ENCORE CAPITAL GROUP INCECPG
ENCORE CAPITAL GROUP INC Income Taxes Disclosure
Note 11: Income Taxes
Income or loss before provision for income taxes consisted of the following (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| US | $ | 285,981 | $ | 137,101 | $ | 61,356 | |||||||||||
| Foreign | 50,178 | (233,316) | (241,620) | ||||||||||||||
Total income (loss) before provision for income taxes | $ | 336,159 | $ | (96,215) | $ | (180,264) | |||||||||||
The provision for income tax consisted of the following (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
Current expense: | |||||||||||||||||
| Federal | $ | 36,002 | $ | 48,272 | $ | 59,558 | |||||||||||
| State | 9,275 | 11,242 | 17,677 | ||||||||||||||
| Foreign | 4,229 | 5,795 | 4,909 | ||||||||||||||
| 49,506 | 65,309 | 82,144 | |||||||||||||||
| Deferred expense (benefit): | |||||||||||||||||
| Federal | 24,344 | (19,653) | (49,028) | ||||||||||||||
| State | 4,171 | (3,423) | (8,685) | ||||||||||||||
| Foreign | 1,304 | 796 | 1,797 | ||||||||||||||
| 29,819 | (22,280) | (55,916) | |||||||||||||||
| Provision for income taxes | $ | 79,325 | $ | 43,029 | $ | 26,228 | |||||||||||
The reconciliation of the U.S. federal statutory income tax rate to the Company’s effective tax rate for the year ended December 31, 2025 after the adoption of ASU 2023-09 was as follows ($ in thousands):
Year Ended December 31, 2025 | |||||||||||
$ | % | ||||||||||
U.S. federal statutory income tax rate | $ | 70,593 | 21.0 | % | |||||||
State and local income tax, net of federal income tax effect(1) | 14,024 | 4.2 | % | ||||||||
Foreign tax effects | |||||||||||
| United Kingdom | |||||||||||
Changes in valuation allowances | (6,735) | (2.0) | % | ||||||||
| Other | 142 | — | % | ||||||||
Other foreign jurisdictions | 1,589 | 0.5 | % | ||||||||
Other adjustments(2) | (288) | (0.1) | % | ||||||||
Total provision for income taxes and effective tax rate | $ | 79,325 | 23.6 | % | |||||||
(1)State taxes in California, Georgia, Illinois, Michigan, New York, Pennsylvania and Wisconsin made up the majority (greater than 50%) of the tax effect in this category.
(2)The Company has reconciling items related to other prescribed categories that were determined to be immaterial and thus are not separately presented in the rate reconciliation.
As previously disclosed for the years ended December 31, 2024 and 2023, prior to the adoption of ASU 2023-09, the effective income tax rate differs from the U.S. federal statutory income tax rate as follows:
________________________
Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
U.S. federal statutory income tax rate | 21.0 | % | 21.0 | % | |||||||
State and local income tax, net of federal income tax effect | (5.7) | % | (3.0) | % | |||||||
| Foreign rate differential | (2.8) | % | 0.6 | % | |||||||
Change in valuation allowance(1) | (32.2) | % | 7.3 | % | |||||||
Goodwill impairment(2) | (22.4) | % | (28.3) | % | |||||||
Taxable gain in foreign jurisdiction(3) | 2.6 | % | 2.9 | % | |||||||
| Nondeductible compensation | (1.2) | % | (0.6) | % | |||||||
| Return to provision adjustments | (1.3) | % | 0.6 | % | |||||||
Forfeit benefit due to merger/liquidations(4) | — | % | (14.7) | % | |||||||
Other | (2.7) | % | (0.3) | % | |||||||
Effective tax rate | (44.7) | % | (14.5) | % | |||||||
(1)The change in valuation allowance during the year ended December 31, 2024 reflected certain foreign subsidiaries’ operating losses. The change in valuation allowance during the year ended December 31, 2023 was primarily due to the forfeit of tax benefits on merger or liquidation of foreign subsidiaries that maintained full valuation allowances on their deferred tax assets.
