HEALTHEQUITY, INC.HQY
HEALTHEQUITY, INC. Income Taxes Disclosure
Income taxes
The income tax provision (benefit) consisted of the following:
| Year ended January 31, | |||||||||||||||||
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 25,949 | $ | 29,376 | $ | 3,260 | |||||||||||
| State | 6,211 | 3,947 | 1,968 | ||||||||||||||
| Total current tax provision | $ | 32,160 | $ | 33,323 | $ | 5,228 | |||||||||||
| Deferred: | |||||||||||||||||
| Federal | $ | (11,886) | $ | (11,004) | $ | (14,382) | |||||||||||
| State | (943) | (2,991) | (2,799) | ||||||||||||||
| Total deferred tax benefit | $ | (12,829) | $ | (13,995) | $ | (17,181) | |||||||||||
| Total income tax provision (benefit) | $ | 19,331 | $ | 19,328 | $ | (11,953) | |||||||||||
Total income tax provision (benefit) differed from the amounts computed by applying the U.S. federal statutory tax rate to income before income taxes as a result of the following:
| Year ended January 31, | |||||||||||||||||
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Federal income tax provision (benefit) at the statutory rate | $ | 24,367 | $ | 15,759 | $ | (8,000) | |||||||||||
| State income tax provision (benefit), net of federal tax provision (benefit) | 4,365 | 5,382 | (1,021) | ||||||||||||||
| Other non-deductible or non-taxable items, net | 1,194 | 447 | 225 | ||||||||||||||
| Excessive employee remuneration | 6,782 | 2,939 | 3,246 | ||||||||||||||
| Excess tax (benefit) shortfall on stock-based compensation expense, net | (12,102) | 304 | (2,479) | ||||||||||||||
| Federal research and development credits | (7,955) | (9,202) | (1,341) | ||||||||||||||
| Change in uncertain tax position reserves, net of indirect benefits | 3,227 | 6,137 | (2,970) | ||||||||||||||
| Deferred tax rate adjustment due to state apportionment changes | 1,504 | (1,039) | (30) | ||||||||||||||
| Adjustment from settlement of IRS examination | — | 2,461 | — | ||||||||||||||
| Return-to-provision adjustments | (1,155) | (433) | (38) | ||||||||||||||
| Change in valuation allowance | (96) | (3,129) | 733 | ||||||||||||||
| Other items, net | (800) | (298) | (278) | ||||||||||||||
| Total income tax provision (benefit) | $ | 19,331 | $ | 19,328 | $ | (11,953) | |||||||||||
The Company’s effective tax rate for the fiscal years ended January 31, 2025, 2024, and 2023 was 16.7%, 25.8%, and 31.4%, respectively. The difference between the effective tax rate and the U.S. federal statutory tax rate each period is impacted by a number of factors, including the relative mix of earnings among state jurisdictions, credits, excess tax benefits or shortfalls on stock-based compensation expense, changes in unrecognized tax benefits and valuation allowance, and other items. The decrease in the effective tax rate for the fiscal year ended January 31, 2025 compared to the fiscal year ended January 31, 2024 was primarily due to an increase in tax deductible stock-based compensation compared to GAAP stock-based compensation expense and a decrease in expense from unrecognized tax benefits, partially offset by an increase in pre-tax book income, an increase in nondeductible executive compensation, and increased expense from deferred tax rate adjustments due to state apportionment changes. The increase in the effective tax rate for the fiscal year ended January 31, 2024 compared to the fiscal year ended January 31, 2023 was primarily due to an increase in pre-tax book income, an increase in unrecognized tax benefits, adjustments from settlement of an IRS examination, and a decrease in tax deductible stock-based compensation compared to GAAP stock-based compensation expense, partially offset by an increase in research and development tax credits and a decrease in valuation allowance.
