Energy Recovery, Inc.ERII
Energy Recovery, Inc. Income Taxes Disclosure
The following table presents the Company’s U.S. and foreign components of consolidated income before income taxes and the
As discussed in Note 1, “Description of Business and Significant Accounting Policies”, the Company has elected to prospectively
The following table presents the components of the Company’s net deferred tax asset, which is presented in other assets, non-current
Accounting for uncertain tax positions is based on judgment regarding the largest amount that is greater than 50% likely of being
provision for income taxes.
Years Ended December 31, | |||||
2025 | 2024 | 2023 | |||
(In thousands) | |||||
Income before income taxes: | |||||
U.S. | $27,423 | $25,608 | $22,592 | ||
Foreign | 172 | 127 | 113 | ||
Total income before income taxes | $27,595 | $25,735 | $22,705 | ||
Current tax provision: | |||||
Federal | $2,692 | $1,266 | $1,268 | ||
State | 17 | 24 | 13 | ||
Foreign | 156 | 106 | 51 | ||
Current tax provision | 2,865 | 1,396 | 1,332 | ||
Deferred tax provision (benefit): | |||||
Federal | 1,547 | 1,619 | (262) | ||
State | 221 | (330) | 131 | ||
Total deferred tax provision (benefit) | 1,768 | 1,289 | (131) | ||
Total provision for income taxes | $4,633 | $2,685 | $1,201 | ||
adopt the guidance in ASU 2023-09. The following table presents a reconciliation of income taxes computed at the statutory federal income
tax rate to the effective tax rate implied by the accompanying Consolidated Statements of Operations for the year ended December 31, 2025
in accordance with ASU 2023-09.
Amount | Percent | ||
U.S. federal taxes at statutory rate | $5,795 | 21% | |
State and local income tax, net of federal benefit1 | 243 | 1 | |
Foreign rate differential | 57 | — | |
Effect of cross-border tax laws | |||
Foreign derived intangible income | (1,853) | (7) | |
Tax credits | |||
Research & development tax credits | (331) | (1) | |
Changes in Valuation Allowances | |||
Nontaxable or Nondeductible Items | |||
Stock-based compensation shortfalls | 275 | 1 | |
Non-deductible compensation | 334 | 1 | |
Other | 114 | 1 | |
Changes in unrecognized tax benefits | (4) | — | |
Other | 3 | — | |
Provision for income taxes and effective tax rate | $4,633 | 17% |
1California makes up the majority of state tax expense in this category.
The following table presents a reconciliation of income taxes computed at the statutory federal income tax rate to the effective tax
rate implied by the accompanying Consolidated Statements of Operations for the years ended December 31, 2024 and December 31, 2023
in accordance with the guidance before the adoption of ASU 2023-09.
Years Ended December 31, | |||
2024 | 2023 | ||
U.S. federal taxes at statutory rate | 21% | 21% | |
Stock-based compensation | 2 | (1) | |
Non-deductible expenses | 1 | 1 | |
Research and Development Tax Credits | (4) | (6) | |
Valuation allowance | (2) | — | |
Foreign derived intangible income | (8) | (10) | |
Effective tax rate | 10% | 5% | |
on the Consolidated Balance Sheets.
December 31, | |||
2025 | 2024 | ||
(In thousands) | |||
Deferred tax assets: | |||
Net operating loss carry forwards | $496 | $496 | |
Amortization of research and experimental expenditures | 8,065 | 7,649 | |
Accruals and reserves | 3,314 | 4,549 | |
Operating lease liabilities | 2,067 | 2,474 | |
Research and development, and foreign tax credit carry forwards | 4,954 | 4,908 | |
Total deferred tax assets | 18,896 | 20,076 | |
Valuation allowance | (4,740) | (4,425) | |
Total deferred tax assets, net of valuation allowance | 14,156 | 15,651 | |
Deferred tax liabilities: | |||
Depreciation on property and equipment | (1,652) | (2,116) | |
Right of use asset | (1,679) | (2,110) | |
Other | (62) | (25) | |
Goodwill | (2,496) | (2,396) | |
Total deferred tax liabilities | (5,889) | (6,647) | |
Net deferred tax asset | $8,267 | $9,004 | |
Valuation Allowance
The following table presents the valuation allowance activities.
