Inspire Medical Systems, Inc.INSP
Inspire Medical Systems, Inc. Income Taxes Disclosure
Income Taxes
The components of our provision (benefit) for income taxes are as follows:
| December 31, | ||||||||||||||||||||
| 2025 | 2024 | 2023 | ||||||||||||||||||
| Current | ||||||||||||||||||||
| Federal | $ | 3,708 | $ | — | $ | — | ||||||||||||||
| State | 4,694 | 4,103 | 644 | |||||||||||||||||
| Foreign | 624 | 854 | 603 | |||||||||||||||||
| Total current | 9,026 | 4,957 | 1,247 | |||||||||||||||||
| Deferred | ||||||||||||||||||||
| Federal | (71,200) | — | — | |||||||||||||||||
| State | (17,532) | — | — | |||||||||||||||||
| Foreign | (19) | (13) | — | |||||||||||||||||
| Total deferred | (88,751) | (13) | — | |||||||||||||||||
| Total provision for income taxes | $ | (79,725) | $ | 4,944 | $ | 1,247 | ||||||||||||||
We adopted ASU No. 2023-09, Improvements to Income Tax Disclosures in fiscal year 2025 under the prospective method. Under this new standard, we disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold of 5% of the global pretax income.
The reconciliation of taxes at the federal statutory rate to our provision for income taxes are as follows for the year ended December 31, 2025:
| Year Ended December 31, | ||||||||||||||
| 2025 | ||||||||||||||
| Amount | Percent | |||||||||||||
| U.S. federal statutory tax rate | $ | 13,696 | 21.0 | % | ||||||||||
State and local income taxes, net of federal income tax effect(1) | (10,198) | (15.6) | ||||||||||||
| Foreign tax effects | 223 | 0.3 | ||||||||||||
| Tax credits | ||||||||||||||
| Research and development ("R&D") tax credits | (5,066) | (7.8) | ||||||||||||
| Effect of cross-border tax laws (net of foreign tax credits) | ||||||||||||||
| Foreign-derived intangible income deduction (FDII) | (776) | (1.2) | ||||||||||||
| Change in valuation allowance | (88,137) | (135.1) | ||||||||||||
| Nontaxable or nondeductible items | ||||||||||||||
| Stock-based compensation | 7,409 | 11.4 | ||||||||||||
| Executive compensation | 2,618 | 4.0 | ||||||||||||
| Other | 506 | 0.8 | ||||||||||||
| Total provision for income taxes | $ | (79,725) | (122.2) | % | ||||||||||
(1) State taxes in Florida, Texas, California, Pennsylvania, Massachusetts, Kentucky, Michigan and South Carolina made up the majority (greater than 50%) of the tax effect in this category.
The reconciliation of taxes at the federal statutory rate to our provision for income taxes for the years ended December 31, 2024 and 2023 are as follows:
| Year Ended December 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Tax at federal statutory rate | 21.0 | % | 21.0 | % | ||||||||||
| State, net of federal benefit | 6.5 | % | 4.0 | % | ||||||||||
| Stock-based compensation | 2.1 | % | 33.6 | % | ||||||||||
| R&D tax credit | (7.8) | % | 20.6 | % | ||||||||||
| Other | 2.2 | % | (4.6) | % | ||||||||||
| Executive compensation | 4.0 | % | (16.3) | % | ||||||||||
| Change in valuation allowance | (18.9) | % | (64.6) | % | ||||||||||
| Total | 9.1 | % | (6.3) | % | ||||||||||
Income taxes paid (refunds received) disaggregated by federal, state, foreign taxes are as follows for the year ended December 31, 2025:
| Year Ended December 31, | ||||||||
| 2025 | ||||||||
| Federal | $ | 3,609 | ||||||
| State | ||||||||
| California | 535 | |||||||
| Other states | 3,808 | |||||||
| Total state | 4,343 | |||||||
| Foreign | 372 | |||||||
| Total income taxes paid | $ | 8,324 | ||||||
Significant components of net deferred tax assets and liabilities were as follows:
| Year Ended December 31, | ||||||||||||||
| 2025 | 2024 | |||||||||||||
| Deferred tax assets: | ||||||||||||||
| Net operating losses | $ | 3,972 | $ | 16,290 | ||||||||||
| R&D tax credits | 13,736 | 12,631 | ||||||||||||
| R&D expenditures, capitalized for tax | 35,022 | 38,813 | ||||||||||||
| Accruals and other | 5,915 | 4,623 | ||||||||||||
| Depreciation | — | 177 | ||||||||||||
| Lease liability | 7,872 | 7,830 | ||||||||||||
| Inventory | 3,151 | 1,852 | ||||||||||||
| Stock-based compensation | 35,871 | 31,097 | ||||||||||||
| Total deferred tax assets | 105,539 | 113,313 | ||||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Depreciation | (5,245) | — | ||||||||||||