(2)During the years ended December 31, 2024 and 2023, the Company recorded a non-cash goodwill impairment charge of $100.6 million and $238.2 million at its Cabot reporting unit, respectively. Refer to “Note 15: Goodwill” for further details.
(3)Represents taxable foreign currency movement recognized in a foreign subsidiary for the years ended December 31, 2024 and 2023.
(4)Represents the forfeit of tax benefits on merger or liquidation of foreign subsidiaries that maintained full valuation allowances on their deferred tax assets during the year ended December 31, 2023.
The Company’s subsidiary in Costa Rica is operating under a 100% tax holiday through August 13, 2026. The exemption under this tax holiday will decrease to 50% through August 13, 2030, and then 0% thereafter. The impact of the tax holiday in Costa Rica for the years ended December 31, 2025, 2024 and 2023 was immaterial.
The Company has not provided for applicable income or withholding taxes on the undistributed earnings from continuing operations for certain of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries as of December 31, 2025, were approximately $184.4 million. Such undistributed earnings are considered permanently reinvested.
The Company does not provide deferred taxes on translation adjustments of unremitted earnings under the indefinite reinvestment exemption. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practical due to the complexities of a hypothetical calculation. Subsidiaries operating outside of the United States for which the Company does not consider under the indefinite reinvestment exemption have no material undistributed earnings or outside basis differences and therefore no U.S. taxes have been provided.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
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| December 31, 2025 | December 31, 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| Net operating losses | $ | 67,738 | $ | 58,008 | |||||||
| Operating lease liabilities | 10,522 | 11,523 | |||||||||
| Accrued expenses | 11,490 | 10,490 | |||||||||
Difference in basis of bond and loan costs | 2,874 | 3,370 | |||||||||
| Difference in basis of receivable portfolio | 10,689 | 12,316 | |||||||||
| Stock-based compensation | 4,847 | 4,427 | |||||||||
| Difference in basis of depreciable and amortizable assets | 2,776 | 4,353 | |||||||||
Accrued interest expense | 5,736 | 14,118 | |||||||||
| Other | 6,651 | 6,437 | |||||||||
| Total deferred tax assets | 123,323 | 125,042 | |||||||||
| Valuation allowance | (84,615) | (84,155) | |||||||||
| Total deferred tax assets net of valuation allowance | 38,708 | 40,887 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Accrued expenses | (4) | (44) | |||||||||
| Difference in basis of receivable portfolio | (54,974) | (27,252) | |||||||||
| Stock-based compensation | — | (19) | |||||||||
| Right-of-use asset | (8,730) | (9,360) | |||||||||
| Difference in basis of depreciable and amortizable assets | (5,445) | (4,282) | |||||||||
| Prepaid expenses | (1,002) | (1,260) | |||||||||
| Other | (369) | (730) | |||||||||
| Total deferred tax liabilities | (70,524) | (42,947) | |||||||||
Net deferred tax liability(1) | $ | (31,816) | $ | (2,060) | |||||||
(1)The Company operates in multiple jurisdictions. In accordance with authoritative guidance relating to income taxes, deferred taxes and liabilities are netted for each tax-paying component of the Company within a particular tax jurisdiction, and presented as a single amount in the statement of financial condition.
As of December 31, 2025, certain of the Company’s foreign subsidiaries have net operating loss carry forwards of approximately $306.4 million, of which $20.8 million will begin to expire in 2027 and the remainder will carry forward indefinitely. Certain of the Company’s domestic subsidiaries have state net operating losses, which will begin to expire in 2038.
Valuation allowances are recorded against deferred tax assets, including certain net operating losses recorded as deferred tax assets, if the Company believes it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2025 valuation allowances increased by $0.5 million, as compared to December 31, 2024. As of December 31, 2024, valuation allowances increased by $29.2 million, as compared to December 31, 2023. The changes in valuation allowance for both years were primarily related to current operating losses at certain foreign entities during the periods.
