Rackspace Technology, Inc.RXT
Rackspace Technology, Inc. Income Taxes Disclosure
Taxes
The benefit for income taxes consisted of the following:
| Year Ended December 31, | |||||||||||||||||
| (In millions) | 2022 | 2023 | 2024 | ||||||||||||||
| Federal | $ | 0.2 | $ | 0.2 | $ | (0.1) | |||||||||||
| Foreign | 11.4 | 18.1 | 11.5 | ||||||||||||||
| State | 4.3 | 7.0 | 0.3 | ||||||||||||||
| Total current | 15.9 | 25.3 | 11.7 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (81.7) | (34.3) | (23.8) | ||||||||||||||
| Foreign | (6.7) | (8.4) | (2.8) | ||||||||||||||
| State | (20.4) | 0.8 | (8.4) | ||||||||||||||
| Total deferred | (108.8) | (41.9) | (35.0) | ||||||||||||||
Total benefit for income taxes | $ | (92.9) | $ | (16.6) | $ | (23.3) | |||||||||||
Loss before income taxes from U.S. and foreign operations were as follows:
| Year Ended December 31, | |||||||||||||||||
| (In millions) | 2022 | 2023 | 2024 | ||||||||||||||
| U.S. | $ | (819.6) | $ | (678.4) | $ | (782.9) | |||||||||||
| Foreign | (78.1) | (176.0) | (98.6) | ||||||||||||||
| Total loss before income taxes | $ | (897.7) | $ | (854.4) | $ | (881.5) | |||||||||||
A reconciliation of the statutory federal tax rate to the effective tax rate is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2023 | 2024 | |||||||||||||||
| Statutory federal tax rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| State taxes, net of federal benefit | 1.6 | % | 0.3 | % | 0.7 | % | |||||||||||
| Tax rate differentials for international jurisdictions | (1.1) | % | 2.5 | % | (1.0) | % | |||||||||||
| Effects of other enacted tax law and rate changes | 0.1 | % | (3.0) | % | (0.1) | % | |||||||||||
| Valuation allowance | (0.1) | % | (0.8) | % | (12.5) | % | |||||||||||
| Share-based compensation | (0.6) | % | (1.1) | % | (0.6) | % | |||||||||||
| Nondeductible compensation | (0.7) | % | (0.8) | % | (0.6) | % | |||||||||||
| Tax impact of goodwill impairment | (9.9) | % | (15.9) | % | (16.0) | % | |||||||||||
Tax impact of the March 2024 Refinancing Transactions | — | % | — | % | 11.7 | % | |||||||||||
| Other, net | — | % | (0.3) | % | — | % | |||||||||||
| Effective tax rate | 10.3 | % | 1.9 | % | 2.6 | % | |||||||||||
Deferred Taxes
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes using the enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant components of our deferred tax assets and liabilities are as follows:
| (In millions) | December 31, 2023 | December 31, 2024 | |||||||||
| Deferred tax assets: | |||||||||||
| Deferred revenue | $ | — | $ | 13.9 | |||||||
| Share-based compensation | 13.9 | 9.7 | |||||||||
| Accruals not currently deductible | 13.3 | 17.8 | |||||||||
| Finance lease liabilities | 90.4 | 85.8 | |||||||||
| Net operating loss carryforwards | 31.3 | 20.3 | |||||||||
| Foreign tax credit | 16.9 | — | |||||||||
| Research and development credits | 30.5 | — | |||||||||
| Depreciation and amortization | 4.0 | 5.0 | |||||||||
| Disallowed interest carryforward | 77.4 | 118.8 | |||||||||
| Operating lease liabilities | 28.6 | 35.4 | |||||||||
| March 2024 Refinancing Transactions | — | 100.5 | |||||||||
| Other | 19.1 | 20.8 | |||||||||
| Total gross deferred tax assets | 325.4 | 428.0 | |||||||||
| Valuation allowance | (66.1) | (173.4) | |||||||||
| Total net deferred tax assets | 259.3 | 254.6 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Depreciation and amortization | 265.1 | 204.5 | |||||||||
| Finance lease liabilities | 6.6 | 4.4 | |||||||||
| Capitalized costs | 8.7 | 8.8 | |||||||||
| Interest rate swaps | 21.8 | 11.9 | |||||||||
| Operating right-of-use assets | 22.7 | 33.3 | |||||||||
| Other | 6.9 | 8.9 | |||||||||
| Total gross deferred tax liabilities | 331.8 | 271.8 | |||||||||
| Net deferred tax liabilities | $ | 72.5 | $ | 17.2 | |||||||
As of December 31, 2024, we no longer have federal net operating loss carryforwards, federal research and development credits, and federal foreign tax credit carryforwards pursuant to IRC Section 108(b)(2) attribute reduction. We have $93.6 million of foreign net operating losses, $5.4 million of which have carryforward periods ranging from 5 to 20 years, and $88.2 million of which have an indefinite carryforward period. Certain foreign net operating loss carryforwards are subject to various limitations under the applicable statutory foreign tax laws. We have disallowed interest expense carryforwards in the U.S. of $493.0 million that can be carried forward indefinitely.
