PEGASYSTEMS INCPEGA
PEGASYSTEMS INC Income Taxes Disclosure
18. INCOME TAXES
The components of income before (benefit from) provision for income taxes are:
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Domestic | $ | 160,307 | $ | 51,966 | $ | 14,016 | |||||||||||
| Foreign | 120,320 | 90,670 | 81,424 | ||||||||||||||
| $ | 280,627 | $ | 142,636 | $ | 95,440 | ||||||||||||
The components of (benefit from) provision for income taxes are:
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 27,011 | $ | 22,941 | $ | 7,827 | |||||||||||
| State | 7,236 | 7,503 | 4,480 | ||||||||||||||
| Foreign | 23,756 | 14,547 | 14,962 | ||||||||||||||
| Total current provision | 58,003 | 44,991 | 27,269 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (90,414) | — | — | ||||||||||||||
| State | (24,461) | — | — | ||||||||||||||
| Foreign | (55,938) | (1,544) | 363 | ||||||||||||||
| Total deferred (benefit) provision | (170,813) | (1,544) | 363 | ||||||||||||||
| $ | (112,810) | $ | 43,447 | $ | 27,632 | ||||||||||||
Below is a reconciliation of the U.S federal statutory tax rate and the Company’s effective tax rate for 2025:
| 2025 | |||||||||||
| (in thousands, except percentages) | Amount | Percent | |||||||||
| U.S. federal statutory income tax | $ | 58,932 | 21 | % | |||||||
State and local income taxes, net of federal benefit(1) | (13,280) | (5) | % | ||||||||
| United States: | |||||||||||
| Effect of cross-border tax laws: | |||||||||||
| Other | (2,216) | (1) | % | ||||||||
| Tax credits: | |||||||||||
| Research and development credits | (3,935) | (1) | % | ||||||||
| Changes in valuation allowances | (97,682) | (35) | % | ||||||||
| Non-taxable or non-deductible items: | |||||||||||
| Non deductible compensation | 10,914 | 4 | % | ||||||||
| Excess tax (benefits) related to share-based compensation | (21,611) | (8) | % | ||||||||
| Other | 65 | — | % | ||||||||
| Other adjustments: | |||||||||||
| Attribute write-off | 4,870 | 2 | % | ||||||||
| Other | 1,816 | 1 | % | ||||||||
| Foreign tax effects: | |||||||||||
| United Kingdom: | |||||||||||
| Statutory tax rate difference | 3,215 | 1 | % | ||||||||
| Changes in valuation allowances | (60,624) | (22) | % | ||||||||
| Other | (5,380) | (2) | % | ||||||||
| India | 8,234 | 3 | % | ||||||||
| Other foreign jurisdictions | 6,014 | 2 | % | ||||||||
| Changes in unrecognized tax benefits | (2,142) | (1) | % | ||||||||
| $ | (112,810) | (40) | % | ||||||||
(1) State and local taxes in District of Columbia, Virginia, Minnesota, Maryland, California, and Florida comprise the majority of this category.
The effective income tax rate and tax benefit recorded in 2025 was primarily driven by the release of the valuation allowance on our net deferred tax assets in the U.S. and U.K.
The One Big Beautiful Bill Act (“OBBBA”) was enacted in the U.S. on July 4, 2025. The OBBBA provides for the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act of 2017, including revisions to the international tax framework and the reinstatement of favorable tax treatment for certain business tax provisions. The OBBBA allows for the ability to immediately expense domestic research and experimental (“R&E”) expenditures starting in 2025 and provides an optional election to accelerate any unamortized domestic R&D expenditures over a one or two year period beginning with the 2025 tax year. In accordance with ASC 740, the impacts of the OBBBA are reflected in the Company’s results for 2025.
