PTC INC. Income Taxes Disclosure

7. Income Taxes

In 2025, 2024, and 2023, our effective tax rate was impacted by our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands. In 2025, 2024, and 2023, the foreign rate differential predominantly relates to these earnings. In addition to the foreign rate differential, our tax rate differed from the U.S. statutory federal income tax due to the net effects of the GILTI and FDII regimes (together referred to as U.S. Tax reform), and the excess tax benefit related to stock-based compensation.

Our effective tax rates for 2025 and 2024 were impacted by a number of offsetting items as outlined below, as well as by the year-over-year increase in Income before income taxes, which was primarily domestic; however, there was ultimately no net change in the effective tax rate year-over-year. In 2025 and 2024, our rate included the effects of IRS procedural guidance requiring consent for previously automatic changes of accounting method. The IRS procedural guidance change significantly increased our estimated taxable income in 2024, with a lesser impact to taxable income in 2025. In 2025, we recorded tax expense of $10.9 million primarily related to accrued interest stemming from the effects of the procedural guidance. In 2024, we recorded a benefit of $4.4 million primarily related to an increase to the estimated tax benefit for the deductions associated with GILTI and FDII.

Additionally, in 2025, we recorded tax benefits of $10.8 million related to tax reserves in foreign jurisdictions.

In 2024, the rate was impacted by a U.S. Tax Court ruling in Varian Medical Systems, Inc. v. Commissioner, issued on August 26, 2024. The ruling related to the U.S. taxation of deemed foreign dividends in the transition year of the Tax Act (our fiscal 2018). As a result, we recorded a $14.4 million benefit for additional foreign tax credits that became available to us. These benefits were offset by a tax expense of $4.6 million related to a tax reserve in a foreign jurisdiction.

Additionally in 2023, our results include tax expense of $21.8 million relating to an uncertain tax position regarding transfer pricing in a foreign jurisdiction. Our rate was also impacted by non-deductible imputed interest related to the deferred payment on the acquisition of ServiceMax, Inc.

As of September 30, 2025 and 2024, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $179.1 million ($28.7 million in Accrued income taxes and $150.4 million in Other liabilities) and $75.3 million ($40.0 million in Accrued income taxes, $6.2 million in Accrued expenses and other current liabilities and $29.1 million in Other liabilities), respectively. As of September 30, 2025 and 2024, prepaid taxes recorded in Prepaid expenses on the accompanying Consolidated Balance Sheets were $20.4 million and $14.0 million, respectively. We made net income tax payments of $121.7 million, $68.6 million and $65.9 million in 2025, 2024 and 2023, respectively.

We reassess our valuation allowance requirements each financial reporting period. We assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to use our existing deferred tax assets.

For U.S. tax return purposes, net operating loss (NOL) carryforwards and tax credits are generally available to be carried forward to future years, subject to certain limitations. At September 30, 2025, we had U.S. federal tax effected NOL carryforwards from acquisitions of $0.4 million which expire in 2026 to 2033. The use of these NOL carryforwards is limited as a result of the change in ownership rules under Internal Revenue Code Section 382. Additionally, we have tax effected state NOL carryforwards, net of federal benefit, of $4.9 million, which expire beginning in 2027 and ending in 2042.

As of September 30, 2025, we had federal R&D credit carryforwards of $2.2 million, which expire beginning in 2026 and ending in 2035, and Massachusetts R&D credit carryforwards of $16.8 million, which expire beginning in 2026 and ending in 2040. We also had foreign tax credits of $6.0 million, which expire beginning in 2032 and ending in 2035.

We also have tax effected NOL carryforwards in non-U.S. jurisdictions totaling $6.7 million, the majority of which do not expire, and non-U.S. tax credit carryforwards of $1.2 million that expire beginning in 2031 and ending in 2037. Additionally, we have tax effected amortization carryforwards of $18.0 million in a foreign jurisdiction. There are limitations imposed on the use of such attributes that could restrict the recognition of any tax benefits.

