Elanco Animal Health IncELAN
Elanco Animal Health Inc Income Taxes Disclosure
Note 15. Income Taxes
The composition of (loss) income before income tax expense for the years ended December 31, was as follows:
| 2025 | 2024 | 2023 | |||||||||||||||
| Federal | $ | 116 | $ | (376) | $ | (669) | |||||||||||
| Foreign | (340) | 864 | (526) | ||||||||||||||
| (Loss) income before income taxes | $ | (224) | $ | 488 | $ | (1,195) | |||||||||||
The composition of income tax expense for the years ended December 31, was as follows:
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 6 | $ | 5 | $ | (8) | |||||||||||
| Foreign | 132 | 274 | 122 | ||||||||||||||
| State | 4 | (17) | 2 | ||||||||||||||
| Total current tax expense | 142 | 262 | 116 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (4) | 1 | (3) | ||||||||||||||
| Foreign | (129) | (114) | (66) | ||||||||||||||
| State | (1) | 1 | (11) | ||||||||||||||
| Total deferred tax benefit | (134) | (112) | (80) | ||||||||||||||
| Income tax expense | $ | 8 | $ | 150 | $ | 36 | |||||||||||
We treat taxes due on future Net Controlled Foreign Corporation Tested Income (NCTI, formerly known as Global Intangible Low-Taxed Income, or GILTI) inclusions in U.S. taxable income as a current period expense when incurred. Certain countries in which we have operations have adopted legislation influenced by the Organization for Economic Co-operation and Development (OECD) Pillar Two rules, including a minimum tax rate of 15%. As of December 31, 2025, the U.S. has not yet enacted legislation to adopt the Pillar Two framework. We are continuing to evaluate additional guidance released by the OECD and the pending legislative adoption by additional individual countries. The adoption of Pillar Two was not material to income tax expense for the years ended December 31, 2025 and 2024.
We recognize deferred taxes for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Deferred taxes are not provided on substantially all of the unremitted earnings of subsidiaries outside of the U.S., except where required, because it is expected that these earnings will be reinvested indefinitely. Deferred taxes, including U.S. or foreign withholding taxes, would be provided when we no longer consider our subsidiary earnings to be permanently reinvested, although the determination of taxes that would be incurred upon the future remittance of such earnings is not practicable.
Significant components of our deferred tax assets and liabilities as of December 31, were as follows:
| 2025 | 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| Compensation and benefits | $ | 51 | $ | 42 | |||||||
| Accruals and reserves | 38 | 48 | |||||||||
| Tax credit carryovers | 45 | 43 | |||||||||
| Tax loss carryovers | 153 | 180 | |||||||||
| Business interest deduction limitation | 187 | 198 | |||||||||
| Inventories | 28 | 40 | |||||||||
| R&D capitalized assets | 74 | 78 | |||||||||
| Lease liabilities | 50 | 47 | |||||||||
| Other assets | 76 | 13 | |||||||||
| Total gross deferred tax assets | 702 | 689 | |||||||||
| Valuation allowances | (246) | (269) | |||||||||
| Total deferred tax assets | 456 | 420 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Right-of-use assets | (38) | (45) | |||||||||
| Intangibles | (664) | (700) | |||||||||
| Property and equipment | (62) | (62) | |||||||||
| Other liabilities | — | (6) | |||||||||
| Total deferred tax liabilities | (764) | (813) | |||||||||
| Deferred tax liabilities, net | $ | (308) | $ | (393) | |||||||
The deferred tax assets and related valuation allowance amounts for net operating losses and tax credits shown above have been adjusted for differences between prior provisional estimates and tax return filings.
At December 31, 2025, we had foreign tax credit carryovers of $6 million available to reduce future income taxes which will begin to expire in 2034 if unused. The U.S. federal credits totaled $23 million while state credits totaled $16 million. If unused, both the U.S. federal and state credits will begin to expire in 2029. The U.S. federal credits were subject to a partial valuation allowance and the state credits were subject to a full valuation allowance.
At December 31, 2025, we also had net operating loss carryovers for foreign, U.S. federal and state income tax purposes of $153 million. Of this total, $99 million will expire between 2026 and 2044, and $54 million of the carryovers had an indefinite carryforward period. Net operating losses and other carryovers for foreign, U.S. federal and state income tax purposes were subject to full and partial valuation allowances.
Movements in the valuation allowance for the years ended December 31, were as follows:
| 2025 | 2024 | 2023 | |||||||||||||||
| January 1 | $ | (269) | $ | (363) | $ | (228) | |||||||||||
| Increase | (2) | (2) | (141) | ||||||||||||||
| Release | 25 | 96 | 6 | ||||||||||||||
| December 31 | $ | (246) | $ | (269) | $ | (363) | |||||||||||
The net decreases in the valuation allowance recorded in income tax expense in 2025 and 2024 were $17 million and $77 million, respectively, while the net increase in the valuation allowance recorded in income tax expense in 2023 was $93 million. The remaining changes during these years were primarily recorded through accumulated other comprehensive loss. The decrease in the valuation allowance during 2024 was primarily attributable to the
sale of our aqua business, which generated U.S. federal taxable income, allowing us to realize certain net operating loss carryforwards and other tax attributes which were historically offset by a valuation allowance. The increase in the valuation allowance during 2023 was primarily attributable to the deemed likelihood of not realizing the benefit of U.S. federal and state deferred tax assets because of U.S. pre-tax losses.
