Freshpet, Inc.FRPT
Freshpet, Inc. Income Taxes Disclosure
Income Taxes:
A summary of income (loss) before income taxes as follows:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Domestic | $ | 71,745 | $ | 55,408 | $ | (27,200) | |||||||||||
| Foreign | (972) | (7,885) | (4,314) | ||||||||||||||
| Total income (loss) before income taxes | $ | 70,773 | $ | 47,523 | $ | (31,514) | |||||||||||
A summary of income tax (benefit) expense as follows:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | — | $ | — | $ | — | |||||||||||
| State | 436 | 598 | 210 | ||||||||||||||
| Foreign | — | — | — | ||||||||||||||
| Total Current | $ | 436 | $ | 598 | $ | 210 | |||||||||||
| Deferred: | |||||||||||||||||
| Federal | $ | (57,729) | $ | — | $ | — | |||||||||||
| State | (11,164) | — | — | ||||||||||||||
| Foreign | 93 | — | — | ||||||||||||||
| Total Deferred | $ | (68,800) | $ | — | $ | — | |||||||||||
| Total income tax (benefit) expense | $ | (68,364) | $ | 598 | $ | 210 | |||||||||||
The following table shows the principal reasons for the difference between the effective income tax rate and the statutory federal income tax rate:
| Year Ended December 31, | ||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | ||||||||||||||||||||||||
| Tax at federal statutory rate | $ | 14,859 | 21.0 | % | $ | 9,983 | 21.0 | % | $ | (6,989) | 21.0 | % | ||||||||||||||
Domestic federal | ||||||||||||||||||||||||||
| Change in valuation allowance: | ||||||||||||||||||||||||||
| Federal valuation allowance | (68,968) | (97.5) | % | (4,946) | (10.4) | % | 8,001 | (24.1) | % | |||||||||||||||||
| Nontaxable or nondeductible items: | ||||||||||||||||||||||||||
| Stock-based compensation expense - excess benefit | (1,812) | (2.5) | % | (8,775) | (18.5) | % | (2,327) | 7.0 | % | |||||||||||||||||
| Non-deductible compensation under IRC Section 162(m) | 656 | 0.9 | % | 1,619 | 3.4 | % | 86 | (0.2) | % | |||||||||||||||||
| Other | 351 | 0.5 | % | 372 | 0.8 | % | 325 | (1.0) | % | |||||||||||||||||
| Tax credits: | ||||||||||||||||||||||||||
| Research and development | (1,697) | (2.4) | % | — | — | % | — | — | % | |||||||||||||||||
| Other | (1,231) | (1.7) | % | 217 | 0.4 | % | 38 | (0.1) | % | |||||||||||||||||
State and local income tax, net of federal income tax effect (1) | (10,819) | (15.3) | % | 472 | 1.0 | % | 171 | (0.5) | % | |||||||||||||||||
| Foreign tax rate effects: | ||||||||||||||||||||||||||
| United Kingdom | 33 | — | % | 1,385 | 2.9 | % | 505 | (1.5) | % | |||||||||||||||||
| Other foreign | 264 | 0.4 | % | 271 | 0.6 | % | 400 | (1.2) | % | |||||||||||||||||
| Effective tax rate | $ | (68,364) | (96.6) | % | $ | 598 | 1.2 | % | $ | 210 | (0.6) | % | ||||||||||||||
(1) The states that contribute to the majority (greater than 50%) of the tax effect in this category include California, Pennsylvania, Illinois and Florida for 2025, California for 2024, and North Carolina, New York, Texas and Massachusetts for 2023.
The effective tax rate for December 31, 2025, differed from the U.S. federal statutory rate of 21% primarily due to the release of the valuation allowance, which significantly reduced the effective tax rate. The rate was further reduced by the excess tax benefit from stock-based compensation expense.
The effective tax rate for December 31, 2024 and 2023, differed from the U.S. federal statutory rate of 21% primarily due to the full valuation allowance in the prior year period.
The amounts of cash taxes paid by the Company are as follows:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Federal | $ | — | $ | — | $ | — | |||||||||||
State (2) | 910 | 193 | 308 | ||||||||||||||
| Foreign | — | — | — | ||||||||||||||
| Income taxes, net of amounts refunded | $ | 910 | $ | 193 | $ | 308 | |||||||||||
(2) The individual jurisdictions with cash taxes paid that equaled or exceeded 5% of total income taxes paid included California ($530), Pennsylvania ($125), Texas ($123) and Illinois ($75) for 2025. For 2024, such jurisdictions included Massachusetts ($30), New York ($45), North Carolina ($30), Oregon ($30), South Carolina ($15) and Tennessee ($15). For 2023, such jurisdictions included Massachusetts ($40), New York ($57), North Carolina ($79), South Carolina ($25), Tennessee ($25) and Texas ($25).
