ON SEMICONDUCTOR CORPON
ON SEMICONDUCTOR CORP Income Taxes Disclosure
Note 16: Income Taxes
The Company's geographic sources of income before income taxes were as follows (in millions):
| Year ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| United States | $ | (102.2) | $ | 1,584.3 | $ | 2,222.2 | |||||||||||
| Foreign | 233.5 | 253.1 | 313.6 | ||||||||||||||
| Income before income taxes | $ | 131.3 | $ | 1,837.4 | $ | 2,535.8 | |||||||||||
The Company's provision for income taxes was as follows (in millions):
| Year ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 110.1 | $ | 276.6 | $ | 372.7 | |||||||||||
| State and local | 8.7 | 20.4 | 21.6 | ||||||||||||||
| Foreign | 59.5 | 52.0 | 76.9 | ||||||||||||||
| Total | 178.3 | 349.0 | 471.2 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (177.2) | (58.2) | (107.9) | ||||||||||||||
| State and local | (7.1) | (18.1) | 13.2 | ||||||||||||||
| Foreign | 13.7 | (9.9) | (26.3) | ||||||||||||||
| Total | (170.6) | (86.2) | (121.0) | ||||||||||||||
| Total provision | $ | 7.7 | $ | 262.8 | $ | 350.2 | |||||||||||
As further provided in Note 4: ''Recent Accounting Pronouncements and Other Developments,'' the Company has elected to prospectively adopt the guidance in ASU 2023-09. The following table is a reconciliation of the U.S. federal statutory income tax rate to the Company's effective tax rate for the year ended December 31, 2025 in accordance with the guidance in ASU 2023-09 (in millions):
| Year ended December 31, | |||||||||||
| 2025 | |||||||||||
| Amount | Percent | ||||||||||
| U.S. federal statutory rate | $ | 27.5 | 21.0 | % | |||||||
State and local income taxes, net of federal income tax effect (1) | (1.2) | (0.9) | % | ||||||||
| Foreign tax effects: | |||||||||||
| Japan: | |||||||||||
| Withholding taxes | 5.4 | 4.1 | % | ||||||||
| Change in valuation allowance | 7.6 | 5.8 | % | ||||||||
| Other | 4.7 | 3.6 | % | ||||||||
| Malaysia: | |||||||||||
| Investment credit expiration | 30.8 | 23.4 | % | ||||||||
| Change in valuation allowance | (27.1) | (20.7) | % | ||||||||
| Other | 0.6 | 0.4 | % | ||||||||
| Korea: | |||||||||||
| Currency translation gain (loss) | 11.2 | 8.5 | % | ||||||||
| Other | 4.0 | 3.0 | % | ||||||||
| Switzerland: | |||||||||||
| Nontaxable foreign exchange gain | (7.0) | (5.3) | % | ||||||||
| Foreign tax rate differential | (5.2) | (4.0) | % | ||||||||
| Other | 1.7 | 1.3 | % | ||||||||
| Other foreign jurisdictions | (1.7) | (1.2) | % | ||||||||
| Effect of cross-border tax laws: | |||||||||||
| Foreign-derived intangible income | (34.7) | (26.4) | % | ||||||||
| Subpart F | 31.0 | 23.6 | % | ||||||||
| Foreign tax credits | (57.3) | (43.6) | % | ||||||||
| Other | (1.9) | (1.4) | % | ||||||||
| Tax credits: | |||||||||||
| Federal research and development credit | (12.0) | (9.1) | % | ||||||||
| Change in valuation allowance | (0.4) | (0.3) | % | ||||||||
| Nontaxable or nondeductible items: | |||||||||||
| Stock-based compensation | 11.3 | 8.6 | % | ||||||||
| Non-deductible officer compensation | 8.5 | 6.4 | % | ||||||||
| Other | 5.7 | 4.4 | % | ||||||||
| Changes in unrecognized tax benefits | 6.1 | 4.6 | % | ||||||||
| Other adjustments | 0.1 | 0.1 | % | ||||||||
| Effective tax rate | $ | 7.7 | 5.9 | % | |||||||
(1)State taxes in Arizona and Minnesota make up the majority (greater than 50 percent) of the tax effect in this category.
