Hagerty, Inc.HGTY
Hagerty, Inc. Income Taxes Disclosure
23 — Taxation
The Company's U.S. federal and state income tax expense relates to its wholly owned U.S. corporate subsidiaries, which are separately taxed as corporations for U.S. federal and state income tax purposes, and Hagerty, Inc.'s allocable share of any taxable income from THG. The Company also owns foreign subsidiaries that file and pay income taxes in their local jurisdictions.
THG is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, THG is not subject to U.S. federal and certain state and local taxes. Any taxable income or loss generated by THG is passed through to and included in the taxable income or loss of its partners, including Hagerty, Inc., on a pro-rata basis.
In addition, Hagerty Re, a Bermuda corporation, made an irrevocable election under Section 953(d) of the IRC, as amended, to be taxed as a U.S. domestic corporation. As a result, Hagerty Re is subject to U.S. taxation on its world-wide income as if it were a U.S. corporation. In accordance with an agreement between Hagerty Re and the Internal Revenue Service ("IRS"), Hagerty Re established an irrevocable letter of credit with the IRS in 2021.
Tax Legislation — On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was enacted. The law contains several key provisions including the reinstatement of immediate expensing of qualifying research and development expenses and permanent extensions of certain provisions within the Tax Cuts and Jobs Act. The immediate expensing provisions of the OBBBA reduced the Company's cash taxes payable by $0.5 million for the 2025 tax year. Additionally, the OBBBA enacted changes to the entity aggregation rule, which ensures that all related companies within a corporate group are treated as one single entity when applying the limitations on deductibility of executive compensation. These changes resulted in a $1.1 million reduction to Company's deferred tax assets related to share-based compensation and the recording of a corresponding income tax expense in 2025.
The Organisation for Economic Co-operation and Development has a framework to implement a global minimum corporate tax rate of 15% for companies with global revenues and profits above certain thresholds (referred to as "Pillar 2"). Certain aspects of Pillar 2 became effective on January 1, 2024 and other aspects became effective on January 1, 2025. The U.S. has not enacted legislation to adopt Pillar 2; however, certain countries in which the Company operates have adopted such legislation. While the Company's effective income tax rate and cash income tax payments could increase in future years as a result of the global minimum tax, management does not expect a material impact to the Company's effective tax rate or its results of operations. This assessment could be affected by legislative guidance and the future enactment of additional provisions within the Pillar 2 framework.
Income Tax Expense — For the years ended December 31, 2025, 2024, and 2023, income before taxes includes the following components:
| Year ended December 31, | ||||||||||||||||||||
| 2025 | 2024 | 2023 | ||||||||||||||||||
| in thousands | ||||||||||||||||||||
| United States | $ | 24,050 | $ | 108,589 | $ | 62,030 | ||||||||||||||
Foreign (1) | 115,132 | (14,907) | (17,258) | |||||||||||||||||
| Total | $ | 139,182 | $ | 93,682 | $ | 44,772 | ||||||||||||||
(1) The Company adopted ASU 2023-09 on a prospective basis, and as a result, for year ended December 31, 2025, foreign income is presented based on the country of domicile which results in Hagerty Re's income before taxes included in the Foreign jurisdiction. For the years ended December 31, 2024 and 2023, Hagerty Re's income was included in the United States based on country of tax jurisdiction.