| Lease asset | (5,761) | (5,742) | ||||||||||||
| Other comprehensive income | (169) | (91) | ||||||||||||
| Total deferred tax liabilities | (11,175) | (5,833) | ||||||||||||
| Net deferred tax assets | 94,364 | 107,480 | ||||||||||||
| Valuation allowance | (5,697) | (107,467) | ||||||||||||
| Total deferred income taxes | $ | 88,667 | $ | 13 | ||||||||||
Deferred income taxes reflect the tax effects of net operating loss carryforwards, tax credit carryforwards, and the net temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
As of December 31, 2025, we had utilized all of the gross federal net operating loss carryforwards from prior years. We had net operating loss carryforwards for state income tax purposes of $60.6 million, which will begin to expire in 2026. We also have gross R&D credit carryforwards of $14.7 million as of December 31, 2025 which will expire at various dates beginning in 2034.
Utilization of the R&D credit carryforwards may be subject to an annual limitation due to the ownership change limitations provided by Section 382 and Section 383 of the Code and similar state provisions. During the year ended December 31, 2025, we finalized an updated analysis to determine whether an ownership change had occurred
through December 31, 2024, and if a limitation exists. It was determined that December 11, 2018 was the only date that we experienced an ownership change. The study concluded that none of the $126.5 million of federal net operating losses nor the $1.7 million of federal R&D credits that were accumulated on December 11, 2018 will expire unused solely due to the limitations under Sections 382 and 383 of the Code.
Based on our analysis of all positive and negative evidence available for the year ended December 31, 2025, having demonstrated sustained profitability which is objective and verifiable, and taking into account anticipated future earnings, we concluded it is more likely than not that the majority of our U.S. federal and U.S. states net deferred tax assets will be realizable. Accordingly, we have recognized a non-recurring tax benefit of $88.8 million for the year ended December 31, 2025. As of December 31, 2025, $5.7 million of our valuation allowance remained against certain tax attributes. The valuation allowance decreased by $101.7 during the year ended December 31, 2025.
On July 4, 2025, the enactment of the One Big Beautiful Bill Act ("OBBBA") into law, marked a significant legislative development, resulting in substantial modifications to the U.S. tax code. The OBBBA influences multiple facets of taxation, including, but not limited to, bonus depreciation, the current-year expensing of research and development costs, and international tax regulations. The income taxes reported for the year ended December 31, 2025 incorporates all relevant tax provisions of this new law.
The changes to our gross unrecognized tax benefits were as follows:
| Year Ended December 31, | ||||||||||||||||||||
| 2025 | 2024 | 2023 | ||||||||||||||||||
| Balance beginning of the year | $ | 146 | $ | 146 | $ | 146 | ||||||||||||||
| Decrease related to the current year | (40) | — | — | |||||||||||||||||
| Balance end of the year | $ | 106 | $ | 146 | $ | 146 | ||||||||||||||
We file income tax returns in the applicable jurisdictions. The 2021 to 2024 tax years remain open to examination by the major taxing authorities to which we are subject. We do not expect a significant change to our unrecognized tax positions over the next 12 months.
Our policy is to record interest related to uncertain tax positions as interest expense and any penalties as other expense in our consolidated statements of operations and comprehensive income (loss). There were no interest or penalties accrued as of December 31, 2025, 2024, or 2023.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 13, 2026 | Showing above |
| 2024 | Feb 10, 2025 | |
| 2023 | Feb 9, 2024 | |
| 2022 | Feb 10, 2023 | |
| 2021 | Feb 15, 2022 | |
| 2020 | Feb 24, 2021 | |
| 2019 | Feb 25, 2020 | |
| 2018 | Feb 26, 2019 | |
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.