Legence Corp.LGN
Legence Corp. Income Taxes Disclosure
Income Taxes
Loss before income tax for the years ended December 31, 2025, 2024, and 2023 consisted entirely of loss from domestic operations of $55.1 million, $23.1 million and $53.9 million, respectively.
The income tax expense (benefit) consists of the following (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current tax expense (benefit): | |||||||||||||||||
| Federal | $ | (499) | $ | 11,842 | $ | 1,939 | |||||||||||
| State | 7,373 | 6,383 | 3,479 | ||||||||||||||
| Total current tax expense | 6,874 | 18,225 | 5,418 | ||||||||||||||
| Deferred tax expense (benefit): | |||||||||||||||||
| Federal | 10,955 | (5,608) | (7,299) | ||||||||||||||
| State | 4,332 | (8,096) | (6,037) | ||||||||||||||
| Total deferred tax expense (benefit) | 15,287 | (13,704) | (13,336) | ||||||||||||||
| Income tax expense (benefit) | $ | 22,161 | $ | 4,521 | $ | (7,918) | |||||||||||
During the tax year 2025, cash paid for income taxes, net of refunds consisted of the following:
| Year Ended December 31, 2025 | |||||
Federal | $ | 9,605 | |||
California | 1,228 | ||||
Pennsylvania | 942 | ||||
Other States | 4,667 | ||||
Foreign | — | ||||
| Total | $ | 16,442 | |||
The following table represents required disclosure pursuant to ASU 2023-09 and reconciles the U.S. federal statutory tax amount and rate to our actual global effective amount and rate for the year ended December 31, 2025:
| Year Ended December 31, 2025 | |||||||||||
| Income tax at the statutory federal rate | $ | (11,580) | 21.0 | % | |||||||
| State and local income taxes | |||||||||||
| Current and Deferred State Tax Provision | 6,910 | (12.5) | % | ||||||||
| State Tax Rate & Apportionment Changes | 3,079 | (5.6) | % | ||||||||
| Tax Credits | (969) | 1.8 | % | ||||||||
| Changes in Valuation Allowances | 1,725 | (3.1) | % | ||||||||
| Nontaxable or nondeductible items | |||||||||||
| Section 179D deduction | (1,596) | 2.9 | % | ||||||||
| Series A Profits Interests | 6,432 | (11.7) | % | ||||||||
| Indemnification Expense | 2,117 | (3.8) | % | ||||||||
| TRA Expense Adjustment | 612 | (1.1) | % | ||||||||
| Non-Controlling Interest | 14,381 | (26.1) | % | ||||||||
| Goodwill Impairment | 5,243 | (9.5) | % | ||||||||
| Other nontaxable or nondeductible items | 646 | (1.2) | % | ||||||||
| Changes in unrecognized tax benefits | (3,589) | 6.5 | % | ||||||||
| Other | (1,250) | 2.2 | % | ||||||||
| Effective tax rate | $ | 22,161 | (40.2) | % | |||||||
The following table presents the required disclosures prior to our adoption of ASU 2023-09 and reconciles the U.S. federal statutory income tax rate to the actual global effective tax rate for the years ended December 31, 2024 and 2023:
| Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Income tax at the statutory federal income tax rate | 21.0% | 21.0% | |||||||||
| Pass-through income not subject to income tax | (48.7)% | (15.5)% | |||||||||
| State and local income taxes | (7.7)% | 4.9% | |||||||||
| Non-corporate pass-through earnings | (6.2)% | (1.1)% | |||||||||
| Nondeductible transaction costs | —% | (3.7)% | |||||||||
| Nondeductible earnout expenses | —% | (17.3)% | |||||||||
| Section 179D deduction | 4.1% | 9.4% | |||||||||
| Intercompany interest transfer | 6.8% | 3.0% | |||||||||
| Stock compensation | (1.9)% | —% | |||||||||
| R&D credit | 3.8% | 1.6% | |||||||||
| Rate change | 30.1% | (1.6)% | |||||||||
| Return to provision adjustments | (1.8)% | 8.2% | |||||||||
| Goodwill impairment | (16.2)% | —% | |||||||||
| Deferred tax adjustments | (0.3)% | 7.1% | |||||||||
| Other | (2.6)% | (1.5)% | |||||||||
| Effective tax rate | (19.6)% | 14.5% | |||||||||
For the tax year ended December 31, 2025, the state and local jurisdiction that makes up the majority (greater than 50 percent) of the effect of the state and local income tax category is California.
