GAP INCGAP

GAP INC Income Taxes Disclosure

10-KFiled Mar 17, 20265 min read
Income Taxes
For financial reporting purposes, components of income before income taxes are as follows:
 Fiscal Year
($ in millions)202520242023
United States$982 $977 $463 
Foreign150 160 93 
Income before income taxes$1,132 $1,137 $556 
The tax expense for income taxes consists of the following:
 Fiscal Year
($ in millions)202520242023
Current:
Federal$167 $194 $63 
State38 29 12 
Foreign42 43 43 
Total current247 266 118 
Deferred:
Federal49 (1)(40)
State13 21 (6)
Foreign7 7 (18)
Total deferred69 27 (64)
Total tax expense$316 $293 $54 
For fiscal 2025, the difference between tax expense and income before taxes at the U.S. federal statutory tax rate, and between the effective tax rate and the U.S. federal statutory tax rate, is as follows:
 Fiscal Year
($ in millions)2025
Income before taxes at federal statutory tax rate$238 21.0 %
State and local income taxes, net of federal benefit (1)50 4.4 
Tax impact of foreign operations17 1.5 
Effect of cross-border tax laws:
U.S. tax on branch income or loss(13)(1.1)
Other(5)(0.4)
Tax credits:
Research and development credits(13)(1.1)
Other(2)(0.2)
Changes in valuation allowance16 1.4 
Nontaxable and nondeductible items:
Nondeductible compensation15 1.3 
Other(3)(0.3)
Changes in unrecognized tax benefits16 1.4 
Total tax expense and effective tax rate$316 27.9 %
__________
(1)State and local income taxes in New York, California, New Jersey, New York City, Illinois, Florida, and Pennsylvania make up the majority (greater than 50 percent) of the tax effect in this category.
In accordance with the guidance prior to the adoption of ASU No. 2023-09, the difference between the effective tax rate and the U.S. federal statutory tax rate for fiscal 2024 and 2023 is as follows:
 Fiscal Year
 20242023
Federal statutory tax rate21.0 %21.0 %
State and local income taxes, net of federal benefit4.4 2.5 
Tax impact of foreign operations(2.4)(0.7)
Valuation allowances3.5 (11.0)
Impact of divestiture activity— (1.6)
Other(0.7)(0.5)
Effective tax rate25.8 %9.7 %
During fiscal 2023, we recorded a $65 million benefit for changes in U.S. and foreign valuation allowances and a $32 million benefit related to a U.S. transfer pricing settlement related to our sourcing activities.
Total cash paid for income taxes, net of refunds, by jurisdiction for fiscal 2025 is as follows:
 Fiscal Year
($ in millions)2025
Cash paid for income taxes during the period, net of refunds:
Federal$163 
State55 
Foreign17 
Total cash paid during the period for income taxes, net of refunds$235 
Deferred tax assets (liabilities) consist of the following:
($ in millions)January 31,
2026		February 1,
2025
Gross deferred tax assets:
Operating lease liabilities$1,061 $1,037 
Accrued payroll and related benefits103 108 
Accruals187 177 
Inventory capitalization and other adjustments53 51 
Deferred income43 43 
Federal, state, and foreign net operating losses188 179 
Other64 49 
Total gross deferred tax assets1,699 1,644 
Valuation allowances(311)(261)
Total deferred tax assets, net of valuation allowances1,388 1,383 
Deferred tax liabilities:
Depreciation and amortization(159)(126)
Operating lease assets(883)(839)
Other(14)(18)
Total deferred tax liabilities(1,056)(983)
Net deferred tax assets$332 $400 
As of January 31, 2026, we had approximately $766 million of state and $603 million of foreign loss carryovers in multiple taxing jurisdictions that could be utilized to reduce tax liabilities of future years. We also had approximately $61 million of foreign tax credit carryovers as of January 31, 2026.
Approximately $628 million of state losses expire between fiscal 2026 and fiscal 2045, and $138 million of the state losses do not expire. Approximately $243 million of the foreign losses expire between fiscal 2026 and fiscal 2045, and $360 million of the foreign losses do not expire. The foreign tax credits begin to expire in fiscal 2029.
Valuation allowances are recorded if, based on the assessment of available evidence, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. Management must analyze all available positive and negative evidence regarding realization of the deferred tax assets and make an assessment of the likelihood of sufficient future taxable income. We have provided valuation allowances of $311 million on certain federal, state, and foreign deferred tax assets that were not deemed realizable based upon estimates of future taxable income.
On July 4, 2025, the One Big Beautiful Bill Act of 2025 (the “OBBBA”) was enacted in the United States. The Company included the impact of the OBBBA tax legislation in the second quarter of fiscal 2025, the period of enactment, and the impact was not material to the Consolidated Financial Statements.
The activity related to our unrecognized tax benefits is as follows: 
 Fiscal Year
($ in millions)202520242023
Balance at beginning of fiscal year$374 $343 $344 
Increases related to current year tax positions15 13 12 
Prior year tax positions:
Increases4 22 21 
Decreases(1)(1)(30)
Lapse of Statute of Limitations(1)(1)(1)
Cash settlements— (1)(3)
Foreign currency translation3 (1)— 
Balance at end of fiscal year$394 $374 $343 
Of the total unrecognized tax benefits as of January 31, 2026, February 1, 2025, and February 3, 2024, approximately $373 million, $354 million, and $325 million, respectively, represents the amount that, if recognized, would favorably affect the effective income tax rate in future periods.
During fiscal 2025, 2024, and 2023, net interest expense of $22 million, $17 million, and $4 million, respectively, has been recognized on the Consolidated Statements of Operations relating to income tax liabilities.
As of January 31, 2026 and February 1, 2025, the Company had total accrued interest related to income tax liabilities of $88 million and $66 million, respectively. There were no accrued penalties related to income tax liabilities as of January 31, 2026 or February 1, 2025.
The Company conducts business globally, and as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Canada, France, the United Kingdom, China, Hong Kong, Japan, and India. We are no longer subject to U.S. federal income tax examinations for fiscal years before 2009, and with few exceptions, we also are no longer subject to U.S. state, local, or non-U.S. income tax examinations for fiscal years before 2010.
The IRS has examined the Company’s federal income tax returns and has sought to disallow research credits for tax years 2009 through 2013. Having exhausted all administrative avenues, the Company filed a petition in U.S. Tax Court on December 20, 2024. The Company believes the research credits taken are appropriate and intends to defend its position. The gross amount of research credits at issue for tax years 2009 through 2013 is approximately $41 million.

Historical Timeline

Fiscal YearFiled
2026Mar 17, 2026Showing above
2025Mar 18, 2025
2024Mar 19, 2024
2023Mar 14, 2023
2022Mar 15, 2022
2021Mar 16, 2021

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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