Rent the Runway, Inc.RENT
Rent the Runway, Inc. Income Taxes Disclosure
Income Taxes
The Company’s net loss before income tax benefit / (expense) from income taxes includes the following components:
| Year Ended January 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Domestic | $ | (71.2) | $ | (114.0) | $ | (139.5) | |||||||||||
| Foreign | 1.6 | 1.0 | 0.6 | ||||||||||||||
Net loss before income tax benefit / (expense) | $ | (69.6) | $ | (113.0) | $ | (138.9) | |||||||||||
Total income taxes allocated to operations are as follows:
| Year Ended January 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
Current provision: | |||||||||||||||||
Federal | $ | — | $ | — | $ | — | |||||||||||
State and local | (0.1) | — | — | ||||||||||||||
| Foreign | (0.2) | (0.2) | — | ||||||||||||||
| Total current provision | (0.3) | (0.2) | — | ||||||||||||||
| Deferred provision: | |||||||||||||||||
| Federal | — | — | — | ||||||||||||||
| State and local | — | — | — | ||||||||||||||
| Foreign | — | — | 0.2 | ||||||||||||||
| Total deferred provision | — | — | 0.2 | ||||||||||||||
| Total income tax benefit / (expense) | $ | (0.3) | $ | (0.2) | $ | 0.2 | |||||||||||
The significant components of the Company’s net deferred tax assets (liabilities) are as follows:
| Year Ended January 31, | |||||||||||
| 2025 | 2024 | ||||||||||
Deferred tax assets: | |||||||||||
Federal and state net operating loss carryforwards | $ | 171.5 | $ | 166.4 | |||||||
Customer credit liabilities | 1.6 | 1.7 | |||||||||
| Interest limitation | 64.3 | 58.0 | |||||||||
Fixed assets | 4.3 | 2.1 | |||||||||
| Capitalized R&D expenses | 16.4 | 14.5 | |||||||||
| Tax credits | 6.8 | 6.7 | |||||||||
| Share-based compensation | 0.6 | 1.6 | |||||||||
| Operating lease liabilities | 12.5 | 13.2 | |||||||||
| Other | 0.5 | 1.3 | |||||||||
| Total deferred tax assets | 278.5 | 265.5 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Fixed assets | — | — | |||||||||
| Operating lease right-of-use assets | (8.9) | (9.4) | |||||||||
| Total deferred tax liabilities | (8.9) | (9.4) | |||||||||
| Net deferred tax assets before valuation allowance | 269.6 | 256.1 | |||||||||
| Less valuation allowance | (269.6) | (256.1) | |||||||||
| Net deferred tax assets | $ | — | $ | — | |||||||
Provisions enacted in the Tax Reform Act in December 2017 related to the capitalization of research and experimental expenditures became effective on January 1, 2022. These provisions require us to capitalize research and experimental expenditures and amortize them for tax purposes over or fifteen years, depending on where the research is conducted. The capitalized expenses do not significantly impact our effective tax rate.
As of January 31, 2025 and 2024, the Company maintained a valuation allowance against all of its U.S. deferred tax assets since, in the judgment of management, the realization of these assets was not considered more likely than not. The net change in the total valuation allowance for the years ended January 31, 2025 and 2024 was an increase of $13.5 million and $23.7 million, respectively. The Company’s deferred tax assets are included in Other assets on the Consolidated Balance Sheets.
As of January 31, 2025, the Company had federal net operating loss tax carryforwards of approximately $654.4 million. Approximately $152.0 million of the net operating loss carryforwards will expire at various times through 2038, while $502.4 million will not expire.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its net operating losses (“NOLs”) to offset future taxable income. The Company had determined that as of March 2021, it had undergone one ownership change on February 16, 2010, and its NOLs arising before that date were subject to Section 382 limitations. These limitations did not materially limit the use of such NOLs to offset the Company’s future taxable income. In fiscal year 2024, the Company completed an update to the prior Section 382 analysis covering the period beginning April 2021 through January 2025. From the study, the Company concluded it did not experience an ownership change during the analysis period. Any ownership change occurring after January 2025 may result in the imposition of additional limitations on the Company’s ability to utilize NOLs existing at the time of the ownership change.
