Duolingo, Inc.DUOL
Duolingo, Inc. Income Taxes Disclosure
INCOME TAXES
For the years ended December 31, 2025, 2024 and 2023 income before income taxes included the following components:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Domestic | $ | 167,873 | $ | 97,051 | $ | 16,501 | |||||||||||
| Foreign | 14,537 | 5,255 | 1,276 | ||||||||||||||
| Total | $ | 182,410 | $ | 102,306 | $ | 17,777 | |||||||||||
For the years ended December 31, 2025, 2024 and 2023 the Company recognized the following provision for income taxes:
| Twelve months ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | (6,243) | $ | 10,652 | $ | 895 | |||||||||||
| State | (313) | 2,639 | 607 | ||||||||||||||
| Foreign | 1,630 | 284 | 341 | ||||||||||||||
| Total | $ | (4,926) | $ | 13,575 | $ | 1,843 | |||||||||||
| Deferred: | |||||||||||||||||
| Federal | $ | (207,587) | $ | — | $ | — | |||||||||||
| State | $ | (17,556) | — | — | |||||||||||||
| Foreign | $ | (1,586) | 157 | (133) | |||||||||||||
| Total | $ | (226,729) | $ | 157 | $ | (133) | |||||||||||
| (Benefit from) provision for income taxes | $ | (231,655) | $ | 13,732 | $ | 1,710 | |||||||||||
Upon adoption of ASU 2023-09, Improvements to Income Tax Disclosures, as described in Note 2, “Summary of Significant Accounting Policies”, cash paid for taxes, net of refunds, during the year ended December 31, 2025 was as follows:
Federal | $ | 9,700 | |||
State | 3,955 | ||||
Foreign | 702 | ||||
Total cash paid for income taxes, net of refunds | $ | 14,357 | |||
Cash paid for income taxes, net of refunds, during the years ended December 31, 2024 and 2023 was $7,620 and $2,320, respectively.
Upon adoption of ASU 2023-09, Improvements to Income Tax Disclosures, as described in Note 2, “Summary of Significant Accounting Policies”, the reconciliation of taxes at the federal statutory rate to our benefit from income taxes for the year ended December 31, 2025 was as follows:
Amount | Percent | ||||||||||
| $ | 38,306 | 21.0 | % | ||||||||
| State taxes, net of Federal income tax effect (1) | (17,799) | (9.8) | % | ||||||||
| Foreign tax effects | |||||||||||
| Inducement payment | (2,651) | (1.5) | % | ||||||||
| Other | 920 | 0.5 | % | ||||||||
| Foreign-Derived Intangible Income deduction | 6,426 | 3.5 | % | ||||||||
| Research and development credit | 8,360 | 4.6 | % | ||||||||
| Valuation allowance changes | (233,479) | (128.0) | % | ||||||||
| Nontaxable or nondeductible items: | |||||||||||
| Equity compensation | (81,847) | (44.9) | % | ||||||||
| Section 162(m) limitation | 47,050 | 25.8 | % | ||||||||
| Meals and entertainment | 2,900 | 1.6 | % | ||||||||
| Other | 159 | 0.1 | % | ||||||||
| Effective income tax rate | (231,655) | (127.0) | % | ||||||||
________________
(1) State taxes in California, Pennsylvania and Illinois made up the majority (greater than 50 percent) of the tax effect in this category.
The reconciliation of taxes at the federal statutory rate to our provision for taxes for the years ended December 31, 2024 and 2023 in accordance with the guidance prior to the adoption of ASU 2023-09 was as follows:
| 2024 | 2023 | ||||||||||
Expected income tax expense at federal statutory rate | 21.0 | % | 21.0 | % | |||||||
State taxes, net of Federal income tax effect | (3.8) | (35.1) | |||||||||
| Section 162(m) limitation | 58.1 | 56.5 | |||||||||
Equity compensation | (97.9) | (208.4) | |||||||||
Meals and entertainment | 1.2 | 5.6 | |||||||||
Foreign-Derived Intangible Income deduction | (13.5) | (13.4) | |||||||||
Other permanent adjustments | 1.8 | 2.2 | |||||||||
Research and development credit | (23.5) | (76.4) | |||||||||
Valuation allowance | 70.0 | 257.6 | |||||||||
Effective income tax rate | 13.4 | % | 9.6 | % | |||||||
The 2025 and 2024 effective tax rate differs from the statutory rate primarily due to tax-deductible stock-based compensation and the generation of research and development tax credits. The effective tax rate for 2025 is also significantly impacted by the release of the valuation allowance on the Company’s net deferred tax assets, while the effective tax rate for 2024 reflects changes in the valuation allowance.
