MADRIGAL PHARMACEUTICALS, INC.MDGL
MADRIGAL PHARMACEUTICALS, INC. Income Taxes Disclosure
Income Taxes
The Company is subject to U.S. federal, state, and foreign income taxes. For the years ended December 31, 2025, 2024, and 2023, the components of loss before provision for income taxes consisted of $158.5 million, $465.9 million, and $373.6 million, respectively, for the United States and $129.8 million for foreign in 2025. The Company did not have any foreign operations in 2024 or 2023.
As of December 31, 2025, the Company had federal net operating loss (“NOL”) carryforwards of approximately $1,179.0 million available to reduce future taxable income, of which $40.4 million will expire between 2031 and 2037. In addition, the Company had foreign NOL carryforwards of approximately $130.8 million available to reduce future taxable income, which will begin to expire in 2033. The Company also had state NOL carryforwards of approximately $979.5 million available to reduce future taxable income, which expire between 2031 and 2043. In addition, the Company had unused federal and state research and development tax credit carryforwards of approximately $81.6 million.
Under Section 382 of the Internal Revenue Code (“IRC”), the utilization of NOL carryforwards may be limited in the event of certain cumulative changes in ownership over a three-year period. Such an ownership change could limit the Company’s ability to utilize its NOL carryforwards and could be triggered by future issuances or sales of securities by the Company or its stockholders. The Company has determined that an ownership change occurred during the year ended December 31, 2017. As a result, the Company’s NOL carryforwards are estimated to be subject to an annual limitation; however, none of the NOLs are expected to expire before becoming available to reduce future taxable income.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will not 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.
As there is no assurance of future taxable income, a full valuation allowance has been established to offset the deferred tax assets. The valuation allowance increased $82.2 million for the year ended December 31, 2025. Changes in the deferred tax asset will be recorded as an income tax benefit or expense on the accompanying consolidated statements of operations.
Entities are also required to evaluate, measure, recognize and disclose any uncertain income tax provisions taken on their income tax returns. The Company has analyzed its tax positions and determined that it had net liabilities for uncertain tax positions, including accrued interest and penalties, of $12.1 million as of December 31, 2025. There were no uncertain tax positions as of December 31, 2024. Of the liabilities for uncertain tax positions as of December 31, 2025, none would impact the Company’s effective tax rate if recognized. The Company does not reasonably expect any material changes to the estimated liability associated with its uncertain tax positions in the next twelve months. Interest and penalties, if any, as they relate to income taxes assessed, are included in the income tax provision. There were no income tax related interest and penalties included in the income tax provision for 2025.
Unrecognized tax benefits were as follows (in thousands):
| For the years ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
Balance at beginning of period | $ | — | $ | — | $ | — | |||||||||||
Increases related to current period tax positions | 3,160 | — | — | ||||||||||||||
Increases related to prior period tax positions | 8,898 | — | — | ||||||||||||||
Balance at end of period | $ | 12,058 | $ | — | $ | — | |||||||||||
The Company files U.S. federal income tax returns and income tax returns in various state, local, and foreign jurisdictions and is routinely subject to examination by taxing authorities in those jurisdictions. Tax years beginning in 2021 remain open to examination by the Internal Revenue Service (“IRS”), state, and foreign taxing authorities. To the extent that the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon IRS, state, or foreign tax authorities’ examination to the extent utilized in a future period.
Temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands):
| For the years ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Deferred tax liabilities | |||||||||||||||||
| Unrealized gains on investments | $ | 117 | $ | 117 | $ | 117 | |||||||||||
| Other deferred tax liabilities | — | 100 | — | ||||||||||||||
Property, plant & equipment | 245 | — | — | ||||||||||||||
| Total deferred tax liabilities | $ | 362 | $ | 217 | $ | 117 | |||||||||||
| Deferred tax assets | |||||||||||||||||
| Accrued expenses | 14,958 | 8,082 | 3,857 | ||||||||||||||
| Intangibles | 40,777 | 401 | 503 | ||||||||||||||
| Gross to net accruals | 3,462 | 167 | — | ||||||||||||||
| Stock compensation | 21,940 | 16,342 | 33,976 | ||||||||||||||
| Property, plant & equipment | — | 172 | 95 | ||||||||||||||
| Net operating losses and other carryforwards | 318,121 | 214,464 | 121,589 | ||||||||||||||
| Capitalized R&D | 120,932 | 200,199 | 175,145 | ||||||||||||||
Other deferred tax assets | 2,192 | — | — | ||||||||||||||
| R&D credit | 69,029 | 69,201 | 48,074 | ||||||||||||||
| Total deferred tax assets before valuation allowance | 591,411 | 509,028 | 383,239 | ||||||||||||||
| Valuation allowance | (591,049) | (508,811) | (383,122) | ||||||||||||||
| Total deferred tax assets | 362 | 217 | 117 | ||||||||||||||
| Net deferred tax assets | $ | — | $ | — | $ | — | |||||||||||
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate for the year ended December 31, 2025 is as follows (in thousands, except percent):
| For the year ended December 31, 2025 | |||||||||||
| Amount | Percent | ||||||||||
| Tax benefit at U.S. federal statutory rate | $ | (60,352) | 21.0 | % | |||||||
State and local income taxes, net of federal income tax effect | — | — | |||||||||
Foreign tax effects | |||||||||||
Switzerland | |||||||||||
Statutory tax rate difference between Switzerland & United States | 17,227 | (6.0) | |||||||||
Change in valuation allowance | 10,242 | (3.6) | |||||||||
Other foreign jurisdictions | 95 | — | |||||||||
Tax credits | (11,886) | 4.1 | |||||||||
Change in valuation allowance | 64,331 | (22.4) | |||||||||
Nontaxable or nondeductible items | |||||||||||
| Stock based compensation | (44,008) | 15.3 | |||||||||
| 162M limitation | 9,755 | (3.4) | |||||||||
Change in unrecognized Tax Benefits | 12,058 | (4.2) | |||||||||
| Other adjustments | 2,538 | (0.9) | |||||||||
| Income tax expense (benefit) and effective tax rate | $ | — | — | % | |||||||
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate for the years ended December 31, 2024 and 2023 is as follows (in thousands):
| For the years ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Tax benefit at U.S. federal statutory rate | $ | (97,837) | $ | (78,462) | |||||||
Stock-based compensation | (9,954) | (8,287) | |||||||||
162M limitation | 21,627 | 3,183 | |||||||||
Other nondeductible expenses | 835 | 53 | |||||||||
State income tax benefit before valuation allowance, net of federal benefit | (19,280) | (16,246) | |||||||||
Increase in domestic valuation allowance | 125,689 | 112,606 | |||||||||
Research and development credit | (17,679) | (12,971) | |||||||||
| Other adjustments | (3,401) | 124 | |||||||||
| Income tax expense (benefit) | $ | — | $ | — | |||||||
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.