NOTE 13 - INCOME TAXES

For the years ended December 31, 2025, 2024, and 2023, domestic and foreign income before income taxes is as follows:


	2025		2024		2023
Domestic	$	106,297	$	134,068	$	83,742
Foreign		5,696		3,990		12,805
Income before income taxes	$	111,993	$	138,058	$	96,547

Income tax expense consisted of the following for the years ended December 31:


	2025			2024			2023
Current:
Federal	$	6,188		$	41,276		$	28,108
State		11,046			16,851			10,380
Foreign		1,955			1,647			2,247
Total current		19,189			59,774			40,735
Deferred:
Federal		4,937			(21,065	)		(20,279	)
State		(3,519	)		(10,851	)		(6,915	)
Foreign		(202	)		30			394
Total deferred		1,216			(31,886	)		(26,800	)
Income tax expense	$	20,405		$	27,888		$	13,935

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes.

The Company’s provision for income taxes differs from the U.S. federal statutory tax rate of 21.0% due to the following reconciling items:


	Year Ended December 31,
	2025						2024						2023
	Amount			Percent			Amount			Percent			Amount			Percent
U.S. federal statutory tax rate	$	23,521			21.0	%	$	28,992			21.0	%	$	20,359			21.0	%
State and local income taxes, net of federal income tax effect (1)		6,004			5.4	%		5,625			4.1	%		6,194			6.4	%
Foreign tax effects:
Puerto Rico:
Foreign branch tax		1,320			1.2	%		1,384			1.0	%		1,396			1.4	%
Other		1,417			1.3	%		2,140			1.5	%		1,435			1.5	%
Effect of changes in tax laws or rates enacted in the current period (2)		(4,458	)		(4.0	)%		—			—			—			—
Effect of cross-border tax laws:
Global intangible low-taxed income		97			0.1	%		—			—			319			0.3	%
Tax credits:
Research and development tax credits		(10,356	)		(9.2	)%		(14,934	)		(10.8	)%		(15,055	)		(15.5	)%
Foreign tax credits		(3,874	)		(3.5	)%		(3,120	)		(2.3	)%		(2,941	)		(3.0	)%
Other		(73	)		(0.1	)%		(526	)		(0.4	)%		(22	)		—
Changes in valuation allowances		1,803			1.6	%		2,281			1.7	%		1,929			2.0	%
Nontaxable or nondeductible items:
Share-based payments		409			0.4	%		(2,376	)		(1.7	)%		(1,075	)		(1.1	)%
Capital loss (3)		—			—			—			—			(3,690	)		(3.8	)%
Worthless Stock deduction (4)		(93	)		(0.1	)%		—			—			(4,903	)		(5.1	)%
Excess compensation		2,183			1.9	%		2,448			1.8	%		1,666			1.7	%
Other		(300	)		(0.3	)%		346			0.3	%		(124	)		(0.1	)%
Changes in unrecognized tax benefits		2,967			2.6	%		5,607			4.1	%		8,447			8.7	%
Other:		(162	)		(0.1	)%		21			—			—			—
Effective tax	$	20,405			18.2	%	$	27,888			20.2	%	$	13,935			14.4	%

(1)

State taxes in Virginia, Maryland, and the District of Columbia make up the majority (greater than 50 percent) of the tax effect in this category.

(2)

The 2025 provision for income tax includes a benefit recognized in the first fiscal quarter of 2025 from tax planning implemented in connection with the “transitional rules” governing unrealized foreign exchange gains and losses derived from translation of the operations, assets and liabilities of non-U.S. qualified subsidiaries provided by recently finalized U.S. federal tax regulations under IRC 987. The regulations under IRC 987 are effective for the Company for tax years beginning after December 31, 2024, and require computation of a pre-transition foreign currency gain or loss to be included in the determination of future taxable income or loss and an analysis of the various elections available to taxpayers. Based on the Company’s current analysis of the regulations and the available election to amortize its pre-2025 cumulative unrealized foreign exchange gains and losses impacting U.S. taxation of foreign earnings under Subpart F of the Internal Revenue Code, the Company recognized a non-cash deferred income tax benefit of $4.5 million related to its election to amortize its pre-transition foreign currency losses against taxable income over ten years.

(3)

During 2023, the Company restructured the ownership of its Canadian entities for tax purposes, resulting in a 3.8% decrease in the Company’s effective income tax rate for the year ended December 31, 2023.

(4)

During 2023, the Company liquidated one of its U.K. subsidiaries as part of the wind-down of its commercial marketing business, resulting in a reduction in the Company’s effective income tax rate of 5.1% for the year ended December 31, 2023.

Income taxes paid, net of refunds received, consisted of the following:


	2025		2024		2023
Federal	$	15,000	$	34,500	$	9,850
State and local
Maryland		1,891		3,771		4,232
Virginia		1,785		4,000		1,855
District of Columbia		1,249		3,501		181
Other (1)		3,380		6,618		3,412
Total state and local		8,305		17,890		9,680
Foreign
U.K.		1,417		1,646		275
Other (2)		3,353		4,771		3,413
Total foreign		4,770		6,417		3,688
Total income taxes paid, net of refunds	$	28,075	$	58,807	$	23,218

(1)

Primarily includes taxes paid to California, New York, New Jersey, and Texas.