A reconciliation of the U.S. federal statutory tax rate to our effective tax rate for the year ended December 31, 2025, is as follows:
| U.S. federal statutory income tax (benefit) expense and rate | $ | (47) | 21.0 | % | |||||||
State and local income tax, net of federal income tax effect (1) | 2 | (0.9) | % | ||||||||
| Foreign tax effects: | |||||||||||
| Germany | |||||||||||
| Change in enacted tax rate | (9) | 4.0 | % | ||||||||
| Other | 2 | (0.9) | % | ||||||||
| Switzerland | |||||||||||
| Statutory tax rate difference | 22 | (9.8) | % | ||||||||
| Other | (1) | 0.4 | % | ||||||||
| United Kingdom | |||||||||||
| Changes in valuation allowances | (8) | 3.6 | % | ||||||||
| Other | 2 | (0.9) | % | ||||||||
| Other foreign jurisdictions | 21 | (9.4) | % | ||||||||
| Effect of cross-border tax laws: | |||||||||||
U.S. tax on foreign earnings | 32 | (14.3) | % | ||||||||
| Other | 3 | (1.3) | % | ||||||||
| Changes in valuation allowances | (5) | 2.2 | % | ||||||||
| Nontaxable or nondeductible items: | |||||||||||
| Non-deductible employee compensation | 8 | (3.6) | % | ||||||||
| Other | 1 | (0.4) | % | ||||||||
| Changes in unrecognized tax benefits | 27 | (12.1) | % | ||||||||
| Other adjustments: | |||||||||||
| Worthless stock deduction | (31) | 13.8 | % | ||||||||
| Other | (11) | 5.1 | % | ||||||||
| Income tax expense and effective tax rate | $ | 8 | (3.5) | % | |||||||
(1)State taxes in California made up greater than 50% of the tax effect in this category.
The following is a reconciliation of the income tax expense applying the U.S. federal statutory tax rate to income (loss) before income taxes to reported income tax expense for the years ended December 31, 2024 and 2023:
| 2024 | 2023 | ||||||||||
| Income tax expense (benefit) at the U.S. federal statutory tax rate | $ | 102 | $ | (251) | |||||||
| Add (deduct): | |||||||||||
| Taxation of international operations | 98 | 3 | |||||||||
| State taxes | (21) | (12) | |||||||||
| Income tax credits | (11) | (10) | |||||||||
| Non-deductible employee compensation | 5 | 15 | |||||||||
| Divestitures and impairments of goodwill and other intangible assets | 38 | 164 | |||||||||
| Other permanent adjustments | 7 | 19 | |||||||||
| Change in uncertain tax positions | 9 | 15 | |||||||||
| Change in valuation allowance | (77) | 93 | |||||||||
| Income tax expense | $ | 150 | $ | 36 | |||||||
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for the years ended December 31, was as follows:
| 2025 | 2024 | 2023 | |||||||||||||||
| Beginning balance at January 1 | $ | 40 | $ | 31 | $ | 16 | |||||||||||
| Additions based on tax positions related to the current year | 37 | 7 | 2 | ||||||||||||||
| Changes for tax positions of prior years | (10) | 2 | 13 | ||||||||||||||
| Ending balance at December 31 | $ | 67 | $ | 40 | $ | 31 | |||||||||||
We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties related to income tax matters were not material for the years ended December 31, 2025, 2024 and 2023.
Net cash payments (refunds) of income taxes by jurisdiction for the year ended December 31, 2025, were as follows:
| 2025 | |||||
| Federal | $ | — | |||
| State | (5) | ||||
| Foreign: | |||||
| China | 12 | ||||
| Germany | 75 | ||||
| Netherlands | 14 | ||||
| Switzerland | 90 | ||||
| Other | 39 | ||||
| Total | $ | 225 | |||
Net cash payments of income taxes during the years ended December 31, 2024 and 2023, were $140 million and $95 million, respectively. The increase in cash paid for income taxes in 2025 was primarily driven by required tax payments associated with the taxable gain from the 2024 divestiture of our aqua business.
Income taxes receivable of $113 million and $121 million, respectively, were included in prepaid expenses and other on our consolidated balance sheets as of December 31, 2025 and 2024. Income taxes payable of $14 million and $127 million, respectively, were included within other current liabilities on our consolidated balance sheets as of December 31, 2025 and 2024.
On July 4, 2025, the One Big Beautiful Bill Act (Act) was enacted into law in the U.S. The Act includes significant provisions, including tax cut extensions and modifications to the U.S. and international tax frameworks. Based on our current analysis of these provisions, we do not believe these provisions will have a material impact on our consolidated financial statements, including our analysis of our U.S. valuation allowance position. Further, the Act did not have a material impact on our income tax expense during the year ended December 31, 2025.
We were included in Lilly's U.S. tax examinations by the Internal Revenue Service (IRS) through the full separation date of March 11, 2019. Pursuant to the tax matters agreement we executed with Lilly in connection with our initial public offering (IPO), the potential liabilities or potential refunds attributable to pre-IPO periods in which Elanco was included in a Lilly consolidated or combined tax return remain with Lilly. The U.S. examination by the IRS of tax years 2016 to 2018 began in 2019 and is ongoing. Final resolution of certain matters is dependent upon several factors, including the potential for formal administrative proceedings.Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 24, 2026 | Showing above |
| 2024 | Feb 25, 2025 | |
| 2023 | Feb 26, 2024 | |
| 2022 | Mar 1, 2023 | |
| 2021 | Feb 28, 2022 | |
| 2020 | Mar 1, 2021 | |
| 2019 | Feb 28, 2020 | |
| 2018 | Feb 20, 2019 | |
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.