Cloudflare, Inc.NET
Cloudflare, Inc. Income Taxes Disclosure
Income Taxes
The components of the Company's loss before income taxes for the years ended December 31, 2025, 2024, and 2023 were as follows:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Domestic | $ | (143,442) | $ | (125,307) | $ | (210,547) | |||||||||||
| Foreign | 50,736 | 54,436 | 32,685 | ||||||||||||||
| Total loss before income taxes | $ | (92,706) | $ | (70,871) | $ | (177,862) | |||||||||||
The components of the Company's provision for (benefit from) income taxes for the years ended December 31, 2025, 2024, and 2023 were as follows:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Current expense: | |||||||||||||||||
| Federal | $ | 3,012 | $ | 1,681 | $ | 513 | |||||||||||
| State | 308 | 142 | 324 | ||||||||||||||
| Foreign | 4,908 | 3,995 | 2,986 | ||||||||||||||
| Total current provision for income taxes | $ | 8,228 | $ | 5,818 | $ | 3,823 | |||||||||||
| Deferred expense (benefit): | |||||||||||||||||
| Federal | $ | (1,503) | $ | (1,205) | $ | — | |||||||||||
| State | (563) | (235) | — | ||||||||||||||
| Foreign | 3,399 | 3,551 | 2,264 | ||||||||||||||
Total deferred provision for income taxes | $ | 1,333 | $ | 2,111 | $ | 2,264 | |||||||||||
Total provision for (benefit from) income taxes | |||||||||||||||||
Federal | $ | 1,509 | $ | 476 | $ | 513 | |||||||||||
State | (255) | (93) | 324 | ||||||||||||||
Foreign | 8,307 | 7,546 | 5,250 | ||||||||||||||
| Total provision for income taxes | $ | 9,561 | $ | 7,929 | $ | 6,087 | |||||||||||
A reconciliation of the U.S. federal statutory rate to the Company's effective tax rate under the requirements of ASU 2023-09 for the year ended December 31, 2025 is as follows:
| Year Ended December 31, | |||||||||||
| 2025 | |||||||||||
| (in thousands) | |||||||||||
| U.S. federal statutory income tax rate | $ | (19,468) | 21.0 | % | |||||||
State income taxes, net of federal tax benefits(1) | (154) | 0.2 | % | ||||||||
| Foreign tax effects | |||||||||||
United Kingdom | |||||||||||
Stock-based and employee compensation | (16,151) | 17.4 | % | ||||||||
Changes in valuation allowances | 15,071 | (16.3) | % | ||||||||
Deferred remeasurement | (3,856) | 4.1 | % | ||||||||
Other | 1,766 | (1.9) | % | ||||||||
| Portugal | |||||||||||
Research and development tax credits | (1,566) | 1.7 | % | ||||||||
Other | (165) | 0.2 | % | ||||||||
Brazil | 1,245 | (1.3) | % | ||||||||
Other foreign jurisdictions | 3,672 | (4.0) | % | ||||||||
| Federal | |||||||||||
Tax credits | |||||||||||
Research and development tax credits | (18,178) | 19.6 | % | ||||||||
| Changes in valuation allowances | 139,326 | (150.3) | % | ||||||||
Nontaxable or nondeductible items | |||||||||||
Stock-based and employee compensation | (98,134) | 105.9 | % | ||||||||
Other | 1,089 | (1.2) | % | ||||||||
Other adjustments | (167) | 0.2 | % | ||||||||
| Changes in unrecognized tax benefits | 5,231 | (5.6) | % | ||||||||
Total provision for income taxes | $ | 9,561 | (10.3) | % | |||||||
(1) State tax benefits in California made up the majority (greater than 50%) of the tax effect in this category.
A reconciliation of the U.S. federal statutory rate to the Company's effective tax rate for the years ended December 31, 2024 and 2023 is as follows:
| Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Expected benefit at U.S. federal statutory rate | 21.0 | % | 21.0 | % | |||||||
| State income taxes, net of federal tax benefits | 0.1 | (0.1) | |||||||||
| Foreign income or losses taxed at different rates | 5.9 | 1.0 | |||||||||
| Stock-based compensation | 60.8 | 12.4 | |||||||||
Non-deductible compensation | (9.4) | (0.9) | |||||||||
| Change in valuation allowance | (84.8) | (30.6) | |||||||||
| Withholding taxes | (2.3) | (0.3) | |||||||||
Gain/loss on convertible senior notes | — | (5.1) | |||||||||
| Miscellaneous permanent items | (2.4) | (0.8) | |||||||||
Total provision for income taxes | (11.1) | % | (3.4) | % | |||||||
A summary of income taxes paid, net of refunds, for the year ended December 31, 2025 is as follows:
| Year Ended December 31, | |||||
| 2025 | |||||
| (in thousands) | |||||
U.S. State and local | $ | 147 | |||
Foreign | 7,620 | ||||
Total cash paid during the period for income taxes, net of refunds | $ | 7,767 | |||
Individual jurisdictions equaling 5% or more of the total income taxes paid, net of refunds, for the tax year ended December 31, 2025 include Brazil at $1.2 million, Singapore at $1.0 million, India at $0.9 million, Australia at $0.7 million, France at $0.5 million, Germany at $0.5 million, and Canada at $0.4 million.
