TheRealReal, Inc.REAL
TheRealReal, Inc. Income Taxes Disclosure
Income Taxes
(1) State taxes in Texas make up the majority (greater than 50%) of the tax effect in this category.
Domestic and international pre-tax loss consists of the following (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
United States | $ | (41,436) | $ | (133,926) | $ | (168,189) | |||||||||||
International | — | — | — | ||||||||||||||
Loss before income taxes | $ | (41,436) | $ | (133,926) | $ | (168,189) | |||||||||||
The components of the Company’s income tax provision were as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
Federal | $ | — | $ | — | $ | — | |||||||||||
State | 363 | 276 | 283 | ||||||||||||||
| Total current tax expense | 363 | 276 | 283 | ||||||||||||||
| Deferred: | |||||||||||||||||
Federal | — | — | — | ||||||||||||||
State | — | — | — | ||||||||||||||
| Total deferred tax expense | — | — | — | ||||||||||||||
| Total provision for income taxes | $ | 363 | $ | 276 | $ | 283 | |||||||||||
Rate Reconciliation
The Company adopted ASU 2023-09 'Income Taxes (Topic 740): Improvements to Income Tax Disclosures' on a prospective basis beginning with the year December 31, 2025. The following table presents required disclosure pursuant to ASU 2023-09 and reconciles the Company's U.S. Federal statutory income tax amount and rate to its actual effective amount and rate for the year ended December 31, 2025:
| Year Ended December 31, 2025 | |||||||||||
(in thousands) | Percent | ||||||||||
Tax at federal statutory rate | $ | (8,834) | 21.0 | % | |||||||
State taxes, net of federal effect (1) | 363 | (0.9) | % | ||||||||
Tax credits | |||||||||||
Research and development credits | (410) | 1.0 | % | ||||||||
Valuation allowance | 2,664 | (6.3) | % | ||||||||
Nondeductible Items | |||||||||||
Section 162(m) compensation limitation | 3,609 | (8.6) | % | ||||||||
Warrant liability fair value adjustment | 7,512 | (17.9) | % | ||||||||
Other contributing items | 1,444 | (3.5) | % | ||||||||
Other adjustments | (106) | 0.3 | % | ||||||||
Stock-based compensation | (5,879) | 14.0 | % | ||||||||
Effective tax rate | $ | 363 | (0.9) | % | |||||||
The following table presents the required disclosures prior to the Company's adoption of ASU 2023-09 and reconciles the U.S. federal statutory income tax rate to the actual global effective income tax rate for the years ended December 31, 2024 and December 31, 2023 (in thousands):
| Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Tax at federal statutory rate | $ | (28,144) | $ | (35,290) | |||||||
| State taxes, net of federal effect | (7,627) | (9,554) | |||||||||
| Stock-based compensation | 3,192 | 8,956 | |||||||||
| Non-deductible items | 1,988 | 504 | |||||||||
| Tax credits | (169) | (531) | |||||||||
| Warrant liability fair value adjustment | 18,333 | — | |||||||||
| Provision to return adjustments | (1,927) | 9,259 | |||||||||
| Valuation allowance | 14,651 | 26,501 | |||||||||
| Other | (21) | 438 | |||||||||
| Provision for income taxes | $ | 276 | $ | 283 | |||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. The Company’s significant components of deferred tax assets and liabilities are as follows (in thousands):
| December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
Net operating loss carryforwards | $ | 230,874 | $ | 230,303 | |||||||
Fixed assets and intangibles | 13,695 | 10,461 | |||||||||
Capitalized research and development | 13,936 | 18,679 | |||||||||
Accruals and reserves | 22,398 | 18,685 | |||||||||
| Stock options | 1,169 | 1,536 | |||||||||
Operating lease liabilities | 24,361 | 29,424 | |||||||||
| Capped calls | 14,241 | 15,011 | |||||||||
| Tax credits | 3,248 | 2,738 | |||||||||
Other | 4,914 | 4,621 | |||||||||
| Gross deferred tax assets | 328,836 | 331,458 | |||||||||
Less: valuation allowance | (308,210) | (306,948) | |||||||||
| Total deferred tax assets | 20,626 | 24,510 | |||||||||
| Deferred tax liabilities: | |||||||||||
Operating lease right-of-use assets | (18,332) | (21,641) | |||||||||
Other | (2,294) | (2,869) | |||||||||
| Gross deferred tax liabilities | (20,626) | (24,510) | |||||||||
| Net deferred tax assets | $ | — | $ | — | |||||||
In assessing the realizability of deferred tax assets, the Company evaluates all available positive and negative evidence by considering whether it is more likely than not that some portion or all of the deferred tax assets will not be recognized. The ultimate realization of deferred tax assets is dependent upon future taxable income, future reversals of existing taxable temporary difference, taxable income in carryback years and tax-planning strategies. The Company believes it is more likely than not that the deferred tax assets in the U.S. will not be realized; accordingly, a valuation allowance has been established against the Company's U.S. deferred tax assets. The net change in the valuation allowance for the years ended December 31, 2025 and December 31, 2024 was an increase of $1.3 million and an increase of $14.7 million, respectively.
