Honest Company, Inc.HNST
Honest Company, Inc. Income Taxes Disclosure
Income Taxes
Loss from continuing operations before income tax was as follows:
| For the year ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
(In thousands) | |||||||||||||||||
| Domestic | $ | (15,482) | $ | (6,049) | $ | (39,163) | |||||||||||
Foreign | — | — | — | ||||||||||||||
| $ | (15,482) | $ | (6,049) | $ | (39,163) | ||||||||||||
The components of income tax provision consisted of the following:
| For the year ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Current | |||||||||||||||||
| Federal | $ | — | $ | — | $ | — | |||||||||||
| State | 204 | 75 | 75 | ||||||||||||||
| Foreign | — | — | — | ||||||||||||||
| 204 | 75 | 75 | |||||||||||||||
| Deferred | |||||||||||||||||
| Federal | — | — | — | ||||||||||||||
| State | — | — | — | ||||||||||||||
| Foreign | — | — | — | ||||||||||||||
| — | — | — | |||||||||||||||
| Income tax provision | $ | 204 | $ | 75 | $ | 75 | |||||||||||
The reconciliation of the income tax benefit computed at the U.S. federal statutory rate of 21% to the Company’s income tax provision is as follows:
| For the year ended December 31, | |||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||
U.S. federal statutory rate | $ | (3,199) | 21.0 | % | $ | (1,252) | 21.0 | % | $ | (8,203) | 21.0 | % | |||||||||||||||||||||||
State and local income taxes (net of federal income tax effect)(1) | 204 | (1.3) | % | 75 | (1.3) | % | 75 | (0.2) | % | ||||||||||||||||||||||||||
Change in valuation allowance | 1,792 | (11.8) | % | (3,314) | 55.6 | % | 4,489 | (11.5) | % | ||||||||||||||||||||||||||
| Nontaxable or nondeductible items: | |||||||||||||||||||||||||||||||||||
Share-based payment awards | (62) | 0.4 | % | 3,437 | (57.6) | % | 3,151 | (8.0) | % | ||||||||||||||||||||||||||
| Nondeductible compensation under §162(m) | 1,358 | (8.9) | % | 947 | (15.9) | % | 654 | (1.7) | % | ||||||||||||||||||||||||||
Nondeductible parking | 69 | (0.5) | % | 71 | (1.2) | % | — | (0.2) | % | ||||||||||||||||||||||||||
Other | 42 | (0.3) | % | 21 | (0.4) | % | 81 | (0.2) | % | ||||||||||||||||||||||||||
| Changes in unrecognized tax benefits | — | — | % | — | — | % | 61 | — | % | ||||||||||||||||||||||||||
| Other adjustments | — | — | % | 90 | (1.5) | % | (233) | 0.6 | % | ||||||||||||||||||||||||||
| Effective tax rate | $ | 204 | (1.3) | % | $ | 75 | (1.3) | % | $ | 75 | (0.2) | % | |||||||||||||||||||||||
___________
(1) State taxes in Texas and New York comprised the majority (greater than 50 percent) of the tax effect in this category.
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities were as follows:
| As of December 31, | |||||||||||
| (In thousands) | 2025 | 2024 | |||||||||
Deferred tax assets | |||||||||||
Intangible assets | $ | 42 | $ | 55 | |||||||
| Lease liability | 3,545 | 5,402 | |||||||||
Accrued expenses | 706 | 171 | |||||||||
Deferred revenue | 462 | 175 | |||||||||
Allowances, reserves and other | 5,076 | 1,810 | |||||||||
Stock-based compensation | 2,333 | 3,192 | |||||||||
| Section 174 capitalized expenses | 5,215 | 5,854 | |||||||||
Net operating loss and other carryforwards | 88,242 | 88,066 | |||||||||
Total deferred tax assets | 105,621 | 104,725 | |||||||||
Valuation allowance | (97,185) | (94,859) | |||||||||
Net deferred tax assets | 8,436 | 9,866 | |||||||||
| Deferred tax liabilities | |||||||||||
Property and equipment | (319) | (548) | |||||||||
| Right-of-use asset | (2,883) | (4,284) | |||||||||
Prepaid expenses | (155) | (241) | |||||||||
State taxes | (5,079) | (4,793) | |||||||||
Total deferred tax liabilities | (8,436) | (9,866) | |||||||||
Net deferred taxes | $ | — | $ | — | |||||||
On July 4, 2025, the 2025 budget reconciliation bill, officially known as the One Big Beautiful Bill Act of 2025 (the “Act”), was enacted into law. The Act includes a broad range of tax reforms such as deductions for domestic research and development expenditures and federal bonus depreciation. The Company has evaluated the provisions of the Act and determined that, because it maintains a full valuation allowance against its deferred tax assets, the Act does not have a material impact on the Company’s condensed consolidated financial statements or effective tax rate.
