FEDERATED HERMES, INC.FHI

FEDERATED HERMES, INC. Income Taxes Disclosure

10-KFiled Feb 27, 20265 min read
Income Taxes
Income Tax Provision consisted of the following expense/(benefit) components for the years ended December 31:
(in thousands)202520242023
Current:
Federal $105,825$112,218$91,194
State 16,34915,41911,645
Foreign488477(540)
Total Current122,662128,114102,299
Deferred:
Federal12,638(4,760)3,686
State(448)(446)(185)
Foreign(1,421)(9,729)751
Total Deferred$10,769$(14,935)$4,252
    Total$133,431$113,179$106,551
The components of income before income taxes consisted of the following for the years ended December 31:
(in thousands)202520242023
U.S.$575,627$502,997$449,420
Non-U.S.(28,101)(121,388)(38,088)
Income Before Income Taxes$547,526$381,609$411,332
The reconciliation between income tax expense/(benefit) and the statutory income tax rate consisted of the following for the years ended December 31: 
(dollars in thousands)202520242023
Amount PercentAmountPercentAmountPercent
U.S. Federal Statutory Tax Rate$114,980 21.0 %$80,138 21.0 %$86,380 21.0 %
State and Local Income Taxes, Net of Federal Income Tax Effect 1
12,836 2.4 11,814 3.1 9,491 2.3 
Foreign Tax Effects
U.K.
Statutory tax rate difference between U.K. & U.S.(1,194)(0.2)(4,851)(1.3)(1,391)(0.3)
Other Nontaxable or Nondeductible Items(1,454)(0.3)1,746 0.5 2,969 0.7 
Nontaxable dividend income(4,378)(0.8)(8,051)(2.1)(1,248)(0.3)
Net Valuation Allowance12,021 2.2 26,550 7.0 7,731 1.9 
Other Foreign Jurisdictions(26)0.0 846 0.2 147 0.0 
Effects of Cross-Border Tax Laws
Subpart F and Foreign-Derived Deduction Eligible Income1,724 0.3 2,100 0.6 1,282 0.3 
Tax Credits
Research & Development Tax Credit(1,986)(0.4)0 0.0 0 0.0 
Nontaxable or Nondeductible Items
Executive Compensation Disallowance4,596 0.9 4,256 1.1 3,920 1.0 
Other(1,698)(0.3)(1,410)(0.4)(1,055)(0.3)
Changes in Unrecognized Tax Benefits636 0.1 14 0.0 (432)(0.1)
Other Adjustments(2,626)(0.5)27 0.0 (1,243)(0.3)
Effective Tax Rate$133,431 24.4 %$113,179 29.7 %$106,551 25.9 %
1     State taxes in New York and local tax in New York City made up the majority (greater than 50 percent) of the tax effect in this category in 2025 and 2024 and New York, New York City and California in 2023.
The effective tax rate for 2025 decreased to 24.4% as compared to the effective tax rate for 2024 of 29.7% primarily due to the impact in 2024 of a valuation allowance on foreign deferred tax assets and the impairment of an indefinite-lived intangible asset.
Income taxes paid (net of refunds) consisted of the following for the years ended December 31: 
(in thousands)202520242023
Federal $109,200$110,400$93,300
State 15,34715,21314,107
Foreign95209626
Total Taxes Paid$124,642$125,822$108,033
U.S. is the only jurisdiction which exceeds the quantitative threshold of 5% of the total income taxes paid (net of refunds received).
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities consisted of the following at December 31:
(in thousands)20252024
Deferred Tax Assets
Tax Net Operating Loss Carryforwards$118,304 $110,704 
Lease Liability26,006 27,480 
Compensation and Related22,742 15,272 
Other2,255 10,826 
Total Deferred Tax Assets169,307 164,282 
Valuation Allowance(108,519)(100,214)
Total Deferred Tax Asset, net of Valuation Allowance$60,788 $64,068 
Deferred Tax Liabilities
Intangible Assets$208,281 $204,885 
Right-of-Use Asset23,885 25,651 
Other12,164 4,489 
Total Gross Deferred Tax Liability$244,330 $235,025 
Net Deferred Tax Liability$183,542 $170,957 
At December 31, 2025, Federated Hermes had deferred tax assets related to state and foreign tax net operating loss carryforwards in certain taxing jurisdictions in the aggregate of $118.3 million. The state net operating losses will expire through 2045, while most foreign net operating losses do not expire. A valuation allowance has been recognized for $30.1 million (or 99.8%) of the deferred tax asset for state tax net operating losses, and for $78.4 million (or 89.0%) of the deferred tax asset for foreign tax net operating losses. The valuation allowances were recorded due to management’s belief that it is more likely than not that Federated Hermes will not realize the full benefit of these net operating losses. For the deferred tax asset, net of valuation allowance related to foreign net operating losses, management has relied on future reversals of temporary taxable differences to support the realizable portion of the deferred tax asset.
At December 31, 2024, Federated Hermes had deferred tax assets related to state and foreign tax net operating loss carryforwards in certain taxing jurisdictions in the aggregate of $110.7 million. The state net operating losses will expire through 2044, while most foreign net operating losses do not expire. A valuation allowance has been recognized for $38.3 million (or 99.6%) of the deferred tax asset for state tax net operating losses, and for $62.0 million (or 85.7%) of the deferred tax asset for foreign tax net operating losses. The valuation allowances were recorded due to management’s belief that it is more likely than not that Federated Hermes will not realize the full benefit of these net operating losses. For the deferred tax asset, net of valuation allowance related to foreign net operating losses, management has relied on future reversals of temporary taxable differences to support the realizable portion of the deferred tax asset.
Federated Hermes’ remaining deferred tax assets as of December 31, 2025 and 2024 primarily related to lease liabilities reported pursuant to ASC 842 and U.S. compensation and related expenses that have been recognized for book purposes but are not yet deductible for tax purposes. Management believes that it is more likely than not that Federated Hermes will receive the
full benefit of these deferred tax assets due to the expectation that Federated Hermes will generate taxable income greater than these amounts in the years they become deductible.
Federated Hermes and its subsidiaries file annual income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and in certain foreign jurisdictions. Federated Hermes’ U.S. federal tax returns for tax years 2022 to 2025 remain open to examination, while filings in its major state tax jurisdictions from tax years 2021 to 2025 generally remain open to examination.
Federated Hermes’ balance of unrecognized tax benefits, excluding interest and penalties, at December 31, 2025, 2024 and 2023 was $1.6 million, $1.0 million and $0.9 million, respectively.

Historical Timeline

Fiscal YearFiled
2025Feb 27, 2026Showing above
2024Feb 28, 2025
2023Feb 23, 2024
2022Feb 24, 2023
2021Feb 25, 2022
2020Feb 26, 2021
2019Feb 21, 2020
2018Feb 22, 2019
2017Feb 23, 2018
2016Feb 24, 2017
2015Feb 22, 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.

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