As of December 31, 2025 and 2024, the Company has a net operating loss carryforward of $869.7 million and $861.8 million for federal tax purposes, respectively, and $812.1 million and $818.6 million for state tax purposes, respectively. If not utilized, these losses will expire beginning in 2026 for state tax purposes. However, beginning in tax year 2018 and forward, the Federal law has changed such that net operating losses generated after December 31, 2017 may
be carried forward indefinitely. Accordingly, $159.4 million of the federal net operating losses will begin to expire in 2033. However, $710.4 million of the federal net operating losses will not expire.
As of December 31, 2025 and 2024, the Company has a credit carryforward of $6.0 million and $4.7 million for federal tax purposes, respectively, and $0.9 million and $1.0 million for state tax purposes, respectively. If not utilized, these credits will expire beginning in 2041 for federal tax purposes and do not expire for state tax purposes.
The Internal Revenue Code of 1986, as amended, imposes restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Utilization of the federal and state net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 and similar state provisions.
The Tax Reform Act of 1986 limits the use of net operating losses and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. During 2019 and 2025, the Company analyzed whether any of the reported net operating losses would be limited because of these rules. Based on the analysis the Company believes $3.3 million of the Federal and $2.1 million of California net operating losses will not be available to offset future taxable income because of the limitation. The reported net operating losses have been adjusted based on this analysis.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and local, jurisdictions, where applicable. As of December 31, 2025 and 2024, all years generally remain open to examination. Additionally, net operating loss carryforwards are subject to examination by the Internal Revenue Service and the California Franchise Tax Board for up to three and four years, respectively, after utilization.
Uncertain Income Tax Positions
The following table reflects the changes to the Company's unrecognized tax benefits (in thousands):
| December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
Unrecognized tax benefits beginning balance | $ | 2,847 | $ | 2,678 | |||||||
Increases related to current year tax positions | 495 | 169 | |||||||||
Increases related to prior year tax positions | 278 | — | |||||||||
Unrecognized tax benefits ending balance | $ | 3,620 | $ | 2,847 | |||||||
As of December 31, 2025 and 2024, the Company had unrecognized tax benefits of $3.6 million and $2.8 million, respectively, none of which, if recognized, would favorably impact the Company’s effective tax rate. The unrecognized tax benefits relate to federal and state research and development credits. The Company's policy is to include interest and penalties as a component to the statements of operations, however there were no associated interest and penalties during the years ended December 31, 2025 and 2024. The Company estimates that there will be no material changes in its uncertain tax positions in the next 12 months.
The Company adopted ASU 2023-09 on a prospective basis for the year ended December 31, 2025 and has included the following table as a result of its adoption, which presents income taxes paid (net of refunds received) for the year ended December 31, 2025 (in thousands):
| Year Ended December 31, 2025 | |||||
Federal | $ | — | |||
State and Local | 331 | ||||
Texas | 185 | ||||
All other states | 146 | ||||
Foreign | — | ||||
Income tax, net of amounts refunded | $ | 331 | |||
The amount of cash income taxes paid by the Company during the years ended December 31, 2024 and December 31, 2023 was $0.2 million.
On July 4, 2025, the U.S. government enacted The One Big Beautiful Bill Act of 2025 ("OBBBA") which includes, among other provisions, changes to the U.S. corporate income tax system including the allowance of immediate expensing of qualifying research and development expenses and permanent extensions of certain provisions within the Tax Cuts and Jobs Act. Certain provisions are effective for the Company beginning in 2025. The Company determined that the OBBBA did not have a material impact on the financial statements for the year ended December 31, 2025.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.