Encompass Health CorpEHC
Encompass Health Corp Income Taxes Disclosure
Income Taxes:
The domestic and foreign components of Income from continuing operations before income tax expense are as follows (in millions):
| For the Year Ended December 31, 2025 | |||||
| United States | $ | 944.8 | |||
| Foreign | 8.2 | ||||
| Income from continuing operations before income tax expense | $ | 953.0 | |||
The significant components of the Provision for income tax expense related to continuing operations are as follows (in millions):
| For the Year Ended December 31, 2025 | |||||
| Current: | |||||
| Federal | $ | 132.3 | |||
| State and local | 35.7 | ||||
| Foreign | 2.6 | ||||
| Total current expense | 170.6 | ||||
| Deferred: | |||||
| Federal | 20.0 | ||||
| State and local | 2.3 | ||||
| Foreign | — | ||||
| Total deferred expense | 22.3 | ||||
| Total income tax expense related to continuing operations | $ | 192.9 | |||
A reconciliation of differences between the federal income tax at statutory rates and our actual income tax expense on our income from continuing operations, is presented below (in millions, except for percentages):
| For the Year Ended December 31, 2025 | |||||||||||
| Amount | % | ||||||||||
| Tax expense at statutory rate | $ | 200.1 | 21.0 | % | |||||||
State and other income taxes, net of federal tax effect(1) | 31.6 | 3.3 | % | ||||||||
| Changes in valuation allowance | 2.9 | 0.3 | % | ||||||||
| Noncontrolling interests | (40.5) | (4.2) | % | ||||||||
| Nontaxable or nondeductible items: | |||||||||||
| Share-based windfall tax benefits | (12.5) | (1.3) | % | ||||||||
| Nondeductible executive compensation | 10.1 | 1.0 | % | ||||||||
| Other | 1.9 | 0.2 | % | ||||||||
| Tax credits | (2.5) | (0.3) | % | ||||||||
| Foreign tax effects | 2.6 | 0.3 | % | ||||||||
| Other, net | (0.8) | (0.1) | % | ||||||||
| Income tax expense | $ | 192.9 | 20.2 | % | |||||||
(1) In 2025, state taxes in Florida, Tennessee, Pennsylvania, Massachusetts, California, and Virginia made up the majority (greater than 50 percent) of the tax effect of this category.
The Provision for income tax expense in 2025 was less than the federal statutory rate primarily due to the impact of noncontrolling interests offset by state and other income tax expense. See Note 1, Summary of Significant Accounting Policies, “Income Taxes,” for a discussion of the allocation of income or loss related to pass-through entities, which is referred to as the impact of noncontrolling interests in this discussion.
Deferred income taxes recognize the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes and the impact of available NOLs. The significant components of our deferred tax assets and liabilities are presented in the following table (in millions):
| As of December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred income tax assets: | |||||||||||
| Net operating loss | $ | 5.5 | $ | 8.8 | |||||||
| Insurance reserve | 21.2 | 20.9 | |||||||||
| Stock-based compensation | 22.2 | 24.0 | |||||||||
| Revenue reserves | 8.5 | 8.0 | |||||||||
| Operating lease liabilities | 21.3 | 22.5 | |||||||||
| Other accruals | 28.8 | 29.4 | |||||||||
| Tax credits | 19.5 | 17.0 | |||||||||
| Total deferred income tax assets | 127.0 | 130.6 | |||||||||
| Less: Valuation allowance | (21.4) | (21.0) | |||||||||
| Net deferred income tax assets | 105.6 | 109.6 | |||||||||
| Deferred income tax liabilities: | |||||||||||
| Intangibles | (66.4) | (63.4) | |||||||||
| Operating lease right-of-use assets | (20.5) | (21.1) | |||||||||
| Property, net | (27.1) | (18.8) | |||||||||
| Carrying value of partnerships | (117.9) | (111.2) | |||||||||
| Other | (0.5) | (0.3) | |||||||||
| Total deferred income tax liabilities | (232.4) | (214.8) | |||||||||
| Net deferred income tax liabilities | $ | (126.8) | $ | (105.2) | |||||||
We have state NOLs of $4.2 million that expire in various amounts at varying times through 2036. For the years ended December 31, 2025 and 2024, the net increase (decrease) in our valuation allowance was $0.4 million and $(7.4) million, respectively. The net increase in our valuation allowance in 2025 related primarily to utilization and expiration of state net operating losses, primarily offset by increases to foreign tax credits that we do not anticipate we will be able to utilize. The decrease in our valuation allowance in 2024 related primarily to the utilization and expiration of state NOLs.
As of December 31, 2025, we have a remaining valuation allowance of $21.4 million. This valuation allowance remains recorded primarily due to foreign tax credits generated by our operations in Puerto Rico. We determined it was necessary to maintain a valuation allowance on our foreign tax credits due to uncertainties related to our ability to utilize a portion of these credits before they expire. The amount of the valuation allowance has been determined based on the weight of all available evidence, as described above, including management’s estimates of taxable income over the periods in which the related deferred tax assets will be recoverable.
Our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. Interest recorded as part of our income tax provision during 2025, 2024, and 2023 was not material. Accrued interest income related to income taxes as of December 31, 2025 and 2024 was not material.