(2)

Primarily includes taxes paid to Belgium and Puerto Rico.

The Company measures certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is 27.0%. Deferred tax assets (liabilities) consisted of the following at December 31:


	2025			2024
Deferred Tax Assets
Allowance for expected credit losses	$	769		$	1,648
Accrued paid time off		2,943			3,525
State net operating loss carryforward		436			456
Stock-based compensation		6,225			6,076
Deferred compensation		7,078			6,568
Foreign tax credits		8,757			8,151
State tax credits		1,776			1,923
Foreign exchange		2,603			4,345
Section 987 pretransition loss		4,012			—
Research tax credits		6,120			—
Foreign deferred		560			333
Accrued bonus		4,759			6,393
Capital loss		1,067			1,020
Facilities impairment		1,463			2,611
Capitalized research expenses		58,355			70,617
Depreciation		810			402
Accrued liabilities and other		513			1,364
Lease liabilities		49,253			54,263
		157,499			169,695
Less: Valuation Allowance		(11,044	)		(9,627	)
Total Deferred Tax Assets		146,455			160,068

Deferred Tax Liabilities
Payroll taxes		(878	)		(939	)
Unbilled revenue		(741	)		(184	)
Amortization		(107,154	)		(108,009	)
Deferred gain and other		(2,418	)		(2,543	)
Lease assets - right-of-use		(42,101	)		(46,790	)
Total Deferred Tax Liabilities		(153,292	)		(158,465	)
Total Net Deferred Tax Assets (Liabilities)	$	(6,837	)	$	1,603

The Company’s 2022, 2023, and 2024 tax years remain subject to examination by the Internal Revenue Service for federal tax purposes. Certain significant state and foreign tax jurisdictions are also either currently under examination or remain open under the statutes of limitation and subject to examination for the tax years from 2021, 2022, 2023, and 2024.

On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (the “OB3 Act”). The OB3 Act made permanent changes to certain key elements of the Tax Cuts and Jobs Act of 2017 (the “TCJA”), including 100% bonus depreciation, domestic research cost expensing, the business interest expense limitation, and the repeal of various clean energy tax credits. As a result, the OB3 Act impacted the Company’s income tax payables and deferred tax assets as of July 4, 2025, the date of enactment, via the reversal of approximately $32.0 million of deferred tax assets resulting from capitalized research expenses incurred through June 30, 2025. The reversal is reflected on the Company’s annual financial statements as of and for the year ended December 31, 2025. These capitalized research expenses are being recovered over their remaining useful lives as outlined in IRC 174A enacted via the OB3 Act.

As of December 31, 2025, the Company had gross state income tax credit carryforwards of approximately $1.7 million, which expire between 2025 and 2030. A deferred tax asset of approximately $1.3 million, net of federal benefit, has been established related to these state income tax credit carryforwards as of December 31, 2025.

The need to establish valuation allowances for deferred assets is based on a more-likely-than-not threshold that the benefit of such assets will be realized in future periods. Appropriate consideration has been given to all available evidence, including historical operating results, projections of taxable income, and tax planning alternatives. The Company concluded that a $0.4 million valuation allowance was required for tax attributes related to specified state jurisdictions, a $1.1 million valuation allowance was required for tax attributes related to capital loss carryforwards, a $0.7 million valuation allowance was required for certain equity-based compensation assets, and an additional $8.7 million valuation allowance was required against our U.S. foreign tax credit carryforwards.

The total amount of unrecognized tax benefits as of December 31, 2025 and 2024 was $24.7 million and $25.8 million, respectively, which includes $18.2 million and $15.0 million, respectively, of tax positions that, if recognized, would impact the effective rate. The unrecognized tax benefits and the related accrued interest are part of other long-term liabilities on the Company’s consolidated balance sheets.

The components of unrecognized tax benefits, excluding penalty and interest, are as follows at December 31:


	2025		2024
Section 41 tax credit		17,980		15,042
Section 174 expense capitalization		6,479		10,798
India transfer pricing		231		—
Total	$	24,690	$	25,840

The unrecognized tax benefit reconciliation, excluding penalty and interest, is as follows:


Unrecognized tax benefits at January 1, 2023	$	145
Increase attributable to tax positions taken during a prior period		19,845
Increase attributable to tax positions taken during the current period		4,141
Unrecognized tax benefits at December 31, 2023		24,131
Decrease attributable to tax positions taken during a prior period		(4,597	)
Increase attributable to tax positions taken during the current period		6,306
Unrecognized tax benefits at December 31, 2024		25,840
Decrease attributable to tax positions taken during a prior period		(4,767	)
Increase attributable to tax positions taken during the current period		3,617
Unrecognized tax benefits at December 31, 2025		24,690

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.

ICF International, Inc. Income Taxes Disclosure

About Income Taxes Disclosures

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