Below is a reconciliation of the U.S federal statutory tax rate and the Company’s effective tax rate for 2024 and 2023:
| (in thousands) | 2024 | 2023 | |||||||||
| U.S. federal income taxes at statutory rates | $ | 29,954 | $ | 20,042 | |||||||
| Valuation allowance | (1,504) | (19,272) | |||||||||
| State income taxes, net of federal benefit and tax credits | 1,297 | 4,117 | |||||||||
| Permanent differences | 786 | 435 | |||||||||
| Federal research and experimentation credits | (4,888) | (3,709) | |||||||||
| Tax effects of foreign activities | (7,817) | 658 | |||||||||
| GILTI, FDII, and BEAT | 13,945 | 14,022 | |||||||||
| Provision to return adjustments | 121 | (3,728) | |||||||||
| Non-deductible compensation | 10,933 | 6,818 | |||||||||
| Tax Reserves | 5,917 | 1,850 | |||||||||
| Excess tax (benefits)/ detriments related to share-based compensation | (5,645) | 4,666 | |||||||||
| Impact of change in tax law | — | 1,726 | |||||||||
| Other | 348 | 7 | |||||||||
| $ | 43,447 | $ | 27,632 | ||||||||
Income Tax Payments
Below is a summary of income taxes paid, net of refunds received by jurisdiction:
| (in thousands) | 2025 | ||||
| India | $ | 12,240 | |||
| United Kingdom | 9,408 | ||||
| United States - State and local | 5,539 | ||||
| Australia | 2,247 | ||||
| United States - Federal | (11,233) | ||||
| Other | 3,429 | ||||
| $ | 21,630 | ||||
Deferred income taxes
Significant components of net deferred tax assets and liabilities are:
| December 31, | |||||||||||
| (in thousands) | 2025 | 2024 | |||||||||
| Deferred tax assets: | |||||||||||
| Research and development capitalization | $ | 85,465 | $ | 75,289 | |||||||
| Net operating loss carryforwards | 62,471 | 72,089 | |||||||||
| Stock based compensation | 48,681 | 42,114 | |||||||||
| Accruals and reserves | 25,495 | 26,925 | |||||||||
| Lease liabilities | 11,890 | 13,434 | |||||||||
| Tax credit carryforwards | 10,742 | 10,441 | |||||||||
| Total deferred tax assets | 244,744 | 240,292 | |||||||||
| Valuation allowances | (23,436) | (195,252) | |||||||||
| Total net deferred tax assets | 221,308 | 45,040 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Prepaid expenses | (15,469) | (8,924) | |||||||||
| Deferred commissions | (14,615) | (16,237) | |||||||||
| Lease liabilities | (8,286) | (8,440) | |||||||||
| Other, net | (5,842) | (3,421) | |||||||||
| Depreciation | (1,624) | (3,663) | |||||||||
| Capped call transactions | — | (57) | |||||||||
| Total deferred tax liabilities | (45,836) | (40,742) | |||||||||
| $ | 175,472 | $ | 4,298 | ||||||||
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. Future realization of deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods. The Company’s deferred tax valuation allowance requires significant judgment and has uncertainties, including assumptions about future taxable income based on historical and projected information. In assessing the Company’s ability to realize its net deferred tax assets, the Company considered various factors including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial results to determine whether it is more likely than not that some portion or all of its net deferred tax assets will not be realized. Based on the positive evidence, including a sustained period of profitability and recent and expected future taxable earnings, management concluded that substantially all of its U.S. and UK deferred tax assets were more likely than not realizable as of December 31, 2025. As a result, the Company released substantially all of the valuation allowance previously maintained against its U.S. federal and state and U.K. deferred tax assets during the fourth quarter of 2025, resulting in a $175 million non‑cash tax benefit.
The Company had approximately $4 million and $5.4 million of post apportionment state net operating loss carryforwards, as of December 31, 2025 and 2024, respectively. The U.S. state losses expire at various times through 2045. Additionally, as of December 31, 2025, the Company had $10.7 million of state tax credit carryforwards.
The Company’s federal net operating loss carryforwards were approximately $7.5 million and $14.2 million at December 31, 2025 and 2024, respectively. These federal carryforward losses and state credits expire between 2026 and 2040, except for $1 million of federal net operating losses and $1 million of state credits, which have an unlimited carryforward period.
The Company’s UK net operating loss carryforwards were approximately $118 million and $147.9 million at December 31, 2025 and 2024, respectively, which have indefinite carryforward periods.
The Company records the applicable deferred taxes associated with the future remittance of undistributed foreign earnings that are not deemed indefinitely reinvested. For the portion of our undistributed foreign earnings for which we assert indefinite reinvestment we have not provided any taxes for these amounts, and it is not practicable to estimate the amount of deferred tax liability that would be incurred.
Uncertain tax benefits
A rollforward of the Company’s gross unrecognized tax benefits is:
(in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
Balance as of January 1, | $ | 37,886 | $ | 30,655 | $ | 19,746 | |||||||||||
| Additions for tax positions related to the current year | 7,091 | 7,316 | 4,859 | ||||||||||||||
| Additions for tax positions of prior years | 1,671 | 2,941 | 7,921 | ||||||||||||||
| Reductions for tax positions of prior years | (2,793) | (3,026) | (1,871) | ||||||||||||||
| Reductions to tax positions as a result of a lapse of the applicable statute of limitations | (191) | — | — | ||||||||||||||
Balance as of December 31, | $ | 43,664 | $ | 37,886 | $ | 30,655 | |||||||||||
The total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate, if recognized, is $18.1 million as of December 31, 2025.
Tax examinations
The Company files federal and state income tax returns in the U.S. and various foreign jurisdictions. In the ordinary course of business, the Company and its subsidiaries are examined by various tax authorities, including the Internal Revenue Service in the U.S. As of December 31, 2025, the Company’s U.S. federal tax returns for the years 2015 through 2019 were under examination by the Internal Revenue Service. In addition, certain foreign jurisdictions are auditing the Company’s income tax returns for periods ranging from 2018 through 2024. The Company does not expect the results of these audits to have a material effect on the Company’s financial condition, results of operations, or cash flows. With few exceptions, the statute of limitations remains open in all jurisdictions for all tax years since 2019.
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.