Years Ended December 31, | ||||||
2025 | 2024 | 2023 | ||||
(In thousands) | ||||||
Balance, beginning of year | $4,425 | $4,600 | $4,185 | |||
Changes to valuation allowance | 315 | (175) | 415 | |||
Balance, end of year | $4,740 | $4,425 | $4,600 | |||
In asserting the recoverability of deferred tax assets, the Company considers whether it is more likely than not that the assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.
The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated
to use the existing deferred tax assets. In making such a determination, the Company considers all available positive and negative evidence,
including recent results of operations, scheduled reversals of deferred tax liabilities, projected future income, tax law updates, and available
tax planning strategies. A significant piece of objective positive evidence evaluated was the cumulative profit incurred in the U.S.
On the basis of this evaluation, as of December 31, 2025, the Company continues to maintain a valuation allowance on its California
research and development (“R&D”) credit carryovers of $4.7 million. In tax year 2024 California amended its tax laws to suspend the use of
net operating loss carryovers of amounts over $1.0 million for the 2024 to 2026 tax years. As a result of this amendment, the Company
recognized a deferred tax asset of California R&D credit carryovers of $0.2 million as of December 31, 2025. The Company will maintain a
valuation allowance on its remaining California R&D credit carryovers because it is more likely than not that the Company will continue to
annually generate more California R&D tax credits than it utilizes, resulting in no net reduction of credits.
On July 4, 2025, the One Big Beautiful Bill Act (“OBBB”) was enacted by the U.S. federal government. The OBBB significantly
modified the income tax treatment of research and development costs, allows companies to elect 100% bonus deprecation on qualified
property as well as various aspects of foreign income, in each case as follows:
1) Research and Development Costs - The OBBB allows U.S. companies to elect to accelerate the deduction of the 2022 to 2024 year
capitalized domestic R&D costs or continue to amortize these capitalized R&D costs over the remaining tax lives. The Company has elected
to continue to amortize the capitalized domestic R&D costs over the remaining lives. In addition, the OBBB allows companies to expense
versus capitalize domestic R&D costs for tax purposes beginning with the 2025 year. Alternatively, companies can elect to continue to
capitalize domestic R&D costs. The Company will elect to continue to capitalize and amortize domestic R&D costs for U.S. federal income
tax purposes.
2) Bonus Depreciation – The OBBB allows U.S. companies to elect 100% bonus deprecation on qualified property acquired and placed in
service after January 19, 2025. This allows the Company to accelerate tax depreciation on qualified property.
3) Foreign Income and Global Intangible Low Taxed Income (“GILTI”) – The IRC Section 250 deduction on GILTI income was reduced from
50% to 40% for tax years beginning after December 31, 2025. In addition, the qualified business asset investment exemption was repealed.
It is expected that this law change will have an immaterial impact to the Company.
4) Foreign Income and Foreign Derived Deduction Eligible Income (“FDDEI” (formerly Foreign Derived Intangible Income (“FDII”))) - The
deduction was reduced from 37.5% of eligible income to 33.34% of eligible income for tax years beginning after December 31, 2025. In
addition, the 10% qualified business asset investment reduction has been eliminated for tax years beginning after December 31, 2025. We
expect that these changes will nominally raise the Company’s effective tax rate in future years.
The Company continues to assert that the accumulated foreign earnings of its subsidiaries in Spain and Canada are permanently
reinvested. Due to the U.S. Tax Cuts and Jobs Act (“Tax Act”) enacted in 2017, any future repatriation of the earnings of its subsidiaries in
Spain and Canada would not be subject to U.S. federal income tax. The Company has estimated that the foreign withholding taxes and U.S.
state income taxes related to a potential future repatriation of these earnings would be immaterial. The Company has evaluated the impact of
the global intangible low taxed income (“GILTI”) and has concluded that the impact to the Company is immaterial.