For the years ended December 31, 2025, 2024, and 2023, income tax (benefit) expense consists of the following components:
| Year ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| in thousands | |||||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 23,786 | $ | 12,075 | $ | 13,664 | |||||||||||
| State | 377 | 368 | 8 | ||||||||||||||
| Foreign | 297 | 7 | — | ||||||||||||||
| $ | 24,460 | $ | 12,450 | $ | 13,672 | ||||||||||||
| Deferred: | |||||||||||||||||
| Federal | $ | (30,586) | $ | 2,846 | $ | 2,899 | |||||||||||
| State | (3,917) | 83 | 22 | ||||||||||||||
| Foreign | — | — | — | ||||||||||||||
| $ | (34,503) | $ | 2,929 | $ | 2,921 | ||||||||||||
| Total | $ | (10,043) | $ | 15,379 | $ | 16,593 | |||||||||||
Beginning with the year ended December 31, 2025, the Company has adopted ASU 2023-09 and, as a result, the reconciliation of income tax expense has been updated on a prospective basis. For the year ended December 31, 2025, the income tax benefit reflected in the Consolidated Statements of Operations differs from the tax computed by applying the statutory U.S. federal rate of 21% to "Income tax benefit (expense)" as follows:
| Year ended December 31, 2025 | ||||||||||||||
| in thousands (except percentages) | ||||||||||||||
| Income tax expense at U.S. federal statutory rate | $ | 29,228 | 21.0 | % | ||||||||||
State and local income taxes, net of federal income tax effect (1) | (5,098) | (3.7) | % | |||||||||||
| Tax credits | (588) | (0.4) | % | |||||||||||
| Nontaxable and nondeductible items: | ||||||||||||||
| Net impact of noncontrolling interest and non-partnership operations on partnership outside basis | (2,424) | (1.7) | % | |||||||||||
| Other | 404 | 0.3 | % | |||||||||||
| Effect of cross-border tax laws: | ||||||||||||||
| U.S. tax on foreign insurance income | 27,087 | 19.5 | % | |||||||||||
| Other | 40 | — | % | |||||||||||
| Foreign branch income | (2,136) | (1.5) | % | |||||||||||
| Changes in valuation allowance | (33,280) | (23.9) | % | |||||||||||
| Changes in unrecognized tax benefits | 123 | 0.1 | % | |||||||||||
| Effect of changes in tax laws or rates enacted in the current period | 1,109 | 0.8 | % | |||||||||||
| Other | (628) | (0.5) | % | |||||||||||
| Foreign tax effects: | ||||||||||||||
| Bermuda: | ||||||||||||||
| Statutory tax exemption | (27,087) | (19.5) | % | |||||||||||
| Canada | 1,670 | 1.2 | % | |||||||||||
| U.K.: | ||||||||||||||
| Valuation allowance | 1,931 | 1.4 | % | |||||||||||
| Other | (832) | (0.6) | % | |||||||||||
| Other foreign jurisdictions | 438 | 0.3 | % | |||||||||||
| Income tax benefit | $ | (10,043) | (7.2) | % | ||||||||||
(1) California, New York, Florida, Pennsylvania, and Michigan represent the majority of the tax effect in this category.
For the years ended December 31, 2024 and 2023, income tax expense reflected in the Consolidated Statements of Operations differs from the tax computed by applying the statutory U.S. federal rate of 21% to "Income tax benefit (expense)" as follows:
| Year ended December 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| in thousands (except percentages) | |||||||||||||||||||||||
| Income tax expense at U.S. federal statutory rate | $ | 19,673 | 21.0 | % | $ | 9,402 | 21.0 | % | |||||||||||||||
| State taxes | 659 | 0.7 | % | (232) | (0.5) | % | |||||||||||||||||
| Net impact of noncontrolling interest and non-partnership operations on partnership outside basis | (8,759) | (9.3) | % | 5,000 | 11.2 | % | |||||||||||||||||
| Foreign rate differential | 2,407 | 2.6 | % | (529) | (1.2) | % | |||||||||||||||||
| Change in valuation allowance | 3,485 | 3.7 | % | 393 | 0.9 | % | |||||||||||||||||
| Loss (gain) related to warrant liabilities, net | 1,794 | 1.9 | % | (2,424) | (5.4) | % | |||||||||||||||||
| Permanent items | 89 | 0.1 | % | 914 | 2.0 | % | |||||||||||||||||
| Effect of changes in tax rates | (4,400) | (4.7) | % | 4,018 | 9.0 | % | |||||||||||||||||
| Other, net | 431 | — | % | 51 | — | % | |||||||||||||||||
| Income tax expense | $ | 15,379 | 16.0 | % | $ | 16,593 | 37.0 | % | |||||||||||||||
Deferred Tax Assets and Liabilities — Deferred tax assets and liabilities reflect temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount recognized for tax purposes, as adjusted for foreign currency translation. At December 31, 2025 and 2024, the tax effects of temporary differences that give rise to significant portions of the deferred tax provision are as follows:
| December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred tax assets: | in thousands | ||||||||||
| Discount on provision for losses and loss adjustment expenses | $ | 1,442 | $ | 1,343 | |||||||
| Unearned premiums | 16,385 | 14,239 | |||||||||
| Tax receivable agreement | 10,110 | — | |||||||||
| Unrealized foreign currency gain | 190 | 597 | |||||||||
| Excess tax basis | 159,189 | 148,089 | |||||||||
| Net operating loss ("NOL") and other carryforwards | 39,047 | 28,854 | |||||||||
| Other | 2,083 | 480 | |||||||||
| Gross deferred tax assets | 228,446 | 193,602 | |||||||||
| Less: valuation allowance | (165,748) | (176,167) | |||||||||
| Total net deferred tax assets | $ | 62,698 | $ | 17,435 | |||||||
| Deferred tax liabilities: | |||||||||||
| Deferred acquisition costs | $ | (37,640) | $ | (32,858) | |||||||
| Unrealized foreign currency gain | (188) | (388) | |||||||||
| Unrealized investment gain | (3,258) | (56) | |||||||||
| Intangible assets | (1,093) | (1,309) | |||||||||
| Other | (997) | (889) | |||||||||
| Total deferred tax liabilities | (43,176) | (35,500) | |||||||||
| Net deferred tax assets (liabilities) | $ | 19,522 | $ | (18,065) | |||||||
The Company has historically maintained a full valuation allowance on its deferred tax assets related to the difference between the outside tax basis and book basis of Hagerty, Inc.'s investment in the assets of THG. The realization of deferred tax assets is dependent upon the generation of future taxable income sufficient to utilize these deferred tax assets. As of December 31, 2024, management concluded that it was more likely than not that certain deferred tax assets, including the deferred tax asset for Hagerty, Inc.'s investment in the assets of THG, would not be realized because the Company was in a three-year cumulative loss position and the generation of sufficient future taxable income to utilize these deferred tax assets was uncertain.
