LKQ CORPLKQ

LKQ CORP Income Taxes Disclosure

10-KFiled Feb 19, 20268 min read
Income Taxes
The provision for income taxes consists of the following components (in millions):

Year Ended December 31,
 202520242023
Current:
Federal$135 $123 $139 
State35 38 40 
Foreign109 140 117 
Total current provision for income taxes$279 $301 $296 
Deferred:
Federal$(58)$(24)$6 
State(10)(3)2 
Foreign(7)(9)— 
Total deferred (benefit) provision for income taxes$(75)$(36)$8 
Total:
Federal$77 $99 $145 
State25 35 42 
Foreign102 131 117 
Provision for income taxes$204 $265 $304 

Income taxes have been based on the following components of income from continuing operations before provision for income taxes (in millions):
Year Ended December 31,
 202520242023
Domestic$371 $545 $783 
Foreign429 381 440 
Income from continuing operations before provision for income taxes$800 $926 $1,223 
As previously disclosed for the years ended December 31, 2024 and 2023, prior to the adoption of ASU 2023-09, the effective income tax rate differs from the statutory federal income tax rate as follows:
Year Ended December 31,
 20242023
U.S. federal statutory rate21.0 %21.0 %
State income taxes, net of state credits and federal tax impact2.6 %2.8 %
Impact of rates on international operations2.3 %1.2 %
Change in valuation allowances1.2 %0.9 %
Non-deductible expenses0.6 %1.2 %
Gains on foreign exchange contracts - acquisition related— %(0.8)%
Other, net1.0 %(1.5)%
Effective tax rate28.7 %24.8 %

The effective income tax rate for the tax year ended December 31, 2025 differs from the statutory federal income tax rate as follows (in millions):
Year Ended December 31, 2025
U.S. federal statutory rate$168 21.0 %
State income taxes, net of state credits and federal tax impact (1)
16 2.1 %
Foreign tax effects
Switzerland
Deductible impairment(9)(1.2)%
Other1 0.1 %
Germany
Subnational income taxes - trade taxes19 2.4 %
Enacted changes in tax laws or rates(11)(1.4)%
Other(11)(1.4)%
Other foreign jurisdictions21 2.8 %
Effect of cross-border tax laws(2)(0.2)%
Tax credits(2)(0.3)%
Changes in valuation allowances2 0.2 %
Non-taxable or non-deductible expenses
Non-deductible impairment10 1.3 %
Other2 0.2 %
Changes in unrecognized tax benefits1 0.1 %
Other adjustments(1)(0.2)%
Effective tax rate$204 25.5 %
(1)     State taxes in California, Illinois, Florida, Texas, Pennsylvania, New York, and Michigan made up the majority (greater than 50 percent) of the tax effect in this category.

Undistributed earnings of our foreign subsidiaries amounted to approximately $2,399 million at December 31, 2025. Beginning in 2018, the Tax Cuts and Jobs Act generally provided a 100% participation exemption from further U.S. taxation of dividends received from 10-percent or more owned foreign corporations held by U.S. corporate shareholders. Although foreign dividend income is generally exempt from U.S. federal tax in the hands of the U.S. corporate shareholders, either as a result of the participation exemption, or due to the previous taxation of such earnings under the transition tax and Global Intangible Low-Taxed Income regime ("GILTI") regimes, companies must still apply the guidance of ASC 740: Income Taxes to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. Further, the 2017 transition tax reduced a majority of the previous outside basis differences in our foreign subsidiaries, and most of any new differences arising have extensive interaction with the GILTI regime.
Based on a review of our global financing and capital expenditure requirements as of December 31, 2025, we continue to plan to permanently reinvest the undistributed earnings of our international subsidiaries. Thus, no deferred U.S. income taxes or potential foreign withholding taxes have been recorded. Due to the complexity of the U.S. tax regime, it remains impractical to estimate the amount of deferred taxes potentially payable were such earnings to be repatriated.

The Organization for Economic Co-operation and Development ("OECD") released a framework, referred to as Pillar Two, to implement a global minimum corporate tax rate of 15% on certain multinational enterprises. Certain countries have enacted legislation to adopt the Pillar Two framework while several countries are considering or still announcing changes to their tax laws to implement the minimum tax directive. On January 5, 2026 the OECD released guidance providing for a Side-by-Side package available for U.S. parented groups beginning for fiscal years beginning on or after January 1, 2026. We have evaluated the developments and do not anticipate any material impact on our financial position, results of operations, or cash flows. We will continue to monitor as additional guidance becomes available.

On July 4, 2025, new U.S. tax legislation was signed into law, commonly referred to as the One Big Beautiful Bill Act ("OBBBA"), which includes significant provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act of 2017, modifications to the international tax framework and the restoration of favorable tax treatment for certain business provisions. The OBBBA includes the acceleration of fixed asset depreciation, modifications to the capitalization of domestic research and development expenses, modifications to the limitations to the deductibility of interest expense, and modifications to certain international provisions. These new provisions take effect starting in 2025 through 2027. The Company has evaluated the OBBBA enacted during the year and estimated its impact on the consolidated financial statements to be immaterial. We will continue to evaluate the full impact of these legislative changes as additional guidance becomes available.