The components of the Company's deferred tax assets and liabilities as of December 31, 2025 and 2024 were as follows:
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Deferred tax assets: | |||||||||||
| Net operating loss carryforwards | $ | 519,271 | $ | 442,764 | |||||||
| Tax credit carryforwards | 92,528 | 74,866 | |||||||||
| Capitalized research and development expenditures | 189,171 | 109,623 | |||||||||
| Operating lease liabilities | 59,410 | 43,135 | |||||||||
| Stock-based compensation | 43,725 | 42,101 | |||||||||
| Accrued expenses and reserves | 6,551 | 5,812 | |||||||||
| Capitalized contract expenditures | 46,473 | 8,664 | |||||||||
| Other | 10,145 | 1,542 | |||||||||
| Gross deferred tax assets | 967,274 | 728,507 | |||||||||
| Valuation allowance | (822,141) | (630,590) | |||||||||
| Total deferred tax assets | $ | 145,133 | $ | 97,917 | |||||||
| Deferred tax liabilities: | |||||||||||
| Right-of-use assets | (56,430) | (40,579) | |||||||||
| Deferred commissions | (53,694) | (42,483) | |||||||||
| Capitalized internal-use software | (9,238) | (4,570) | |||||||||
| Depreciation and amortization | (40,430) | (21,849) | |||||||||
| Other | — | (38) | |||||||||
| Total deferred tax liabilities | $ | (159,792) | $ | (109,519) | |||||||
Net deferred tax liabilities | $ | (14,659) | $ | (11,602) | |||||||
In determining the need for a valuation allowance, the Company weighs both positive and negative evidence in the various jurisdictions in which it operates to determine whether it is more likely than not that its deferred tax assets are realizable. A full valuation allowance has been established in the United States and United Kingdom and no deferred tax assets and related tax benefits have been recognized in the consolidated financial statements. There is no valuation allowance associated with any other jurisdiction as of December 31, 2025.
The worldwide valuation allowance as of December 31, 2025 and 2024 was $822.1 million and $630.6 million, respectively. The net change in the worldwide valuation allowance for the years ended December 31, 2025, 2024, and 2023 was an increase of $191.5 million, an increase of $78.4 million, and an increase of $74.6 million, respectively. The increase in the Company’s valuation allowance compared to the prior year was primarily due to an increase in taxable losses generated in the United States and United Kingdom and the capitalization and amortization of research and development expenses.
As of December 31, 2025, the Company had federal and state net operating loss carryforwards of $1,859.1 million and $988.3 million, which begin to expire in 2029 and 2027, respectively. As of December 31, 2025, the Company had U.K. net operating loss carryforwards of $269.8 million that can be carried forward indefinitely.
As of December 31, 2025, the Company had research and development tax credit carryforwards for federal and state purposes of $91.6 million and $42.2 million, which begin to expire in 2029 and 2039, respectively.
As of December 31, 2025 the Company had foreign tax credit carryforwards for federal income tax purposes of $0.3 million, which will expire, if not utilized, in 2026.
Utilization of net operating losses and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by Section 382 of the Internal Revenue Code and similar state provisions. Such a limitation could result in the expiration of the net operating loss carryforwards and tax credits before utilization.
On July 4, 2025, the United States signed into law the One Big Beautiful Bill Act (OBBBA), which, among other provisions, makes permanent the immediate expensing of domestic research and development expenditures, reinstates 100% bonus depreciation for certain qualified property, and modifies the international tax framework. The enactment of OBBBA resulted in an immaterial impact on the income tax provision due to the Company’s full valuation allowance in the United States.
A reconciliation of the beginning and ending amount of the Company's total gross unrecognized tax benefits was as follows:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance as of the beginning of the period | $ | 33,014 | $ | 29,039 | $ | 23,940 | |||||||||||
| Increases for tax positions related to the prior year | 732 | 268 | 590 | ||||||||||||||
| Decreases for tax positions related to the prior year | (473) | (1,232) | (243) | ||||||||||||||
| Additions for tax positions related to the current year | 8,969 | 4,939 | 4,752 | ||||||||||||||
| Balance as of the end of the period | $ | 42,242 | $ | 33,014 | $ | 29,039 | |||||||||||
The Company classifies uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year or otherwise directly related to an existing deferred tax asset, in which case the asset is recorded net of the uncertain tax position on the consolidated balance sheet. As of December 31, 2025, $0.9 million of the Company’s gross unrecognized tax benefits, if recognized, would affect the effective tax rate and $41.3 million would result in an adjustment to deferred tax assets with corresponding adjustments to valuation allowance.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company did not recognize any income tax expense related to interest and penalties in the years ended December 31, 2025, 2024, and 2023, respectively.
The Company currently considers its significant tax jurisdictions to include the United States, Portugal, and the United Kingdom. Because of the net operating loss carryforwards, substantially all of the Company’s tax years remain open to U.S. federal and state tax examination. The Company’s foreign tax returns are open to audit under the statutes of limitations of the respective foreign countries in which the subsidiaries are located.
The Company generally does not provide deferred income taxes for the undistributed earnings of its foreign subsidiaries where the Company intends to reinvest such earnings indefinitely. Should circumstances change and it becomes apparent that some or all of the undistributed earnings will no longer be indefinitely reinvested, the Company will accrue for income taxes not previously recognized, where applicable.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 26, 2026 | Showing above |
| 2024 | Feb 20, 2025 | |
| 2023 | Feb 21, 2024 | |
| 2022 | Feb 24, 2023 | |
| 2021 | Mar 1, 2022 | |
| 2020 | Feb 25, 2021 | |
| 2019 | Mar 4, 2020 | |
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.