A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate for the years ended December 31, 2024 and 2023 in accordance with the guidance prior to the adoption of ASU 2023-09 is as follows:
| Year ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| U.S. federal statutory rate | 21.0 | % | 21.0 | % | |||||||
| Increase (decrease) resulting from: | |||||||||||
| State and local taxes, net of federal tax benefit | 0.4 | 0.7 | |||||||||
| Impact of foreign operations | 1.4 | 0.3 | |||||||||
| Foreign-derived intangible income benefit | (6.9) | (6.8) | |||||||||
Change in valuation allowance and related effects (1) | 0.2 | 0.5 | |||||||||
| Share-based compensation costs | 0.2 | (0.2) | |||||||||
| U.S. federal R&D credit | (1.1) | (0.4) | |||||||||
| Non-deductible officer compensation | 0.4 | 0.3 | |||||||||
| Impact of audit settlement | (0.7) | (1.8) | |||||||||
| Other | (0.6) | 0.2 | |||||||||
| Total | 14.3 | % | 13.8 | % | |||||||
(1)For the year ended December 31, 2024, this included a benefit of $7.5 million, or 0.4% related to the decrease in the valuation allowance for the expiration of Japan net operating losses ("NOLs"), partially netted with an offsetting expense of $6.2 million or 0.3% related to the expiration of those same Japan NOLs. For the year ended December 31, 2023, this included a benefit of $13.7 million, or 0.5% related to a decrease in the valuation allowance for the expiration of Japan NOLs, partially netted with an offsetting expense of $15.3 million, or 0.6% related to the expiration of those same Japan NOLs.
The tax effects of temporary differences in the recognition of income and expense for tax and financial reporting purposes that give rise to significant portions of the net deferred tax asset (liability) were as follows (in millions):
| As of December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| NOL and tax credit carryforwards | $ | 278.4 | $ | 308.7 | |||||||
| 163 (j) interest expense carryforward | 0.3 | 4.4 | |||||||||
| Lease liabilities | 51.0 | 57.6 | |||||||||
| ROU asset | (41.0) | (52.7) | |||||||||
| Tax-deductible goodwill and amortizable intangibles | (58.6) | (31.6) | |||||||||
| Capitalization of research and development expenses | 566.0 | 523.7 | |||||||||
| Reserves and accruals | 108.7 | 61.7 | |||||||||
| Property, plant and equipment | 20.7 | (122.1) | |||||||||
| Inventories | 151.4 | 116.0 | |||||||||
| Undistributed earnings of foreign subsidiaries | (71.3) | (77.8) | |||||||||
| Share-based compensation | 10.1 | 10.4 | |||||||||
| Pension | (2.1) | 0.2 | |||||||||
| Convertible Debt | 68.6 | 89.0 | |||||||||
| Other | 12.3 | 21.0 | |||||||||
| Deferred tax assets and liabilities before valuation allowance | 1,094.5 | 908.5 | |||||||||
| Valuation allowance | (207.1) | (216.2) | |||||||||
| Net deferred tax asset | $ | 887.4 | $ | 692.3 | |||||||
The Company has investment tax credits, which are accounted for pursuant to ASC 740, in Korea and the Czech Republic. The Company uses the deferral method of accounting for investment tax credits under which the credits are recognized as reductions
in the carrying value of the related assets. Deferred tax related to differences in GAAP versus tax carrying value is recorded pursuant to the gross-up method.
As of December 31, 2025 and 2024, the Company had approximately $2.5 million and $4.4 million, respectively, of U.S. federal NOL carryforwards, before the impact of unrecognized tax benefits. The decrease is due to current year utilization. These NOL carryforwards can be carried forward indefinitely until utilized. As of December 31, 2025 and 2024, the Company had approximately $1.4 million and $0.5 million, respectively, of U.S. federal credit carryforwards, before consideration of the impact of unrecognized tax benefits and the valuation allowance. The credits will expire in 2032 if unutilized. These NOL and credit carryforwards relate to acquisitions and, consequently, are limited in the amount that can be utilized in any one year.