The following table presents the Company’s California net operating loss carryforward.Earliest Expiration Year | December 31, | ||||
2025 | 2024 | ||||
(In thousands) | |||||
California | 2034 | $6,822 | $6,822 | ||
Utilization of the California net operating loss carryforward may be subject to a substantial annual limitation due to the ownership
change limitations provided by the California Revenue and Taxation Code which could result in the expiration of the net operating loss
carryforward before utilization. As of December 31, 2025, there are no ownership change limits on the utilization of the California net
operating loss carryforward.
The following table presents the Company’s R&D credit by taxing authority, minimum tax credit and foreign tax credit carryforwards.Earliest Expiration Year | December 31, | ||||
2025 | 2024 | ||||
(In thousands) | |||||
California | No Expiration Date | 6,271 | 6,098 | ||
Utilization of the credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations
provided by the U.S. Internal Revenue Code (“IRC”) and similar California provisions. As of December 31, 2025, there are no ownership
change limits on the utilization of these net tax credit carryforwards.
The following table presents the net cash paid by the Company for income taxes during the year ended December 31, 2025.December 31, | ||
2025 | ||
(In thousands) | ||
Domestic | ||
Federal | $1,250 | |
States | 8 | |
Foreign | ||
Spain | 79 | |
China | 51 | |
Other | 10 | |
Total cash paid for taxes, net of refunds | $1,398 |
realized upon the ultimate settlement with a taxing authority. The following table presents the aggregate changes in the balance of the gross
unrecognized tax benefits.
Years Ended December 31, | |||||
2025 | 2024 | 2023 | |||
(In thousands) | |||||
Gross unrecognized tax benefits, beginning of year | $1,862 | $1,705 | $1,505 | ||
Additions: | |||||
Current year tax position | 87 | 170 | 184 | ||
Prior year tax position | 6 | — | 16 | ||
Reductions: | |||||
Settlement | (136) | — | — | ||
Prior year tax position | (9) | (13) | — | ||
Gross unrecognized tax benefits, end of year | $1,810 | $1,862 | $1,705 | ||
As of December 31, 2025, the Company had unrecognized tax benefits of $1.8 million, of which $1.0 million, if recognized, would
affect the Company’s effective tax rate.
The Company adopted the accounting policy that interest and penalties are classified as part of its income taxes. As of December 31,
2025, there was no accrued interest or penalties associated with any unrecognized tax benefits.
There are currently no examinations for U. S federal, state taxing authorities, and foreign tax authorities. The previously disclosed tax
examination has been concluded with no material impact to the consolidated financial statements. The Company believes that, as of
December 31, 2025, the gross unrecognized tax benefits will not materially change in the next twelve months. The Company believes that it
has adequately provided for any reasonably foreseeable outcomes related to any tax audits and that any settlement will not have a material
adverse effect on the consolidated financial position or results of operations. However, there can be no assurances as to the possible
outcomes.
The Organisation for Economic Cooperation and Development (“OECD”) developed Model Global Anti-Base Erosion (“GloBE”) rules
(commonly referred to as Pillar II) establishing a Global Minimum Tax to ensure multinational enterprises with consolidated revenue of more
than €750.0 million pay at least an effective tax rate of 15% on income arising in each jurisdiction in which they operate. Given the Company
does not meet the minimum threshold, there is no impact to our tax provision for fiscal year 2025. The Company will continue to evaluate the
impact of these tax law changes in future reporting periods.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 25, 2026 | Showing above |
| 2024 | Feb 26, 2025 | |
| 2023 | Feb 21, 2024 | |
| 2022 | Feb 22, 2023 | |
| 2021 | Feb 24, 2022 | |
| 2020 | Mar 12, 2021 | |
| 2019 | Mar 6, 2020 | |
| 2018 | Mar 7, 2019 | |
| 2017 | Mar 8, 2018 | |
| 2016 | Mar 10, 2017 | |
| 2015 | Mar 4, 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.