The amounts of income taxes paid (net of refunds received) by jurisdiction are as follows:
| For the year ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
(In thousands) | |||||||||||||||||
Federal | $ | — | $ | — | $ | — | |||||||||||
State | 110 | 89 | 116 | ||||||||||||||
| Foreign | — | — | — | ||||||||||||||
For the applicable periods all tax cash payments were immaterial and are therefore not being separately disclosed.
Net Operating Loss Carryforwards
As of December 31, 2025, the Company had federal and state net operating loss carryforwards tax effect of $313.0 million and $274.0 million, respectively. As of December 31, 2024, The Company had federal and state net operating loss carryforwards tax effect of $313.0 million and $272.0 million, respectively. Federal and state net operating loss carryforwards begin to expire in 2032. As of December 31, 2025 and 2024, the Company did not have any state tax credits. Federal net operating losses generated after January 1, 2018 would not expire, but would only be available to offset up to 80% of the Company’s future taxable income.
The IRC imposes substantial restrictions on the utilization of net operating losses and other tax attributes in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use pre-change net operating loss and research tax credits may be limited as prescribed under IRC Sections 382 and 383. Events which may cause limitation in the amount of the net operating losses and credits that the Company utilizes in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. The Company performed a study to determine whether net operating losses and credit carryover limitations exist under Section 382 as of December 31, 2025, and determined that a portion of the net operating losses that were generated during 2022 and prior are subject to Section 382 annual limitations. As of December 31, 2025 and 2024, these limitations did not cause any of the limited net operating losses to be permanently lost.
Valuation Allowance
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible or includable in taxable income. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.
A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2025. Such objective evidence limits the ability to consider other subjective evidence such as its projections for future growth. To the extent that a valuation allowance has been established and it is subsequently determined that it is more likely than not that the deferred tax assets will be recovered, the valuation allowance will be released. At December 31, 2025, based on all available evidence, a full valuation allowance has been recorded since it is more likely than not that the deferred tax assets will not be realized.
The following table summarizes the changes in the valuation allowance:
| For the year ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
(In thousands) | |||||||||||||||||
Beginning balance | $ | 94,859 | $ | 98,771 | $ | 94,103 | |||||||||||
Changes to valuation allowance | 2,326 | (3,918) | 4,654 | ||||||||||||||
Other increases (decreases) | — | 6 | 14 | ||||||||||||||
Ending balance | $ | 97,185 | $ | 94,859 | $ | 98,771 | |||||||||||
Uncertain Tax Positions
The Company is subject to taxation in the U.S. federal and various state jurisdictions. During the years ended December 31, 2025 and 2024, the Company has not recorded any uncertain tax positions and has not recognized interest or penalties in the consolidated statements of comprehensive loss. The Company is subject to examination from federal tax authorities for years 2022, 2023 and 2024. To the extent allowed by law, the federal and state tax authorities may have the right to
examine prior periods where net operating losses or tax credits were generated and carried forward and make adjustments up to the amount of the net operating loss or credit carryforward.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 25, 2026 | Showing above |
| 2024 | Feb 26, 2025 | |
| 2023 | Mar 8, 2024 | |
| 2022 | Mar 16, 2023 | |
| 2021 | Mar 28, 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.