As of each reporting period, management considers new evidence, both positive and negative, that could affect its view of the future realization of its deferred tax assets. In the third quarter of 2025, management's continued assessment of the realizability of the Company's deferred tax assets concluded that sufficient future taxable income will be generated to realize a portion of the deferred tax assets related to the outside basis in Hagerty, Inc.'s investment in THG and other tax attributes of the Hagerty, Inc. filing entity. In assessing the realizability of these deferred tax assets, management considered all sources of positive and negative evidence, including (i) that the Company had achieved cumulative three-year profitability during the quarter; (ii) that the Company's forecasts indicated continued profitability; and (iii) other positive business factors. Based on this evaluation, management determined it was appropriate to release a portion of the valuation allowance previously recorded against the federal and state deferred tax assets related to the outside basis in Hagerty, Inc.'s investment in THG and other tax attributes of the Hagerty, Inc. filing entity. As a result, $41.8 million of this valuation allowance was released in 2025 with a corresponding income tax benefit recognized in the Consolidated Statements of Operations.
In addition, during the year ended December 31, 2025, the Company recorded $31.4 million in deferred tax assets and a corresponding valuation allowance primarily due to (i) $24.1 million associated with changes to the outside basis difference in Hagerty, Inc.'s investment in THG and (ii) $7.3 million related to certain federal, state and foreign net operating losses.
During the year ended December 31, 2025, the Company's total valuation allowance decreased by $10.4 million consisting of a $24.5 million net income tax benefit recorded through the Consolidated Statements of Operations, partially offset by $14.1 million recorded through Stockholders' Equity on the Consolidated Balance Sheets related to exchanges of THG units for Class A Common Stock and stock-based compensation activity.
As of December 31, 2025 and December 31, 2024, the Company had deferred tax assets of $159.2 million and $148.1 million, respectively, related to the outside basis difference in Hagerty, Inc.'s investment in THG. A portion of the total outside basis difference is expected to reverse only upon the eventual sale of Hagerty, Inc.'s interest in THG, which would likely result in a capital loss. Accordingly, as of December 31, 2025 and December 31, 2024, the Company maintained a corresponding valuation allowance of $133.2 million and $148.1 million, respectively, against the deferred tax assets associated with the outside basis difference.
As of December 31, 2025, the Company had $87.8 million of gross federal NOLs that can be carried forward indefinitely. The Company also had $55.9 million of state NOLs, of which $12.3 million can be carried forward indefinitely and $43.6 million that expires in taxable years 2026 through 2045, if unused. The Company also had $110.9 million of gross foreign NOLs, of which $14.4 million can be carried forward indefinitely and $96.5 million that expires in taxable years 2036 through 2045, if unused. In addition, the Company had $0.6 million of federal research and development credits that expires in taxable years 2044 through 2045.
As of each of the periods presented above, the Company did not provide deferred income taxes on the outside book-tax basis difference on its foreign subsidiaries or any undistributed retained earnings which are indefinitely reinvested. The reversal of these temporary differences or distributions could result in additional tax; however, it is not practicable to estimate the amount of any unrecognized deferred tax liabilities at this time.
Tax Examinations — The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction, as well as many state and foreign jurisdictions. As of December 31, 2025, tax years 2021 to 2024 are subject to examination by various tax authorities. With few exceptions, as of December 31, 2025, the Company is no longer subject to U.S. federal, state, local or foreign examinations for years before 2021. THG is currently under audit by the IRS for the 2021 tax year.
The Canadian Revenue Agency closed its examinations of the Company for the 2018 tax year in March 2024 and for the 2020-2022 tax years in February 2025, with no changes to previously filed tax returns.
Uncertain Tax Positions — The calculation of the Company's tax liabilities involves uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across its global operations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
The Company records uncertain tax benefits ("UTB") as liabilities in accordance with ASC 740 and adjusts these liabilities when management's conclusion changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the UTB liabilities. These differences will be reflected as increases or decreases to Income tax benefit (expense) in the period in which new information is available.