Significant components of the Company's net deferred tax liability as reflected in the Consolidated Balance Sheets are as follows (in thousands):
| December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Deferred tax assets: | |||||||||||||||||
| Net operating loss carryforwards | $ | 11,161 | $ | 1,417 | $ | 2,314 | |||||||||||
| Research and development credit carryforwards | — | — | 316 | ||||||||||||||
| Amortization | 1,084 | 12,917 | 11,430 | ||||||||||||||
| Accrued expenses | 1,363 | 951 | 737 | ||||||||||||||
| Outside basis difference in partnerships | 169,244 | — | — | ||||||||||||||
| Tax receivable agreement liability | 25,431 | — | — | ||||||||||||||
| Interest carryforwards | 5,669 | — | — | ||||||||||||||
| Operating lease liabilities | 5,410 | 5,667 | 6,368 | ||||||||||||||
| Other | 1,035 | 924 | 1,889 | ||||||||||||||
| Total deferred tax assets | 220,397 | 21,876 | 23,054 | ||||||||||||||
| Less: Valuation allowance | (181,533) | (129) | — | ||||||||||||||
| Net deferred tax assets | $ | 38,864 | $ | 21,747 | $ | 23,054 | |||||||||||
| Deferred tax liabilities: | |||||||||||||||||
| Outside basis difference in partnerships | (22,799) | (20,875) | (26,485) | ||||||||||||||
| Intangible assets | (26,187) | (28,734) | (36,974) | ||||||||||||||
| Operating lease right-of-use-assets | (4,759) | (5,133) | (5,818) | ||||||||||||||
| Property and equipment depreciation | (2,064) | (1,967) | (2,423) | ||||||||||||||
| Other | (55) | — | (26) | ||||||||||||||
| Total deferred tax liabilities | (55,864) | (56,709) | (71,726) | ||||||||||||||
| Net deferred tax liabilities | $ | (17,000) | $ | (34,962) | $ | (48,672) | |||||||||||
The Company acquired additional tax attributes from prior acquisitions. As of December 31, 2025, the Company had 163(j) interest carryforward of $23.3 million, Federal net operating loss of $34.2 million and State net operating loss of $62.0 million. The Federal net operating losses can be carried forward indefinitely. Many of the jurisdictions in which the Company has State net operating losses have an indefinite carryforward period; however, $2.4 million of State net operating losses could begin to expire as early as 2037 if not utilized.
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company regularly evaluates valuation allowances for deferred tax assets for which future realization is uncertain, including in connection with changes in tax laws. As of December 31, 2025, the Company has a valuation allowance of $181.5 million. Of the total valuation allowance established, $169.2 million was recorded against the deferred tax asset related to the Company’s investment in Legence Holdings based on the difference between the financial statement amount of its investment and the tax basis (outside basis difference). The remainder of the valuation allowance established relates to the deferred tax assets on the tax receivable liability agreement and the state net operating loss carryforwards.
Pursuant to Section 382 of the Internal Revenue Code, utilization of Federal net operating loss carryforwards are subject to annual limitations due to the ownership changes of prior acquisitions. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Based on performing Section 382 studies for prior acquisitions, the Company does not expect any permanent expiration of net operating losses.
The Company recognizes gross unrecognized tax benefits in Other long-term liabilities on the Consolidated Balance Sheets, all of which would affect the effective income tax rate if recognized in future periods. The following table presents changes in the unrecognized tax benefits (in thousands):
| December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Unrecognized tax benefits at the beginning of period | $ | 10,358 | $ | 2,677 | $ | 2,677 | |||||||||||
| Increases based on tax positions related to the current period | — | — | — | ||||||||||||||
| Increases based on tax positions related to prior periods | — | 7,681 | — | ||||||||||||||
| Decreases based on tax positions related to prior periods | (2,453) | — | — | ||||||||||||||
| Decreases related to cash settlements with taxing authorities | — | — | — | ||||||||||||||
| Unrecognized tax benefits at the end of period | $ | 7,905 | $ | 10,358 | $ | 2,677 | |||||||||||
During the year ended December 31, 2025, the Company's unrecognized tax benefits decreased by $2.5 million due to a write off of a prior position as a result of statute of limitation expiration in 2025. During the year ended December 31, 2024, the Company’s unrecognized tax benefits increased by $7.7 million due to the AMA acquisition, which included consolidated VIEs. The Company anticipates that the unrecognized tax benefits could decrease by as much as approximately $2.2 million over the next 12 months.
The Company recognizes a liability for interest and penalties related to the unrecognized tax benefits. As of December 31, 2025 and 2024, the liability for interest and penalties was $3.1 million and $4.3 million, respectively, and is included in Other long-term liabilities on the Consolidated Balance Sheets. Of these amounts, $2.7 million and $4.1 million, respectively, relate to consolidated VIEs. The Company's policy is to classify interest and penalties as income tax expense.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Company remains subject to income tax examinations for its U.S. federal income taxes for tax years ending December 31, 2022 through 2025. Starting in 2021, the Company has utilized historical pre-acquisition tax losses (2009 through 2021) related to a prior acquisition, which could be subject to review by the IRS upon examination. The open years subject to examination for state tax purposes vary by jurisdiction but generally the Company is no longer subject to examinations for tax years ending on or before December 31, 2021.
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.