The significant components of the deferred tax assets and liabilities are as follows (in millions):

December 31,
20252024
Deferred Tax Assets:
Accrued expenses and reserves$42 $57 
Qualified and nonqualified retirement plans19 20 
Inventory30 10 
Accounts receivable18 22 
Interest deduction carryforwards31 30 
Stock-based compensation8 9 
Operating lease liabilities335 346 
Net operating loss carryforwards29 38 
Other32 44 
Total deferred tax assets, gross544 576 
Less: valuation allowance(52)(51)
Total deferred tax assets$492 $525 
Deferred Tax Liabilities:
Goodwill and other intangible assets$304 $373 
Property, plant and equipment90 96 
Trade names74 79 
Operating lease assets, net323 336 
Other16 10 
Total deferred tax liabilities$807 $894 
Net deferred tax liability$(315)$(369)
Deferred tax assets and liabilities are reflected on the Consolidated Balance Sheets as follows (in millions):

December 31,
20252024
Noncurrent deferred tax assets$16 $17 
Noncurrent deferred tax liabilities331 386 

Noncurrent deferred tax assets and noncurrent deferred tax liabilities are included in Other noncurrent assets and Deferred income taxes, respectively, on the Consolidated Balance Sheets.

We have net operating loss carryforwards, primarily for certain international tax jurisdictions, the tax benefits of which totaled approximately $29 million and $38 million at December 31, 2025 and 2024, respectively. At December 31, 2025 and 2024, we had tax credit carryforwards for U.S. and certain U.S. state jurisdictions, the tax benefits of which totaled approximately $4 million and $3 million, respectively. As of December 31, 2025 and 2024, we had interest deduction carryforwards in Italy the tax benefits of which totaled $31 million and $30 million, respectively. As of December 31, 2025 and 2024, valuation allowances of $52 million and $51 million, respectively, were recorded for deferred tax assets related to the foreign interest deduction carryforwards, certain foreign and U.S. net operating loss carryforwards, tax credit, and capital loss carryforwards.

The majority of the net operating losses will generally carry forward until 2035 to 2044. The interest deduction carryforwards in Italy do not expire. Realization of these deferred tax assets is dependent on the generation of sufficient taxable income prior to the expiration dates, where applicable, or in the case of interest deduction carryforward, subject to legislative thin capitalization constraints, typically based on profitability. Based on historical and projected operating results, we believe that it is more likely than not that earnings will be sufficient to realize the deferred tax assets for which valuation allowances have not been provided. While we expect to realize the deferred tax assets, net of valuation allowances, changes in tax laws or in estimates of future taxable income may alter this expectation.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):

 202520242023
Balance at January 1,$28 $8 $5 
Additions for acquired tax positions— — 6 
Additions based on tax positions related to the current year2 10 — 
Additions based on tax positions related to prior years3 15 3 
Reductions for tax positions of prior year(18)— (1)
Lapse of statutes of limitations— (3)(5)
Settlements with taxing authorities(1)(2)— 
Cumulative translation adjustment1 — — 
Balance at December 31,$15 $28 $8 

Included in the balance of unrecognized tax benefits above as of December 31, 2025, 2024 and 2023, are approximately $15 million, $10 million and $8 million, respectively that, if recognized, would affect the effective tax rate. The balance of unrecognized tax benefits at December 31, 2025, 2024 and 2023 includes an insignificant amount, $18 million, and an insignificant amount of tax benefits that, if recognized, would result in adjustments to deferred taxes.

We recognize interest and penalties accrued related to unrecognized tax benefits as income tax expense. As of the years ended December 31, 2025, 2024 and 2023, we had accumulated interest and penalties of $1 million, attributable to the unrecognized tax benefits noted above. During each of the years ended December 31, 2025, 2024 and 2023, we recorded $1 million or less of interest and penalties through the income tax provision, prior to any reversals for lapses in the statutes of limitations and settlements.

The Company and/or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various U.S. state and international jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or international income tax examinations by tax authorities for years before 2019. Adjustments from examinations, if any, are not expected to have a material effect on our Consolidated Financial Statements.
The amounts of income taxes paid (net of refunds) are as follows (in millions):
 Year Ended December 31, 2025
Federal$150 
State32 
Foreign
Germany27 
United Kingdom25 
Canada18 
Other48 
Total foreign118 
Total net income taxes paid$300 

Net income taxes paid were $322 million and $305 million for years ended December 31, 2024 and 2023, respectively.

Historical Timeline

Fiscal YearFiled
2025Feb 19, 2026Showing above
2024Feb 20, 2025
2023Feb 22, 2024
2022Feb 23, 2023
2021Feb 25, 2022
2020Feb 26, 2021
2019Feb 27, 2020
2018Mar 1, 2019
2017Feb 28, 2018
2016Feb 27, 2017
2015Feb 25, 2016

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.

Other Available Disclosures

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