Distribution Solutions Group, Inc.DSGR
Distribution Solutions Group, Inc. Income Taxes Disclosure
Note 13 – Income Taxes
Income (loss) from operations before income taxes consisted of the following:
| Year Ended December 31, | |||||||||||||||||
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| United States | $ | (1,552) | $ | (23,598) | $ | (24,949) | |||||||||||
| Foreign | 20,963 | 23,062 | 22,942 | ||||||||||||||
| Total | $ | 19,411 | $ | (536) | $ | (2,007) | |||||||||||
Income taxes paid, net of refunds received consisted of the following:
| Year Ended December 31, | |||||
| (in thousands) | 2025 | ||||
| U.S. federal | $ | 4,897 | |||
| U.S. state and local | $ | 2,874 | |||
| Foreign | |||||
| Canada | $ | 4,966 | |||
| Mexico | 2,680 | ||||
| Hungary | 1,191 | ||||
| Other foreign jurisdictions | 1,579 | ||||
| Total foreign | $ | 10,416 | |||
| Total income taxes paid | $ | 18,187 | |||
Provision (benefit) for income taxes from operations consisted of the following:
| Year Ended December 31, | |||||||||||||||||
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Current income tax expense: | |||||||||||||||||
| U.S. federal | $ | 3,569 | $ | 3,035 | $ | 4,961 | |||||||||||
| U.S. state | 2,432 | 2,633 | 2,388 | ||||||||||||||
| Foreign | 9,073 | 7,777 | 7,639 | ||||||||||||||
| Total | $ | 15,074 | $ | 13,445 | $ | 14,988 | |||||||||||
| Deferred income tax expense (benefit): | |||||||||||||||||
| U.S. federal | $ | (72) | $ | (3,554) | $ | (8,101) | |||||||||||
| U.S. state | (1,317) | (1,603) | 1,232 | ||||||||||||||
| Foreign | (2,619) | (1,492) | (1,159) | ||||||||||||||
| Total | $ | (4,008) | $ | (6,649) | $ | (8,028) | |||||||||||
| Total income tax expense (benefit): | |||||||||||||||||
| U.S. federal | $ | 3,497 | $ | (519) | $ | (3,141) | |||||||||||
| U.S. state | 1,115 | 1,030 | 3,620 | ||||||||||||||
| Foreign | 6,454 | 6,285 | 6,481 | ||||||||||||||
| Total | $ | 11,066 | $ | 6,796 | $ | 6,960 | |||||||||||
The Company adopted ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures on a prospective basis beginning with the year ended December 31, 2025. The reconciliation between the effective income tax rate and the statutory federal rate for operations for the year ended December 31, 2025 (subsequent to the January 1, 2025 prospective adoption of ASU 2023-09) is as follows:
| Year Ended December 31, | ||||||||
| (in thousands) | 2025 | |||||||
| Statutory federal rate | $ | 4,076 | 21.00 | % | ||||
State income taxes, net of federal effect(1) | 881 | 4.54 | ||||||
| Change in valuation allowance | 2,330 | 12.00 | ||||||
| Nontaxable or nondeductible items | ||||||||
| Meals and entertainment | 249 | 1.28 | ||||||
| Other nontaxable or nondeductible items | 239 | 1.23 | ||||||
| Branch income | 980 | 5.05 | ||||||
| Other cross-border tax laws | 17 | 0.09 | ||||||
| Worldwide changes in UTB | 52 | 0.27 | ||||||
| Other | 244 | 1.25 | ||||||
| Foreign Tax Effects | ||||||||
| Canada | ||||||||
| Tax rate differential | 430 | 2.22 | ||||||
| Adjustment to income taxes payable | 290 | 1.50 | ||||||
| Other Canada | 227 | 1.18 | ||||||
| Mexico | ||||||||
| Tax rate differential | 675 | 3.48 | ||||||
| Adjustment to income taxes payable | (511) | (2.63) | ||||||
| Other Mexico | 112 | 0.58 | ||||||
| Turkey | ||||||||
| Adjustment to income taxes payable | (386) | (1.99) | ||||||
| Other Turkey | (11) | (0.06) | ||||||
| Hungary | ||||||||
| Tax rate differential | (560) | (2.89) | ||||||
| Adjustment to income taxes payable | 781 | 4.02 | ||||||
| Other Hungary | (44) | (0.23) | ||||||
| Denmark | ||||||||
| Provision to return adjustments | 476 | 2.45 | ||||||
| Adjustment to income taxes payable | 692 | 3.57 | ||||||
| Other Denmark | 56 | 0.29 | ||||||
| Brazil | ||||||||
| Unrealized gains | 212 | 1.09 | ||||||
| Adjustment to income taxes payable | (338) | (1.74) | ||||||
| Other Brazil | (14) | (0.07) | ||||||
| India | ||||||||
| Provision to return adjustments | 461 | 2.38 | ||||||
| Adjustment to income taxes payable | (717) | (3.69) | ||||||
| Other India | (20) | (0.10) | ||||||
| Other foreign jurisdictions | 187 | 0.94 | ||||||
| Total | $ | 11,066 | 57.01 | % | ||||
(1) The states and local jurisdictions that contribute to the majority (greater than 50%) of the tax effect in this category include California, Illinois, New York, Pennsylvania, Florida, and Colorado.
