Freshworks Inc.FRSH
Freshworks Inc. Income Taxes Disclosure
14. Income Taxes
We adopted ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, prospectively during the year ended December 31, 2025.
Our net income (loss) before provision for income taxes for the years ended December 31, 2025, 2024, and 2023 was as follows (in thousands):
Year Ended December 31, | ||||||||||||||||||||
2025 | 2024 | 2023 | ||||||||||||||||||
| Domestic | $ | 12,935 | $ | (130,763) | $ | (165,144) | ||||||||||||||
| Foreign | 40,347 | 39,926 | 41,375 | |||||||||||||||||
| Total | $ | 53,282 | $ | (90,837) | $ | (123,769) | ||||||||||||||
The components of the provision for income taxes for the years ended December 31, 2025, 2024, and 2023 were as follows (in thousands):
Year Ended December 31, | ||||||||||||||||||||
2025 | 2024 | 2023 | ||||||||||||||||||
| Current: | ||||||||||||||||||||
Federal | $ | 4,010 | $ | 2,897 | $ | 2,589 | ||||||||||||||
State | 1,051 | 484 | 221 | |||||||||||||||||
| Foreign | 13,599 | 13,792 | 12,179 | |||||||||||||||||
| Deferred: | ||||||||||||||||||||
Federal | (131,046) | (12,725) | — | |||||||||||||||||
State | (17,973) | (1,440) | — | |||||||||||||||||
| Foreign | (82) | 1,523 | (1,322) | |||||||||||||||||
| Total provision for income taxes | $ | (130,441) | $ | 4,531 | $ | 13,667 | ||||||||||||||
A reconciliation of provision for income taxes to the amount computed by applying the 21% statutory U.S. federal income tax rate to income before income taxes after the adoption of ASU 2023-09 is as follow:
Year Ended December 31, | |||||||||||
2025 | |||||||||||
Amount | Rate % | ||||||||||
| U.S Federal statutory tax rate | $ | 11,189 | 21.0 | % | |||||||
| United States | |||||||||||
State and local income taxes(1) | (14,365) | (27.0) | |||||||||
Foreign tax effects | |||||||||||
India | |||||||||||
Effect of rates different than statutory | 1,358 | 2.5 | |||||||||
Lease accounting | 660 | 1.2 | |||||||||
| Other | 1,066 | 2.0 | |||||||||
| United Kingdom | |||||||||||
| Other | (698) | (1.3) | |||||||||
| Brazil | |||||||||||
| Withholding tax | 563 | 1.1 | |||||||||
| Other foreign jurisdictions | 2,095 | 3.9 | |||||||||
| Effect of cross-border tax laws | |||||||||||
| Global intangible low-taxed income, net of credits | 3,021 | 5.7 | |||||||||
| Foreign-derived intangible income | (4,777) | (9.0) | |||||||||
Branch taxes | 6,640 | 12.5 | |||||||||
| Tax Credits | |||||||||||
| Foreign tax credits | (14,577) | (27.4) | |||||||||
| Research and development credits | (4,562) | (8.6) | |||||||||
Changes in valuation allowances | (137,367) | (257.8) | |||||||||
| Nontaxable or nondeductible items | |||||||||||
| Stock-based compensation | 11,020 | 20.7 | |||||||||
| Non-deductible expenses | 464 | 0.9 | |||||||||
| Foreign exchange loss | 1,075 | 2.0 | |||||||||
| Other Adjustments | 320 | 0.7 | |||||||||
| Changes in unrecognized tax benefits | 6,434 | 12.1 | |||||||||
| Total provision for income taxes | $ | (130,441) | (244.8) | % | |||||||
(1) Income taxes in California made up the majority (greater than 50 percent) of the state tax effect.
A reconciliation of the provision for income taxes to the amount computed by applying the 21% statutory U.S. federal income tax rate to income before income taxes for years prior to the adoption of ASU 2023-09 is as follows:
Year Ended December 31, | |||||||||||
2024 | 2023 | ||||||||||
Federal income tax | 21.0 | % | 21.0 | % | |||||||
| Stock-based compensation | (23.9) | (16.9) | |||||||||
| Change in valuation allowance | 4.3 | (6.4) | |||||||||
| Foreign tax rate differential | (4.9) | — | |||||||||
| Earnings from foreign subsidiaries | (2.1) | (1.8) | |||||||||
| Uncertain tax positions | (3.2) | (2.1) | |||||||||
| U.S. taxes on foreign operations | 3.5 | (4.8) | |||||||||
| Other items | 0.3 | — | |||||||||
Total provision for income taxes | (5.0) | % | (11.0) | % | |||||||
The components of our net deferred tax assets as of December 31, 2025 and 2024, were as follows (in thousands):
| December 31, | |||||||||||
2025 | 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| Net operating loss carryforwards | $ | 21,269 | $ | 58,907 | |||||||
| Foreign tax credit carryforwards | 21,488 | 8,489 | |||||||||
| Capitalized R&E under IRC 174 | 112,700 | 98,274 | |||||||||
| Stock-based compensation | 6,327 | 6,705 | |||||||||
Accruals and reserves | 24,344 | 9,965 | |||||||||
| Allowance for uncollectible accounts | 328 | 412 | |||||||||
| Operating lease liability | 11,605 | 9,518 | |||||||||
| Total deferred tax assets | 198,061 | 192,270 | |||||||||
| Less: valuation allowance | — | (151,738) | |||||||||
| Deferred tax assets, net of valuation allowance | 198,061 | 40,532 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Commissions | (7,764) | (6,102) | |||||||||
Depreciation and amortization | (14,903) | (17,159) | |||||||||
Federal tax effect of non-US branches | (7,119) | — | |||||||||
| Operating lease right-of-use assets | (10,809) | (8,772) | |||||||||
| Net deferred tax assets | $ | 157,466 | $ | 8,499 | |||||||
We monitor the realizability of our deferred tax assets taking into account all relevant factors at each reporting period. As of December 31,2025, based on the relevant weight of positive and negative evidence, including the implemented tax restructuring, we concluded that it is more likely than not that our U.S. federal and state deferred tax assets are realizable. As such, we released $151.7 million valuation allowance related to U.S. federal and state deferred tax assets during the year ended December 31, 2025. Our valuation allowance decreased by $3.1 million during the year ended December 31, 2024.