Deferred Income Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Federal net operating losses (NOLs) | $ | 82,140 | $ | 82,206 | $ | 88,265 | |||||||||||
| State NOLs | 15,840 | 15,939 | 12,699 | ||||||||||||||
| Foreign NOLs | 2,159 | 5,584 | 4,269 | ||||||||||||||
| Stock-based compensation expense | 25,269 | 34,368 | 23,643 | ||||||||||||||
| Property and equipment | (59,345) | (47,159) | (35,756) | ||||||||||||||
| Other | 5,335 | 7,555 | 5,536 | ||||||||||||||
| Gross deferred income tax assets | $ | 71,398 | $ | 98,493 | $ | 98,656 | |||||||||||
| Domestic valuation allowance | (858) | (92,952) | (94,448) | ||||||||||||||
| Foreign valuation allowance | (1,740) | (5,541) | (4,208) | ||||||||||||||
| Net deferred income tax assets | $ | 68,800 | $ | — | $ | — | |||||||||||
At December 31, 2024, the Company determined that a full valuation allowance against its $98.5 million of net deferred tax assets was appropriate. At December 31, 2025, the Company concluded that it was appropriate to release a majority of the valuation allowance against the $71.4 million of deferred tax assets recorded as of that date based on the weight of available evidence, which now supports the conclusion that it is more likely than not that the majority of deferred tax assets will be realized. Based on sustained profitability, including three-year cumulative income before taxes of $76.9 million, excluding the prior year gain on our equity investment, the significant deferred tax liabilities expected to reverse in future periods, and the projections of future taxable income sufficient to fully utilize the Company's federal and state NOLs, the positive evidence supporting the release of most of the valuation allowance outweighed the negative evidence supporting a full valuation allowance. As a result, we recognized a deferred income tax benefit of $68.8 million for the year ended December 31, 2025.
The Company continues to maintain a partial valuation allowance of $2.6 million against certain deferred tax assets, of which, $1.7 million relates to foreign NOLs. With the exception of operations in the United Kingdom, the Company's foreign subsidiaries have not yet generated sustained income. Accordingly, the Company believes it is prudent to maintain a full valuation allowance on these foreign NOLs because it is more likely than not that the related tax benefits will not be realized. The remaining $0.9 million valuation allowance relates to deferred tax assets associated with stock-based compensation, which are not expected to be realized due to anticipated limitations on future deductions, and a state tax credit that is expected to expire unused based on current projections.
Impact of the One Big Beautiful Bill Act ("OBBBA")
On July 4, 2025, the OBBBA was enacted. Among other changes, the OBBBA made permanent (i) 100% bonus depreciation on qualified fixed assets, (ii) the immediate deduction for domestic research and development expenses, and (iii) revisions to the limitation on the deductibility of business interest expense. The provisions of the OBBBA did not materially impact the Company's income tax provision during the year ended December 31, 2025, though the Company continues to evaluate the potential effects of the OBBBA on its consolidated financial statements.
Uncertain Tax Positions
Public entities are required to evaluate, measure, recognize and disclose uncertain tax positions. The Company has analyzed its tax positions and concluded that, as of December 31, 2025, it had no uncertain tax positions. Historically, the Company incurred U.S. federal and state net operating losses from its inception through 2023 and began generating taxable income in 2024. As such, tax years from inception onward remain subject to potential examination because the utilization of NOLs from earlier years opens those years to audit by federal and state taxing authorities. Interest and penalties, if any, related to uncertain tax positions are recorded within the income tax provision. The Company had no unrecognized tax benefits and has not accrued any interest or penalties for the years ended 2025, 2024 and 2023.
The Company also evaluated the impact of the disallowance of certain compensation deductions under Internal Revenue Code Section 162(m). This analysis resulted in the disallowance of $3.1 million of compensation expense, which increased the Company's effective tax rate.
Net Operating Loss Summary
At December 31, 2025, the Company had federal NOL carryforwards of $391.1 million. Of this amount, $146.5 million - generated in 2017 and prior years - will expire, if unused, between 2028 and 2037. The remaining $244.6 million, generated from 2018 through 2023, may be carried forward indefinitely but generally may only be used to offset up to 80% of taxable income in any given year.
The Company may be subject to the NOL utilization limitations of Section 382 of the Code. An ownership change would impose an annual limitation on the use of pre‑change NOLs. The amount of any such limitation depends on the Company’s value immediately before the ownership change, capital changes during a specified testing period, and the federal long‑term tax‑exempt rate. The Company has completed several Section 382 analyses in prior years that concluded that certain annual limitations apply.
At December 31, 2025, the Company also had $275.4 million of state NOLs that are scheduled to expire between 2026 and 2046, and $1.7 million of United Kingdom NOLs, which do not expire.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.