The Company has the following deferred tax assets (liabilities) as of December 31, 2025 and 2024:
| 2025 | 2024 | ||||||||||
| Net operating loss carryforwards | $ | 27,541 | $ | 4,491 | |||||||
| Section 174 research and development capitalization | 118,009 | 190,768 | |||||||||
| Research and development credits | 74,943 | 61,198 | |||||||||
| Lease liability | 22,201 | 13,004 | |||||||||
| Stock-based compensation | 6,881 | 4,755 | |||||||||
| Marketing and advertising | 1,124 | 674 | |||||||||
| Sales tax / Value added tax ("VAT") reserve | 905 | 560 | |||||||||
| Other deferred tax assets | 516 | 70 | |||||||||
| Valuation allowance | — | (256,728) | |||||||||
| Total deferred tax assets | 252,120 | 18,792 | |||||||||
| ROU asset | (17,551) | (10,757) | |||||||||
| Capitalized software | (4,251) | (4,444) | |||||||||
| Property and equipment | (2,440) | (2,885) | |||||||||
| Other deferred tax liabilities | (788) | (322) | |||||||||
| Total deferred tax liabilities | (25,030) | (18,408) | |||||||||
| Net deferred taxes | $ | 227,090 | $ | 384 | |||||||
During the year ended December 31, 2025, the Company released the valuation allowance previously recorded against its federal and state DTAs, resulting in a one-time income-tax benefit of $256,728. In reaching this conclusion, management considered, among other factors, consecutive quarterly pre-tax profitability, a three-year cumulative income position, and sustained operational profitability. Management will continue to monitor quarterly operating results, projected taxable income, and other relevant evidence, and may record a valuation allowance in future periods if actual results or other information differ from current expectations.
The income-tax benefit for the year ended December 31, 2025 reflects the combined impact of the valuation-allowance release and other discrete tax items recognized during the period, which are not indicative of ongoing operating performance. The decision to release the valuation allowance was based primarily on sustained and verifiable positive evidence.
As of December 31, 2025, the company has accumulated undistributed earnings generated by our foreign subsidiaries, most of which have been previously subject to U.S. tax. We intend to indefinitely reinvest these earnings, as well as future earnings from our foreign subsidiaries to fund our international operations. In addition, we expect future U.S. cash generation will be sufficient to meet future U.S. cash needs.
On July 4, 2025, the One Big Beautiful Bill Act was signed into law. Included in this legislation are provisions that allow for the immediate expensing of domestic research and development expenses, which the Company implemented during 2025. These changes did not have a material impact to the overall financial statements the year ended December 31, 2025.
The Company’s income before taxes, income tax provision or benefit and effective tax rates were as follows. The large variance in the effective tax rate between periods primarily reflects the recognition of the valuation-allowance release and other discrete tax benefits in the year ended December 31, 2025.
The following table represents the activity in our valuation allowance for the years ended December 31, 2025 and 2024:
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Beginning balance—January 1 | $ | (256,728) | $ | (156,870) | |||||||
| Increase in valuation allowance | — | (99,858) | |||||||||
| Release of valuation allowances | 256,728 | — | |||||||||
| Ending balance—December 31 | $ | — | $ | (256,728) | |||||||
The Company utilized its remaining federal net operating loss carryforwards in 2024, but during 2025 generated $111,199 of federal net operating losses, with an indefinite carryforward. The Company also has approximately $72,425 in state net operating loss carryforwards. State net operating loss carryforwards are subject to varying statutory carryforward periods, generally ranging from 10 to 30 years, with certain jurisdictions permitting indefinite carryforward. As of December 31, 2025,these state net operating loss carryforwards will begin to expire in 2035 and continue through 2047.
The Company has approximately $76,419 in federal and state general business credits that are available to offset future taxable income through 2045. The Company has analyzed the impact of IRC Sections 382 and 383 on these tax attributes and has determined that no prior ownership changes have occurred which would limit the Company’s ability to utilize the NOLs and research and development tax credits.
The Company’s tax years through the 2025 tax year remain subject to examination by federal and state tax authorities.
The Company utilizes a more-likely-than-not standard in recognizing a tax benefit in its financial statements. No uncertain tax benefits have been recorded in 2025, 2024, and 2023, respectively.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 27, 2026 | Showing above |
| 2024 | Feb 28, 2025 | |
| 2023 | Feb 29, 2024 | |
| 2022 | Mar 1, 2023 | |
| 2021 | Mar 4, 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.