On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law, introducing significant changes to the U.S. tax code, including the immediate expensing of U.S. research and development costs, the immediate expensing of certain capital expenditures, and other tax code changes effective beginning in 2026.
Effective January 1, 2025, all non-U.S. earnings are not permanently reinvested.
Net Operating Loss and Credit Carryforwards
As of December 31, 2025, we have U.S. federal net operating loss (NOL) carryforwards of approximately $67.3 million. If not utilized, the federal NOL carryforwards will begin to expire in 2034. For the Federal NOL carryforwards arising in tax years beginning after December 31, 2017, the Tax Cuts Jobs Act of 2017 (TCJA) limits our ability to utilize carryforwards to 80% of taxable income; however, these NOLs may be carried forward indefinitely. We have foreign tax credit of $17.6 million, which will begin to expire in 2028 if not utilized. We also have research and development credits of $4.6 million, which will begin to expire in 2041 if not utilized.
As of December 31, 2025, the NOL carryforwards for all the states in the United States is $112.0 million, of which $110.3 million will begin to expire in 2026, and $1.7 million will be carried forward indefinitely.
Utilization of the NOL carryforwards may be subject to a substantial annual limitation due to the ownership change provisions of IRC Section 382 and similar state provisions. The annual limitation may result in the expiration of NOL carryforwards before utilization. We continually monitors the impact to net operating losses of any ownership changes.
Income Taxes Paid
The following presents cash paid for income taxes, net of refunds by jurisdiction for the year ended December 31, 2025 (in thousands):
Year Ended December 31, | |||||
2025 | |||||
U.S. Federal | $ | — | |||
U.S. State | 695 | ||||
Foreign | |||||
India | 11,889 | ||||
Other foreign jurisdictions | 1,800 | ||||
Total cash paid for taxes, net of refunds | $ | 14,384 | |||
For the years ended December 31, 2024 and 2023, cash paid for taxes, net of refunds was $11.9 million and $12.0 million, respectively.
Unrecognized Tax Benefits
We recognize financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount we recorded is the largest benefit that has no likelihood of being realized upon ultimate settlement with the relevant tax authority. As of December 31, 2025 and 2024, we had gross unrecognized tax benefits of $13.3 million and $8.1 million, respectively, all of which would affect the effective tax rate.
The following table presents a reconciliation of the beginning and ending amount of the unrecognized tax benefits (in thousands):
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Unrecognized gross tax benefits at the beginning of the period | $ | 8,144 | $ | 5,634 | |||||||
| Increases related to prior year tax positions | 2,612 | 449 | |||||||||
| Decreases related to prior year tax positions | (512) | — | |||||||||
| Increases in current year unrecognized benefits | 3,071 | 2,061 | |||||||||
| Unrecognized gross tax benefits at the end of the period | $ | 13,315 | $ | 8,144 | |||||||
We recognize interest and penalties related to income tax matters as a component of income tax expense. Accrued interest of $3.2 million and $2.2 million has been recorded as of December 31, 2025 and 2024, respectively.
Our major tax jurisdictions are India and the United States and we also file income tax returns in various U.S. states and foreign jurisdictions. Carryover attributes beginning December 31, 2008, remain open to adjustment by the U.S. federal and state authorities. The U.S. federal, state, and foreign jurisdictions have statutes of limitations that generally range from three to five years. Due to our net losses, substantially all of our U. S. federal and state income tax returns are subject to examination
since inception. We are under examination in India and have appealed our case to the appeals court. As of December 31, 2025, we are waiting the results of the appeal. We believe that we have provided adequate reserves for our income tax uncertainties in all open tax years. As the outcome of our tax audits are resolved in a manner inconsistent with management's expectations, we could adjust our provision for income taxes in the future.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 26, 2026 | Showing above |
| 2024 | Feb 20, 2025 | |
| 2023 | Feb 16, 2024 | |
| 2022 | Feb 23, 2023 | |
| 2021 | Feb 23, 2022 | |
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.