In December 2016, we signed an agreement with the IRS to participate in their Compliance Assurance Process (“CAP”) for the 2017 tax year and have renewed this agreement each year since. CAP is a program in which we and the IRS endeavor to agree on the treatment of significant tax positions prior to the filing of our federal income tax returns. In April 2025, the IRS issued a no change letter effectively closing our 2023 tax year audit. Thus, the statute of limitations has expired, or we have settled, federal income tax examinations with the IRS for all tax years through 2023.
The IRS offered, and we accepted, admission into the IRS Bridge Plus Pilot program (“CAP Bridge”) for the years 2024, 2025, and 2026. Under this program, we are required to provide additional documentation (including a draft return) to the IRS prior to filing our return. The IRS performs a risk assessment review of this documentation and provides recommendations to us. We then file our return and submit a post-filing representation that our return was filed consistent with the documentation provided and any IRS recommendations. After further review, the IRS then issues either a full or partial acceptance letter. We are currently under audit by the IRS under the CAP Bridge program for tax years 2024, 2025, and 2026. Our state income tax returns are also periodically examined by various regulatory taxing authorities; however, there are no current state audits at this time.
For the tax years that remain open under the applicable statutes of limitations, management considered potential unrecognized tax benefits and determined there are no material unrecognized tax benefits that would impact prior years’ income taxes.
Income taxes paid (net of refunds) consisted of the following (in millions):
| For the Year Ended December 31, 2025 | |||||
| Federal | $ | 91.8 | |||
| State and local | 29.1 | ||||
| Foreign | 3.1 | ||||
| Income taxes paid (net of refunds) | $ | 124.0 | |||
On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (“OBBBA”). The OBBBA contained a broad range of tax reform provisions affecting businesses. While tax changes in the OBBBA did not have a material impact on our effective tax rate, certain tax provisions in the OBBBA, namely the provision that permanently extended bonus depreciation for assets placed in service after January 19, 2025 and the provision allowing for immediate expensing of certain research and development costs, resulted in current deductions that yielded lower cash income tax for 2025. We currently estimate these provisions produced an additional approximately $84 million in current deductions resulting in approximately $22 million in cash tax savings in 2025. We continue to evaluate the tax and other provisions of the OBBBA and the potential effects on our financial position, results of operations, and cash flows.
Information prior to the adoption of ASU 2023-09—
As described in Note 1, Summary of Significant Accounting Policies, “Recent Accounting Pronouncements,” we elected to prospectively adopt the guidance in ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The information below is in accordance with the guidance prior to the adoption of ASU 2023-09.
The significant components of the Provision for income tax expense related to continuing operations are as follows (in millions):
| For the Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Current: | |||||||||||
| Federal | $ | 111.0 | $ | 101.7 | |||||||
| State and other | 28.5 | 26.6 | |||||||||
| Total current expense | 139.5 | 128.3 | |||||||||
| Deferred: | |||||||||||
| Federal | 8.6 | (0.7) | |||||||||
| State and other | 2.1 | 4.6 | |||||||||
| Total deferred expense | 10.7 | 3.9 | |||||||||
| Total income tax expense related to continuing operations | $ | 150.2 | $ | 132.2 | |||||||
A reconciliation of differences between the federal income tax at statutory rates and our actual income tax expense on our income from continuing operations, which include federal, state, and other income taxes, is presented below:
| For the Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Tax expense at statutory rate | 21.0 | % | 21.0 | % | |||||||
| Increase (decrease) in tax rate resulting from: | |||||||||||
| State and other income taxes, net of federal tax benefit | 3.9 | % | 4.1 | % | |||||||
| Increase in valuation allowance | — | % | 0.3 | % | |||||||
| Noncontrolling interests | (3.8) | % | (4.0) | % | |||||||
| Share-based windfall tax benefits | (1.0) | % | — | % | |||||||
| Other, net | (0.1) | % | 0.4 | % | |||||||
| Income tax expense | 20.0 | % | 21.8 | % | |||||||
The Provision for income tax expense in 2024 was less than the federal statutory rate primarily due to the impact of noncontrolling interests and share-based windfall tax benefits, offset by state and other income tax expense. The Provision for income tax expense in 2023 was greater than the federal statutory rate primarily due to state and other income tax expense and a gross increase in valuation allowance, offset by the impact of noncontrolling interests. See Note 1, Summary of Significant Accounting Policies, “Income Taxes,” for a discussion of the allocation of income or loss related to pass-through entities, which is referred to as the impact of noncontrolling interests in this discussion.
The amount of income tax payments and refunds are as follows (in millions):
| For the Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Income tax payments | $ | 164.5 | $ | 109.3 | |||||||
| Income tax refunds | 0.7 | 2.7 | |||||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 26, 2026 | Showing above |
| 2024 | Feb 28, 2025 | |
| 2023 | Feb 28, 2024 | |
| 2022 | Feb 27, 2023 | |
| 2021 | Feb 25, 2022 | |
| 2020 | Feb 26, 2021 | |
| 2019 | Feb 27, 2020 | |
| 2018 | Feb 27, 2019 | |
| 2017 | Feb 28, 2018 | |
| 2016 | Feb 22, 2017 | |
| 2015 | Feb 25, 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.