Federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||
| State income taxes, net of federal effect | 0.2 | 0.2 | 0.3 | ||||||||
| Stock-based compensation | 3.5 | 1.1 | 1.2 | ||||||||
| Research and development tax credits | (5.1) | (2.7) | (2.7) | ||||||||
| Foreign-derived intangible income deduction | (1.4) | (1.3) | (2.3) | ||||||||
| U.S. tax on foreign entities | 1.3 | 1.3 | 1.3 | ||||||||
| Foreign rate differential | (1.2) | (2.1) | (1.9) | ||||||||
| Increase (decrease) unrecognized tax benefit | (2.7) | 0.6 | 1.9 | ||||||||
| Tax Act of 2017 | — | (3.2) | — | ||||||||
| Other | (0.1) | 0.5 | 0.6 | ||||||||
| Effective tax rate | 15.5 | % | 15.4 | % | 19.4 | % | |||||
Our effective tax rate was 15.5% in fiscal 2025, compared with our federal statutory rate of 21.0%, and with our effective tax rate in fiscal 2024 of 15.4%. The increase in our effective tax rate was primarily due to lower tax benefits
related to settlement of stock-based awards and a non-recurring benefit related to the Transition Tax liability under the Tax Act recognized in fiscal 2024, partially offset by the recognition of tax benefits from previously unrecognized tax benefits due to the expiration of the statute of limitations and higher tax credits.
Our effective tax rate was 15.4% in fiscal 2024, compared with our effective tax rate in fiscal 2023 of 19.4%. The decrease in our effective tax rate was primarily due to a tax benefit related to the Transition Tax liability under the Tax Act. Additionally, we recognized tax benefits from previously unrecognized tax benefits due to a lapse in the statute of limitations and reduced benefit from foreign operations.
Uncertain Tax Positions
As of September 26, 2025, the total amount of gross unrecognized tax benefits was $83.7 million, of which $28.1 million, if recognized, would reduce our effective tax rate. Our liability decreased from fiscal 2024 primarily due to releases from the expiration of the statute of limitations, partially offset by additional accruals in fiscal 2025. Our liability for unrecognized tax benefits is classified within other non-current liabilities in our consolidated balance sheet. Over the next twelve months, we estimate that this amount could be reduced by $1.5 million as a result of the expiration of certain statutes of limitations. Aggregate changes in the balance of gross unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):
| Fiscal Year Ended | |||||||||||
| September 26, 2025 | September 27, 2024 | September 29, 2023 | |||||||||
| Beginning Balance | $ | 81,615 | $ | 76,304 | $ | 69,682 | |||||
| Gross increases - tax positions taken during prior years | 15,687 | 2,346 | 219 | ||||||||
| Gross decreases - tax positions taken during prior years | (1,946) | — | (1,143) | ||||||||
| Gross increases - tax positions taken during current year | 7,514 | 10,626 | 7,546 | ||||||||
| Gross decreases - settlements with tax authorities during current year | (116) | (343) | — | ||||||||
| Lapse of statute of limitations | (19,088) | (7,318) | — | ||||||||
| Ending Balance | $ | 83,666 | $ | 81,615 | $ | 76,304 | |||||
Classification of Interest and Penalties
We include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued are reduced in the period that such determination is made and are reflected as a reduction of the overall income tax provision. In fiscal 2025, our current tax provision was decreased by the release of accrued interest expense of $12.2 million, while in fiscal year 2024, our current tax provision was increased by interest expense of $3.3 million. Accrued interest and penalties are included within the related tax liability line item in our consolidated balance sheets. Our accrued interest and penalties on unrecognized tax benefits as of September 26, 2025 and September 27, 2024 were as follows (in thousands):
| Fiscal Year Ended | ||||||||
| September 26, 2025 | September 27, 2024 | |||||||
| Accrued interest | $ | 1,428 | $ | 13,597 | ||||
| Accrued penalties | 98 | 225 | ||||||
| Total | $ | 1,526 | $ | 13,822 | ||||
We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions. We file income tax returns in the U.S. federal, states, and foreign jurisdictions. Our major tax jurisdictions are the U.S. federal, California, and Ireland.
Our operations in certain jurisdictions remain subject to examination for fiscal 2013 to 2023, some of which are currently under audit or review. We are currently under audit by the IRS for our fiscal 2018 U.S. federal tax year. The resolution of these audits could have a material impact to our consolidated financial statements. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If resolution of any tax issues addressed in our current audits are inconsistent with management’s expectations, we may be required to adjust our tax provision for income taxes in the period such resolution occurs.
The final U.S. foreign tax credit regulations, issued on January 4, 2022, introduced significant changes to foreign tax credit utilization. However, temporary relief was granted and extended to delay the effective date of the final regulations until further notice. These provisions may have a material adverse effect on our future tax provisions unless modified or withdrawn.
The OECD published its model rules “Tax Challenges Arising From the Digitalisation of the Economy - Global Anti-Base Erosion Model Rules (Pillar Two)” which established a global minimum corporate tax rate of 15% for certain multinational enterprises. Many countries have implemented or are in the process of implementing the Pillar Two legislation, became applicable to Dolby beginning in fiscal 2025. Dolby recorded an immaterial amount in our fiscal 2025 consolidated financial statements. We continue to monitor the impact as countries implement legislation and the OECD provides additional guidance.
In July 2025, the OBBBA was signed into law in the U.S. OBBBA contains several corporate income tax provisions, including the extension of many expiring provisions from the Tax Cuts and Jobs Act of 2017, modifications to the international tax framework, and restores the ability to elect immediate expensing of domestic research and experimental expenditures under Section 174 and 100% bonus depreciation for qualified property placed in service on or after January 20, 2025. These provisions are generally effective beginning in fiscal 2026. OBBBA did not have a material impact on our income tax expense or financial statements for fiscal 2025. Dolby will continue to evaluate the effects of these provisions in future periods.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Nov 18, 2025 | Showing above |
| 2024 | Nov 19, 2024 | |
| 2023 | Nov 17, 2023 | |
| 2022 | Nov 18, 2022 | |
| 2021 | Nov 17, 2021 | |
| 2020 | Nov 16, 2020 | |
| 2019 | Nov 25, 2019 | |
| 2018 | Nov 15, 2018 | |
| 2017 | Nov 16, 2017 | |
| 2016 | Nov 18, 2016 | |
| 2015 | Nov 24, 2015 | |
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.