A reconciliation of the beginning and ending amounts of unrecognized tax benefit is as follows (in thousands):
| Amount | |||||
| December 31, 2022 | $ | 3,988 | |||
| Increase related to prior year tax positions | 2,302 | ||||
| Increase related to current year tax positions | 649 | ||||
| Decrease related to expiration of statute of limitations | (69) | ||||
| Other | 91 | ||||
December 31, 2023 | 6,961 | ||||
| Decrease related to expiration of statute of limitations | (1,044) | ||||
| Decrease related to prior year tax positions | (38) | ||||
| Increase related to current year tax positions | 483 | ||||
| Other | (107) | ||||
December 31, 2024 | 6,255 | ||||
Decrease related to expiration of statute of limitations | (529) | ||||
Decrease related to prior year tax positions | (23) | ||||
Decrease related to settlements with taxing authorities | (1,745) | ||||
Increase related to current year tax positions | 196 | ||||
| Other | 130 | ||||
December 31, 2025 | $ | 4,284 | |||
The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $4.9 million, $7.9 million and $8.2 million as of December 31, 2025, 2024, and 2023 respectively. As of December 31, 2025, 2024 and 2023, there was $4.2 million, $6.6 million and $5.0 million, respectively, of unrecognized tax benefit that if recognized, would result in a net tax benefit. During the year ended December 31, 2025, the decrease in the Company’s gross unrecognized tax benefit was primarily due to the settlements with taxing authorities and the release of a prior year position related to a domestic entity. During the year ended December 31, 2024, the decrease in the Company’s gross unrecognized tax benefit was primarily due to the release of a prior year position related to a domestic entity. During the year ended December 31, 2023, the increase in the Company’s gross unrecognized tax benefit was primarily due the release of prior year position related to domestic entity. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations.
The Company recognizes interest and penalties related to income tax as a component of the provision for income taxes. Interest and penalties expensed during the years ended December 31, 2025, 2024 and 2023 were immaterial. Interest and penalties accrued as of December 31, 2025, 2024 and 2023 were immaterial.
In December 2021, the Organization for Economic Cooperation and Development (“OECD”) enacted model rules for a new global minimum tax framework (“Pillar Two”). Under the Pillar Two rules, a company is required to determine a combined effective tax rate for each jurisdiction. If the jurisdictional effective tax rate determined under the Pillar Two rules is less than 15%, a top-up tax will be due to bring the jurisdictional effective tax rate up to 15%. In December 2022, European Union Member States adopted a directive implementing the Pillar Two rules requiring Member States to enact the directive into their national laws and these began to go into effect from January 1, 2024. The Company has estimated the applicable top-up tax and recorded this in tax expense for the year ended December 31, 2025. The estimated impact of top-up tax for the period was immaterial.
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (“OBBBA”), which includes a broad range of tax reform provisions affecting businesses. The legislation features permanent extension, with modifications, of key 2017 Tax Cuts and Jobs Act provisions that were set to change at the end of 2025. The effects of the OBBBA were included for the year ended December 31, 2025 and the impact was immaterial.
The Company files federal, state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. The Company is subject to examination of its income tax returns by various taxing authorities, and the timing of the resolution of income tax examinations cannot be predicted with certainty. In general, the Company is subject to examination for tax years after December 31, 2021 for the U.S. federal jurisdiction, after December 31, 2021 for U.S state jurisdictions, and after December 31, 2020 in major foreign jurisdictions.
The Company’s management regularly assesses the likelihood of adverse outcomes resulting from examinations, if any, to determine the adequacy of the Company’s provision for income taxes. If any issues addressed in the Company’s tax examinations are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
The amounts of cash taxes paid for income taxes, net of refunds received, by jurisdiction pursuant to the disclosure requirements of ASU 2023-09 for the year ended December 31, 2025 were as follows (in thousands):
Year Ended December 31, 2025 | |||||
US federal | $ | 38,100 | |||
| US state and local | 12,741 | ||||
Foreign | |||||
| Ireland | (3,202) | ||||
| India | 4,823 | ||||
| Other | 2,304 | ||||
Cash paid for income taxes, net of refunds received | $ | 54,766 | |||
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.