As of September 30, 2025, we have a valuation allowance of $3.4 million against net deferred tax assets in the United States and a valuation allowance of $5.1 million against net deferred tax assets in certain foreign jurisdictions. The $3.4 million U.S. valuation allowance relates to Massachusetts tax credit carryforwards which we do not expect to realize a benefit from prior to expiration. The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily for our capital loss carryforwards, the majority of which do not expire. However, there are limitations imposed on the utilization of such capital losses that could restrict the recognition of any tax benefits.

Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. In 2025, 2024 and 2023 we recorded net interest expense of $10.0 million, $3.3 million and $0.5 million, respectively. In 2025, 2024 and 2023 we had no penalty expenses in our income tax provision. As of September 30, 2025 and 2024, we had accrued $13.6 million and $3.1 million of estimated interest expense, respectively. We had no accrued tax penalties as of September 30, 2025, 2024 or 2023.

In 2024, we requested consent from the IRS to change our tax accounting method for the treatment of certain deductions. In accordance with GAAP, our financial statements have not reflected the effects of this accounting method change as we had not received IRS consent as of September 30, 2025. Accordingly, since we reflected the benefits associated with this position in our U.S. federal tax return for the year ended September 30, 2024, which was filed during the fourth quarter of 2025, we have included an unrecognized tax benefit of $109.2 million within Other liabilities on the Consolidated Balance Sheets. We subsequently received formal consent from the IRS in October 2025. Consequently, we will release the reserve in the first quarter of 2026, primarily resulting in corresponding decreases to Deferred tax assets and the reserve for unrecognized tax benefits within Other liabilities. Additionally, this will result in a net income tax benefit of $6.5 million for the reversal of the associated accrued interest and indirect effects on GILTI and FDII as discussed above.

If all of our unrecognized tax benefits as of September 30, 2025 were to become recognizable in the future, we would record a benefit to the income tax provision of $32.1 million (which would be partially offset by an increase in the U.S. valuation allowance of $6.0 million). Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. As described above, within the next 12 months the amount of unrecognized tax benefits related to the IRS consent will be reduced by $109.2 million. Apart from that, we do not believe it is reasonably possible that there could be additional reductions to the amount of unrecognized tax benefits within the next 12 months.

In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the IRS in the United States. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, transfer pricing, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates. As of September 30, 2025, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:

Additionally, net operating loss and tax credit carryforwards from certain earlier periods in these jurisdictions may be subject to examination to the extent they are used in later periods.

We incurred expenses related to stock-based compensation in 2025, 2024 and 2023 of $216.2 million, $223.5 million and $206.5 million, respectively. Accounting for the tax effects of stock-based awards requires that we establish a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. The tax benefit recognized in the Consolidated Statements of Operations related to stock-based compensation totaled $42.5 million, $27.5 million and $33.4 million in 2025, 2024 and 2023, respectively. Upon vesting of the stock-based awards, the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit and is recorded to the tax provision. In 2025, 2024 and 2023, net windfall tax benefits of $7.4 million, $10.2 million and $7.8 million were recorded to the tax provision.

Prior to the passage of the U.S. Tax Cuts and Jobs Act in December of 2017 (the Tax Act), we asserted that substantially all of the undistributed earnings of our foreign subsidiaries were considered indefinitely reinvested and accordingly, no deferred taxes were provided. Pursuant to the provisions of the U.S. Tax Act, these earnings were subjected to U.S. federal taxation via a one-time transition tax, and there is therefore no longer a material cumulative basis difference associated with the undistributed earnings. We maintain our assertion of our intention to permanently reinvest these earnings outside the United States unless repatriation can be done substantially tax-free, with the exception of our Taiwan subsidiary. If we decide to repatriate any additional non-U.S. earnings in the future, we may be required to establish a deferred tax liability on such earnings. The amount of unrecognized deferred tax liability on the undistributed earnings would not be material.

On July 4, 2025, the “One Big Beautiful Bill Act” (the “Act”) was enacted into law. The Act includes changes to U.S. tax law that will be applicable to us beginning in 2026. These changes include provisions allowing accelerated tax deductions for qualified property and research expenditures. While there is no material impact on our financial statements for the year ended September 30, 2025, we are in the process of evaluating the prospective impact of the Act to our consolidated financial statements and cash flow.