As of December 31, 2025 and 2024, the Company had approximately $224.5 million and $245.7 million, respectively, of U.S. state NOL carryforwards, before consideration of valuation allowance or the impact of unrecognized tax benefits. The decrease is primarily due to current year utilization. The U.S. state NOL carryforwards will expire in varying amounts beginning in 2026 while an amount of the state NOLs carryforward indefinitely. As of December 31, 2025 and 2024, the Company had $114.1 million and $110.2 million, respectively, of U.S. state credit carryforwards before consideration of valuation allowance or the impact of unrecognized tax benefits. The U.S. state credits will expire in varying amounts beginning in 2026 while a substantial amount of the state credits carryforward indefinitely.
As of December 31, 2025 and 2024, the Company had approximately $237.1 million and $244.1 million, respectively, of foreign NOL carryforwards, before consideration of valuation allowance. The decrease is primarily due to current year utilization. As of December 31, 2025 and 2024, the Company had $145.6 million and $157.6 million, respectively, of foreign credit carryforwards before consideration of valuation allowance. A significant portion of the foreign NOLs and credit carryforwards will expire in varying amounts prior to 2035, if unutilized.
The Company analyzes the need for a valuation allowance related to its deferred tax assets. As of December 31, 2025, the Company recorded a partial valuation of $73.1 million against the Korea investment tax credits forecasted to expire unutilized. Of the remaining valuation allowance of $134.0 million, $40.6 million primarily relates to NOLs and tax credits in certain other foreign jurisdictions that primarily expire in 2026, and $93.4 million, net of federal benefit on its U.S. state NOL and credit deferred tax assets forecasted to expire unutilized. See Schedule II - "Valuation and Qualifying Accounts" included elsewhere in this Form 10-K.
As of December 31, 2025, the Company was not indefinitely reinvested with respect to the earnings of its foreign subsidiaries and has therefore accrued withholding taxes that would be owed upon future distributions of such earnings.
The activity for unrecognized gross tax benefits was as follows (in millions):
| 2025 | 2024 | 2023 | |||||||||||||||
| Balance at beginning of year | $ | 45.7 | $ | 67.7 | $ | 136.8 | |||||||||||
| Additions for tax benefits related to the current year | 3.7 | 5.2 | 3.4 | ||||||||||||||
| Additions for tax benefits of prior years | 9.4 | 1.4 | 0.7 | ||||||||||||||
| Reductions for tax benefits of prior years | — | (22.3) | (48.0) | ||||||||||||||
| Lapse of statute | (4.1) | (4.0) | (9.9) | ||||||||||||||
| Settlements | (6.0) | (2.3) | (15.3) | ||||||||||||||
| Balance at end of year | $ | 48.7 | $ | 45.7 | $ | 67.7 | |||||||||||
Included in the December 31, 2025 balance of $48.7 million is $39.5 million related to unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. Also included in the balance of unrecognized tax benefits as of December 31, 2025 is $9.2 million of benefit that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.
The Company recognizes interest and penalties accrued related to uncertain tax positions in tax expense in the Consolidated Statements of Operations and Comprehensive Income. The Company recognized approximately $0.4 million of net tax benefit, $1.6 million of net tax expense and $0.8 million of tax benefit for interest and penalties during the year ended December 31, 2025, 2024 and 2023, respectively. The Company had approximately $3.2 million, $3.6 million, and $2.0 million of accrued interest and penalties as of December 31, 2025, 2024, and 2023, respectively.
The Company is currently under IRS examination for the 2022 and 2023 tax years. Tax years prior to 2021 are generally not subject to examination by the IRS. For state tax returns, the Company is generally not subject to income tax examinations for tax years prior to 2021. With respect to jurisdictions outside the United States, the Company is generally not subject to examination for tax years prior to 2015.Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 9, 2026 | Showing above |
| 2024 | Feb 10, 2025 | |
| 2023 | Feb 5, 2024 | |
| 2022 | Feb 6, 2023 | |
| 2021 | Feb 14, 2022 | |
| 2020 | Feb 16, 2021 | |
| 2019 | Feb 19, 2020 | |
| 2018 | Feb 20, 2019 | |
| 2017 | Feb 21, 2018 | |
| 2016 | Feb 28, 2017 | |
| 2015 | Feb 24, 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.