Deferred tax assets and liabilities consisted of the following:
| (in thousands) | January 31, 2025 | January 31, 2024 | |||||||||
| Deferred tax assets: | |||||||||||
| Net operating loss carryforward | $ | 1,120 | $ | 1,730 | |||||||
| Stock compensation | 11,937 | 14,069 | |||||||||
| Research and development credits | 4,160 | 3,796 | |||||||||
| Lease liabilities | 13,245 | 14,371 | |||||||||
| Capitalized research and development | 53,238 | 33,474 | |||||||||
| Fixed assets | 1,083 | 939 | |||||||||
| Accruals and reserves | 5,099 | 3,557 | |||||||||
| Other, net | 6,632 | 1,937 | |||||||||
| Total gross deferred tax assets | $ | 96,514 | $ | 73,873 | |||||||
| Less valuation allowance | (1,066) | (1,164) | |||||||||
| Deferred tax assets, net of valuation allowance | 95,448 | 72,709 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Intangible assets | (84,120) | (86,195) | |||||||||
| Incremental contract costs | (15,282) | (12,887) | |||||||||
| Right-of-use assets | (10,926) | (11,949) | |||||||||
| Goodwill | (38,205) | (28,691) | |||||||||
| Other, net | (2,749) | (1,657) | |||||||||
| Total gross deferred tax liabilities | (151,282) | (141,379) | |||||||||
| Net deferred tax liabilities | $ | (55,834) | $ | (68,670) | |||||||
Management considered whether it is more likely than not that some portion or all of the deferred tax assets would be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities in making this assessment and determined that based on the weight of all available evidence, it is more likely than not (i.e., a likelihood of more than 50%) that the Company will be able to realize all of its federal deferred tax assets and the majority if its state deferred tax assets. The Company recorded a valuation allowance of $1.1 million and $1.2 million as of January 31, 2025 and 2024, respectively, related to certain state deferred tax assets. The $0.1 million decrease in valuation allowance recorded is primarily the result of a corresponding increase in unrecognized tax benefits.
As of January 31, 2025, the Company had recorded state net operating loss carryforwards of $18.5 million, which begin to expire at various intervals beginning with the tax year ending January 31, 2033. As of January 31, 2025, the Company also had state research and development tax credits of $13.6 million, which begin to expire at various intervals beginning with the tax year ending January 31, 2026.
As of January 31, 2025 and 2024, the gross unrecognized tax benefit was $24.1 million and $19.2 million, respectively. If recognized, $20.9 million and $16.2 million of the total unrecognized tax benefits would affect the Company's effective tax rate as of January 31, 2025 and 2024, respectively. Total gross unrecognized tax benefits increased by $4.9 million in the period from January 31, 2024 to January 31, 2025.
A tabular reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
| (in thousands) | January 31, 2025 | January 31, 2024 | |||||||||
| Gross unrecognized tax benefits at beginning of year | $ | 19,213 | $ | 8,690 | |||||||
| Gross amounts of increases and decreases: | |||||||||||
| Increases as a result of tax positions taken during a prior period | 1,004 | 9,325 | |||||||||
| Increases as a result of tax positions taken during the current period | 5,076 | 3,386 | |||||||||
| Decreases as a result of settlement | — | (1,030) | |||||||||
| Decreases resulting from the lapse of the applicable statute of limitations | (1,153) | (1,158) | |||||||||
| Gross unrecognized tax benefits at end of year | $ | 24,140 | $ | 19,213 | |||||||
Certain unrecognized tax benefits are required to be netted against their related deferred tax assets as a result of ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar
Tax Loss, or a Tax Credit Carryforward Exists. The resulting unrecognized tax benefit recorded within the Company's consolidated balance sheet excludes the following amounts that have been netted against the related deferred tax assets accordingly:
| (in thousands) | January 31, 2025 | January 31, 2024 | |||||||||
| Total gross unrecognized tax benefits | $ | 24,140 | $ | 19,213 | |||||||
| Amounts netted against related deferred tax assets | (8,363) | (7,186) | |||||||||
| Unrecognized tax benefits recorded on the consolidated balance sheet | $ | 15,777 | $ | 12,027 | |||||||
The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of other income, net in the statement of operations and comprehensive income (loss). During the fiscal years ended January 31, 2025, 2024, and 2023, the Company recorded penalties and interest of $0.6 million, $0.1 million, and $0.4 million, respectively, related to unrecognized tax benefits. As of January 31, 2025 and 2024, the Company recorded accrued interest and penalties of $2.0 million and $1.4 million, respectively.
The Company files income tax returns with U.S. federal and state taxing jurisdictions and is currently under examination by the states of California and Texas. Such examinations may lead to ordinary course adjustments or proposed adjustments to the Company's taxes, net operating losses, and/or tax credit carryforwards. As a result of the Company's net operating loss carryforwards and tax credit carryforwards, the Company remains subject to examination by one or more jurisdictions for tax years after 2006.
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.