The reconciliation between the effective income tax rates and the statutory federal rates for operations for the years ended December 31, 2024 and 2023 (prior to the January 1, 2025 prospective adoption of ASU 2023-09) are as follows:
| Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Statutory federal rate | 21.0 | % | 21.0 | % | |||||||
| Increase (decrease) resulting from: | |||||||||||
| Change in valuation allowance - current period activity | (1,196.4) | (380.7) | |||||||||
| Foreign rate differential | (63.2) | 6.2 | |||||||||
| Stock compensation | 81.6 | (5.0) | |||||||||
| Compensation deduction limitation | — | (7.0) | |||||||||
| State and local taxes, net | 178.4 | 67.1 | |||||||||
| Life insurance | (14.1) | (3.4) | |||||||||
| Meals & entertainment | (65.2) | (17.3) | |||||||||
| Change in uncertain tax positions | 46.0 | 18.1 | |||||||||
| Provision to return differences | (78.5) | (45.3) | |||||||||
| GILTI, Section 78, FDII, and Section 250 | (8.5) | — | |||||||||
| Transaction costs | (157.4) | — | |||||||||
| Branch income | (275.2) | (81.6) | |||||||||
| Change in deferred balances | 263.4 | 79.4 | |||||||||
| Other items, net | 0.2 | 1.7 | |||||||||
| Provision for income taxes | (1,267.9) | % | (346.8) | % | |||||||
Deferred income tax assets and liabilities contain the following temporary differences:
| December 31, | |||||||||||
| (in thousands) | 2025 | 2024 | |||||||||
| Deferred tax assets: | |||||||||||
| Federal & state NOL carryforward | $ | 13,547 | $ | 9,943 | |||||||
| Deferred revenue | 181 | 135 | |||||||||
| Stock based compensation | 3,829 | 3,113 | |||||||||
| Inventory adjustments | 10,817 | 10,269 | |||||||||
| Accrued benefits & bonuses | 7,575 | 7,821 | |||||||||
| Bad debt reserve | 1,447 | 546 | |||||||||
| Capitalized transaction costs | 1,886 | 1,523 | |||||||||
| Section 163(j) limitation carryforward | 21,313 | 20,422 | |||||||||
| Right of use liabilities | 27,499 | 21,476 | |||||||||
| Investment in foreign subsidiaries | 285 | — | |||||||||
| Other | 5,281 | 5,952 | |||||||||
| Deferred state income tax | 176 | 452 | |||||||||
| Total gross deferred tax assets | 93,836 | 81,652 | |||||||||
| Valuation allowance | (19,279) | (14,868) | |||||||||
| Total net deferred tax assets | 74,557 | 66,784 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Other intangibles | 34,573 | 45,360 | |||||||||
| Fixed assets | 30,407 | 21,685 | |||||||||
| Right of use assets | 26,201 | 20,449 | |||||||||
| Other | 2,327 | 1,419 | |||||||||
| Total gross deferred tax liabilities | 93,508 | 88,913 | |||||||||
| Net deferred tax liabilities | $ | (18,951) | $ | (22,129) | |||||||
At December 31, 2025, the Company had $21.4 million of U.S. federal net operating loss carryforwards (“NOLs”) that do not expire, and $85.2 million of state NOLs that expire between 2026 and 2037. At December 31, 2025 the Company had a total valuation allowance of $19.3 million. At December 31, 2024, the valuation allowance was $14.9 million. The change in the valuation allowance during 2025 was primarily related to establishing a valuation allowance against the deferred tax asset for Section 163(j) limited interest expense. The Company does not expect that its future taxable income will be sufficient to realize these existing deferred tax assets.
Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise would subject the company to foreign withholding taxes and may subject the Company to U.S. federal and state taxes. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested profits is not feasible primarily due the Company’s legal entity structure and the complexity of U.S. tax laws.
Global Intangible Low Taxed Income (GILTI) is a deemed amount of income derived from controlled foreign corporations (CFCs) in which a U.S. person is a 10% direct or indirect shareholder. The Company owns numerous CFCs, which are subject to GILTI inclusion. However, because several of the CFCs operate in countries with a high tax rate, notably Canada, Denmark and Mexico, it was determined that a Section 954 High Tax Exception to GILTI inclusions is appropriate.
As required under ASU 2023-09, the Company has included only the portion of the valuation allowance related to federal deferred tax assets in the “change in valuation allowance” line of the rate reconciliation. The following table presents a reconciliation of the total change in the valuation allowance:
| Year Ended December 31, | |||||
| (in thousands) | 2025 | ||||
| Beginning balance | $ | (14,868) | |||
| Changes to income tax expense | (4,411) | ||||
| Changes to OCI | — | ||||
| Changes to goodwill | — | ||||
| Ending balance | $ | (19,279) | |||
Undistributed earnings of our foreign subsidiaries are considered to be permanently reinvested and accordingly, no deferred U.S. income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. income tax. At the present time it is not practicable to estimate the amount of U.S. income taxes that might be payable if these earnings were repatriated.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| Year Ended December 31, | |||||||||||||||||
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Balance at beginning of year | $ | 2,362 | $ | 2,734 | $ | 3,027 | |||||||||||
| Gross increase - tax positions in prior periods | — | — | 503 | ||||||||||||||
| Gross decrease - tax positions in prior periods | — | (152) | — | ||||||||||||||
| Gross increase - tax position in current period | 826 | 595 | — | ||||||||||||||
| Lapses in statutes of limitations | (644) | (815) | (796) | ||||||||||||||
| Balance at end of year | $ | 2,544 | $ | 2,362 | $ | 2,734 | |||||||||||
The recognition of the unrecognized tax benefits would have a favorable effect on the effective tax rate. The unrecognized tax benefits as of December 31, 2025 included $0.5 million of tax benefits that, if recognized, would impact the effective tax rate in future periods. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The unrecognized tax benefits are recorded as a component of Other Liabilities in the Consolidated Balance Sheets. The total amount accrued for interest and penalties in the liability for uncertain tax positions was $0.5 million, $1.1 million and $0.8 million as of December 31, 2025, 2024 and 2023, respectively. Interest and penalties are recognized over uncertain tax positions that arose from income tax matters in Canada. The Company has substantially concluded all Canadian income tax matters through the year ended 2017. Years 2018 through present are open and subject to examination.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. As of December 31, 2025, the Company was subject to U.S. federal income tax examinations for the years 2022 through 2024 and income tax examinations from various other jurisdictions for the years 2018 through 2024.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 5, 2026 | Showing above |
| 2024 | Mar 6, 2025 | |
| 2023 | Mar 7, 2024 | |
| 2022 | Mar 14, 2023 | |
| 2021 | Feb 24, 2022 | |
| 2020 | Feb 26, 2021 | |
| 2019 | Feb 27, 2020 | |
| 2018 | Mar 4, 2019 | |
| 2017 | Feb 22, 2018 | |
| 2016 | Feb 23, 2017 | |
| 2015 | Feb 18, 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.