Guidewire Software, Inc.GWRE
Guidewire Software, Inc. Income Taxes Disclosure
Income Taxes
The Company recognized an income tax benefit of $20.4 million for the fiscal year ended July 31, 2025 compared to an income tax benefit of $20.7 million for the fiscal year ended July 31, 2024. The Company’s fiscal year 2025 income tax benefit was similar to the fiscal year 2024 income tax benefit even though the Company generated more pre-tax income due to an increase in deductions from stock-based compensation, the foreign derived intangible income deduction, change in valuation allowance, and an increase in research and development tax credits, partially offset by non-deductible debt retirement expense and non-deductible executive compensation.
The effective tax rate differs from the statutory U.S. Federal income tax rate of 21% mainly due to the debt retirement expense which is non-deductible for tax purposes and other permanent differences for stock-based compensation including excess tax benefits, research and development credits, foreign earnings taxed in the United States, the foreign derived intangible income deduction, and certain non-deductible expenses, including executive compensation limitation.
The Company’s income (loss) before provision for (benefit from) income taxes is as follows (in thousands):
| Fiscal years ended July 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Domestic | $ | 24,752 | $ | (44,280) | $ | (150,628) | |||||||||||
| International | 24,643 | 17,442 | 16,534 | ||||||||||||||
| Income (loss) before provision for (benefit from) income taxes | $ | 49,395 | $ | (26,838) | $ | (134,094) | |||||||||||
The provision for (benefit from) income taxes consisted of the following (in thousands):
| Fiscal years ended July 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| U.S. Federal | $ | 2,050 | $ | 738 | $ | 555 | |||||||||||
| State | 2,567 | 1,710 | 564 | ||||||||||||||
| Foreign | 4,656 | 3,563 | 3,904 | ||||||||||||||
| Total current | 9,273 | 6,011 | 5,023 | ||||||||||||||
| Deferred: | |||||||||||||||||
| U.S. Federal | (26,188) | (22,856) | (23,372) | ||||||||||||||
| State | (3,729) | (3,396) | (3,808) | ||||||||||||||
| Foreign | 235 | (494) | (82) | ||||||||||||||
| Total deferred | (29,682) | (26,746) | (27,262) | ||||||||||||||
| Total provision for (benefit from) income taxes | $ | (20,409) | $ | (20,735) | $ | (22,239) | |||||||||||
Differences between income taxes calculated using the statutory federal income tax rate of 21% and the provision for income taxes are as follows (in thousands):
| Fiscal years ended July 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Statutory federal income tax | $ | 10,375 | $ | (5,634) | $ | (28,159) | |||||||||||
| State taxes, net of federal benefit | (1,200) | (1,702) | (3,253) | ||||||||||||||
| Stock-based compensation | (28,474) | (4,415) | 9,902 | ||||||||||||||
| Non-deductible officers' compensation | 10,882 | 4,996 | 2,783 | ||||||||||||||
| Foreign income taxed at different rates | (2,023) | (960) | (55) | ||||||||||||||
| Research tax credits | (14,884) | (12,067) | (7,817) | ||||||||||||||
| Base erosion and anti-abuse tax | 3 | (3,091) | (935) | ||||||||||||||
| Foreign earnings taxed in the U.S. | 3,366 | 2,390 | 2,199 | ||||||||||||||
| Non-deductible acquisition costs | — | 30 | 617 | ||||||||||||||
| Permanent differences and others | 1,434 | 1,254 | 1,576 | ||||||||||||||
| Change in valuation allowance | (5,682) | 491 | 903 | ||||||||||||||
Foreign derived intangible income | (5,429) | (2,027) | — | ||||||||||||||
Debt retirement expense | 11,223 | — | — | ||||||||||||||
| Total provision for (benefit from) income taxes | $ | (20,409) | $ | (20,735) | $ | (22,239) | |||||||||||
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities are as follows (in thousands):
| As of July 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Accruals and reserves | $ | 26,083 | $ | 27,636 | |||||||
| Stock-based compensation | 10,174 | 9,077 | |||||||||
| Deferred revenue | 1,284 | 711 | |||||||||
| Capitalized research and development | 168,266 | 110,502 | |||||||||
| Property and equipment | 398 | — | |||||||||
| Lease liabilities | 8,612 | 9,908 | |||||||||
| Convertible debt | 12,086 | 919 | |||||||||
| Net operating loss carryforwards | 19,385 | 49,864 | |||||||||
| Tax credits | 158,257 | 145,934 | |||||||||
| Total deferred tax assets | 404,545 | 354,551 | |||||||||
| Less valuation allowance | 66,295 | 65,791 | |||||||||
| Net deferred tax assets | 338,250 | 288,760 | |||||||||
| Less deferred tax liabilities: | |||||||||||
| Intangible assets | 16,859 | 12,682 | |||||||||
| Operating lease assets | 7,782 | 9,130 | |||||||||
| Property and equipment | — | 184 | |||||||||
| Unremitted foreign earnings | 1,759 | 851 | |||||||||
| Capitalized commissions | 18,831 | 15,022 | |||||||||
| Total deferred tax liabilities | 45,231 | 37,869 | |||||||||
| Total net deferred tax assets | $ | 293,019 | $ | 250,891 | |||||||
The Company considered both positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, differences between prior book and tax profits/losses, and results of future operations, and determined that a valuation allowance was not required for a significant portion of its deferred tax assets. A valuation allowance of $66.3 million and $65.8 million remained as of July 31, 2025 and 2024, respectively, primarily related to California, U.S. Federal, and Canada deferred tax assets. The increase of $0.5 million in the valuation allowance in the current fiscal year relates primarily to net operating losses and income tax credits in certain tax jurisdictions for which no tax benefit is expected to be recognized, offset by a release of valuation allowances on foreign tax credits.