The benefit for income taxes differs from the amount computed by applying the statutory U.S. Federal income tax rate to pretax loss because of the effect of the following items:
| Year Ended January 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Compute “expected” tax benefit | 21.00 | % | 21.00 | % | 21.00 | % | |||||||||||
| State income taxes, net of federal benefit | (0.13) | % | (0.02) | % | (0.01) | % | |||||||||||
| Valuation of warrants | — | % | — | % | — | % | |||||||||||
| Nondeductible transaction costs | — | % | — | % | — | % | |||||||||||
| Nondeductible compensation | (1.69) | % | (2.55) | % | (1.95) | % | |||||||||||
| Share-based compensation | 0.16 | % | (0.09) | % | (0.48) | % | |||||||||||
| Current year change in valuation allowance | (19.24) | % | (19.74) | % | (19.34) | % | |||||||||||
| Other | (0.49) | % | 1.26 | % | 1.00 | % | |||||||||||
| Income tax benefit (expense) | (0.39) | % | (0.14) | % | 0.22 | % | |||||||||||
The Company has not recognized deferred tax liabilities for outside basis differences (including undistributed earnings) relating to the Company’s foreign subsidiary because such amounts have been indefinitely reinvested. The Company has determined that it is impracticable to estimate the unrecorded deferred tax liability associated with the foreign subsidiary for which the Company is asserting indefinite reinvestment.
The following table summarizes the unrecognized tax benefit activity for the periods indicated:
| Year Ended January 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Balance as of the beginning of the period | $ | 1.2 | $ | 0.9 | $ | 0.7 | |||||||||||
| Additions based on tax positions related to the current year | — | 0.3 | 0.2 | ||||||||||||||
| Additions for tax positions of prior years | — | — | — | ||||||||||||||
| Reductions for tax positions of prior years | — | — | — | ||||||||||||||
| Lapse of statute of limitations | — | — | — | ||||||||||||||
| Settlements | — | — | — | ||||||||||||||
| Balance as of the end of the period | $ | 1.2 | $ | 1.2 | $ | 0.9 | |||||||||||
The amount of unrecognized tax benefits included on the Consolidated Balance Sheets as of January 31, 2025 and 2024 are $1.2 million and $1.2 million, respectively.
The total amount of unrecognized benefits relating to the Company’s tax position is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations. The outcomes and timing of such events are highly uncertain and a reasonable estimate of the range of gross unrecognized tax benefits, excluding interest and penalties, that could potentially be reduced during the next 12 months cannot be made at this time.
The Company is subject to United States federal and state taxation, as well as subject to taxation in Ireland. The Company may be subject to examination by the Internal Revenue Service (“IRS”) and as of January 31, 2025, tax year 2021 and years filed thereafter remain open to examination. These examinations may result in proposed adjustments to the Company’s income tax liability or tax attributes with respect to years under examination as well as subsequent periods.
The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by the Company. In addition, tax authorities periodically review income tax returns filed by the Company and can raise issues regarding its filing positions, timing and amount of income and deductions, and the allocation of income among the jurisdictions in which the Company operates. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. Any adjustments as a result of any examination may result in additional taxes or penalties against the Company. If the ultimate result of these audits differs from original or adjusted estimates, they could have a material impact on the Company’s tax provision.
On August 16, 2022, Congress passed the Inflation Reduction Act of 2022. The key tax provisions applicable to the Company are a 15% corporate minimum tax on book income and a 1% excise tax on stock repurchases effective January 1, 2023. These tax law changes have not had and are not expected to have a material impact on the Company’s consolidated financial position.
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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.