As of December 31, 2025, total gross unrecognized tax benefits were $0.1 million. As of December 31, 2024, the Company had no unrecognized tax benefits. The Company recognizes interest and penalties related to unrecognized tax benefits within "Income tax benefit (expense)" in the Consolidated Statements of Operations. As of December 31, 2025, there were no amounts of gross interest and penalties accrued.
| December 31, | ||||||||||||||
| 2025 | 2024 | |||||||||||||
| in thousands | ||||||||||||||
| Beginning of period | $ | — | $ | — | ||||||||||
| Additions based on tax positions related to the current year | 57 | — | ||||||||||||
| Additions for tax positions of prior years | 66 | — | ||||||||||||
| End of period | $ | 123 | $ | — | ||||||||||
TRA Liability — In connection with the consummation of the business combination that formed Hagerty, Inc. in 2021, Hagerty, Inc. entered into a TRA with the Legacy Unit Holders. The TRA provides for payment to the Legacy Unit Holders of 85% of the U.S. federal, state and local cash tax savings realized by Hagerty, Inc. as a result of the increases in tax basis and certain other tax benefits, as outlined in the Business Combination Agreement, upon the exchange of THG units and shares of Hagerty, Inc. Class V Common Stock for shares of Hagerty, Inc. Class A Common Stock or cash. The remaining 15% cash tax savings resulting from the basis adjustments are retained by Hagerty, Inc. The Business Combination Agreement is provided as Exhibit 2.1, incorporated by reference within Item 15. Exhibits, Financial Statement Schedules, in this Annual Report.
In connection with the filing of its 2019 income tax return, THG made an election under Section 754 of the IRC for each taxable year in which TRA exchanges occur. This election allows THG to adjust the tax basis of its assets when certain ownership changes or distributions occur. This election cannot be revoked without the permission of the IRS Commissioner and will be in place for any future exchange of THG units.
In general, under the TRA, cash tax savings result in a year when the tax liability of Hagerty, Inc. for the year, computed without regard to the deductions attributable to the amortization of the basis increase and other deductions that arise in connection with the payment of the cash consideration under the TRA or the exchange of THG units and shares of Hagerty, Inc. Class V Common Stock for shares of Hagerty, Inc. Class A Common Stock, would be more than the tax liability for the year taking into account such deductions. Payments under the TRA are due when the Company produces taxable income and the resulting cash tax liability is reduced by deducting the amortization of the basis increase on a filed tax return. The payments under the TRA are expected to be substantial.
The amount and timing of any payments under the TRA will vary depending on a number of factors, including, but not limited to, the increase in tax basis of THG's assets, the timing of any future redemptions, exchanges or purchases of THG units held by Legacy Unit Holders, the price of Hagerty, Inc. Class A Common Stock at the time of the redemption, exchange or purchase, the extent to which redemptions or exchanges are taxable, the amount and timing of the taxable income that Hagerty, Inc. generates in the future, the tax rates then applicable, and the portion of the payments under the TRA constituting imputed interest.
The estimation of the TRA Liability is, by its nature, imprecise and subject to significant assumptions regarding the amount and timing of Hagerty, Inc.'s future taxable income. If the Company does not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, then it would not be required to make the related payment under the TRA. Therefore, the Company only recognizes a liability for the TRA if it determines it is probable that it will generate sufficient future taxable income over the term of the TRA to utilize the related tax benefits. Estimating future taxable income is inherently uncertain and requires significant management judgment.
As of December 31, 2024, the estimated value of the TRA Liability was $2.2 million. As of December 31, 2025, based on Hagerty, Inc.'s forecast of future taxable income, the estimated value of the TRA Liability was $39.8 million. The $37.6 million increase recorded in 2025 includes $34.8 million recorded in the third quarter of 2025, consisting of (i) $5.6 million related to the THG Unit Exchange and recorded as an increase to "Additional paid-in capital" on the Consolidated Balance Sheets; and (ii) $29.2 million related to prior THG unit exchanges within "Interest expense and other, net" in the Consolidated Statements of Operations. Refer to Note 20 — Stockholders' Equity for additional information about the THG Unit Exchange.
For the years ended December 31, 2025 and 2024, changes in the estimated value of the TRA Liability recorded within "Interest expense and other, net" in the Consolidated Statements of Operations resulted in an expense of $32.2 million and $1.6 million, respectively.
During the year ended December 31, 2025, Hagerty, Inc. made TRA payments of $0.2 million to the Legacy Unit Holders. There were no such TRA payments during the year ended December 31, 2024.
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.