As of July 31, 2025, the Company had U.S. Federal, California, and other states net operating loss (“NOL”) carryforwards of $15.7 million, $50.2 million and $145.2 million, respectively. The U.S. Federal and California NOL carryforwards will start to expire in 2032 and 2034, respectively. The NOL carryforwards in other states will primarily start to expire in various years between 2026 and 2034.
As of July 31, 2025, the Company had research and development tax credit (“R&D credit”) carryforwards of the following (in thousands):
| U.S. Federal | $ | 98,595 | ||||||
| California | 71,173 | |||||||
| Total R&D credit carryforwards | $ | 169,768 | ||||||
U.S. Federal R&D credit carryforwards available at July 31, 2025 will expire starting in 2027. California R&D tax credits do not expire.
Federal and California laws impose restrictions on the utilization of NOL carryforwards and R&D credit carryforwards in the event of a change in ownership of the Company, as defined by Internal Revenue Code 382 and 383. The Company experienced an ownership change in the past that does not materially impact the availability of its carryforwards. However, should there be an ownership change in the future, the Company’s ability to utilize existing carryforwards could be substantially restricted.
As of July 31, 2025, the Company has recorded a provisional estimate for foreign withholding taxes on undistributed earnings from foreign subsidiaries of $1.8 million. The Company may repatriate foreign earnings in the future to the extent that the repatriation is not restricted by local laws or there are no substantial incremental costs associated with such repatriation.
In the United States, on July 4, 2025, H.R. 1 was signed into law. Among other provisions, the legislation reinstates immediate expensing for domestic research and experimental expenditures, extends 100% bonus depreciation for qualified property placed in service beginning January 20, 2025, and makes certain other provisions of the Tax Cuts and Jobs Act permanent. The Company is evaluating the impact of the provisions of this legislation that are effective subsequent to fiscal year 2025 and will reflect its impact in its financial statements in the periods in which they are effective.
Unrecognized Tax Benefits
Activity related to unrecognized tax benefits is as follows (in thousands):
| Fiscal years ended July 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Unrecognized tax benefits - beginning of period | $ | 21,520 | $ | 20,518 | $ | 18,786 | |||||||||||
| Gross increases - prior period tax positions | 2 | 231 | 1 | ||||||||||||||
| Gross decreases - prior period tax positions | (134) | (2,664) | (982) | ||||||||||||||
| Gross increases - current period tax positions | 4,352 | 3,435 | 2,713 | ||||||||||||||
| Unrecognized tax benefits - end of period | $ | 25,740 | $ | 21,520 | $ | 20,518 | |||||||||||
During the year ended July 31, 2025, the Company’s unrecognized tax benefits increased by $4.2 million. As of July 31, 2025, the Company had unrecognized tax benefits of $16.4 million that, if recognized, would affect the Company’s effective tax rate. The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense in its consolidated statements of operations. As of July 31, 2025, the total interest and penalties related to unrecognized tax benefits was not material.
The Company, or one of its subsidiaries, files income taxes in the U.S. Federal jurisdiction and various state and foreign jurisdictions. If the Company utilizes NOL carryforwards or tax credits in future years, the U.S. Federal, state and local, and non-U.S. tax authorities may examine the tax returns covering the period in which the net operating losses and tax credits arose. As a result, the Company’s tax returns in the U.S. and California remain open to examination from fiscal years 2002 through 2025.
The Organization for Economic Co-operation and Development has implemented a framework for a global minimum corporate tax of 15% applied on a country-by-country basis for companies with global revenues and profits above certain thresholds (referred to as Pillar 2). Pillar 2 provisions did not have a material impact on the Company’s financial statements for any of the years presented.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Sep 11, 2025 | Showing above |
| 2024 | Sep 16, 2024 | |
| 2023 | Sep 18, 2023 | |
| 2022 | Sep 26, 2022 | |
| 2021 | Sep 24, 2021 | |
| 2020 | Sep 28, 2020 | |
| 2019 | Sep 30, 2019 | |
| 2018 | Sep 19, 2018 | |
| 2017 | Sep 20, 2017 | |
| 2016 | Sep 15, 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.