We’ve recorded a valuation allowance with respect to certain of our deferred tax assets relating primarily to operating losses in certain U.S. state and foreign jurisdictions that we believe are not likely to be realized. Additionally, we’ve recorded a valuation allowance with respect to disallowed interest that we do not expect to be realizable in the future. Furthermore, we recorded a valuation allowance with respect to other deferred tax assets based upon the determination that we would not generate enough income by reversing deferred tax liabilities to fully utilize all deferred tax assets prior to the expiration of any applicable carryforward periods. Changes to valuation allowances consisted of the following:
| (In millions) | 2022 | 2023 | 2024 | ||||||||||||||
| Balance at January 1, | $ | 58.3 | $ | 58.5 | $ | 66.1 | |||||||||||
| Additions charged to income tax expense | 1.6 | 39.2 | 124.1 | ||||||||||||||
| Reductions credited to income tax expense | (1.4) | (31.6) | (16.8) | ||||||||||||||
| Balance at December 31, | $ | 58.5 | $ | 66.1 | $ | 173.4 | |||||||||||
The effective tax rate for the year ended December 31, 2022 was primarily impacted by the tax impact associated with the goodwill impairments, the geographic distribution of profits, tax effects from share-based compensation and executive compensation that is nondeductible under IRC Section 162(m) of the IRC. The effective tax rate for the year ended December 31, 2023 was impacted by the tax impact associated with the goodwill impairments, executive compensation that is nondeductible under IRC Section 162(m), the net impact of the geographic distribution of our earnings, tax effects from nondeductible share-based compensation as well as changes in our valuation allowance. The effective tax rate for the year ended December 31, 2024 was impacted by the tax impact associated with changes in valuation allowance, the tax impact associated with the goodwill impairment recorded in the first and third quarters of 2024, the majority of which was nondeductible for income tax purposes, and the tax impact of the March 2024 Refinancing Transactions discussed below. The tax impact of the March 2024 Refinancing Transactions includes the exclusion of cancellation of indebtedness income (“CODI”), federal and state attribution reduction and changes in valuation allowance.
As a result of the March 2024 Refinancing Transactions, as further described in Note 7, “Debt”, specifically upon the completion of the Private Exchange and Public Term Loan Exchange in March 2024, and the completion of the Public Note Exchange in April 2024, the company realized CODI for US tax purposes of $531.5 million and $80.5 million, respectively. We realized an additional $13.1 million CODI for US tax purposes from third quarter 2024 debt repurchase activity, for a total $625.1 million for the year ended December 31, 2024. Pursuant to IRC Section 108, an insolvent debtor may exclude CODI from taxable income to the extent of the debtor’s insolvency (liabilities greater than the fair value of its assets) but must reduce its tax attributes, subject to certain limitations and according to prescribed ordering rules, based on the amount of CODI excluded from taxable income. The company currently estimates that the level of its insolvency (as defined for US Tax purposes) exceeds the amount of CODI resulting from the March 2024 Refinancing Transactions, such that all resulting CODI will be excluded from the company’s taxable income.
As of December 31, 2024, we have reduced various tax attributes, including $14.8 million of federal and certain state net operating loss deferred tax assets, $29.2 million of federal research and development credits, and $12.6 million of federal foreign tax credits. The process for determining the amount of tax attribute reduction is complex and the actual reduction to attributes does not occur until the first day of the company’s tax year subsequent to the date of the discharge event, or January 1, 2025. Therefore, the estimated impact of the tax attribute reduction from the March 2024 Refinancing Transactions is subject to change until the finalization of the company’s tax returns for the year ending December 31, 2024.
We do not permanently reinvest our foreign earnings due to the debt service requirements of our capital structure. Due to historic, internal tax restructurings, we have effectively recognized any tax impact of the repatriation of foreign earnings. Thus, as of December 31, 2024, there is no deferred tax liability for undistributed foreign earnings.
Uncertain Tax Positions
We file income tax returns in each jurisdiction in which we operate, both domestically and internationally. Due to the complexity involved with certain tax matters, we have considered all relevant facts and circumstances for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. We believe that there are no other jurisdictions in which the outcome of uncertain tax matters is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.
A rollforward of unrecognized tax benefits, excluding accrued penalties and interest, for the years ended December 31, 2022, 2023 and 2024 is as follows:
| Year Ended December 31, | |||||||||||||||||
| (In millions) | 2022 | 2023 | 2024 | ||||||||||||||
| Balance, beginning of period | $ | 52.4 | $ | 57.0 | $ | 63.6 | |||||||||||
| Additions based on tax positions related to the current year | 10.9 | 12.6 | 12.7 | ||||||||||||||
| Additions for tax positions of prior years | 0.3 | 0.9 | 0.6 | ||||||||||||||
| Reduction for statute expiration | (4.7) | (4.8) | (7.0) | ||||||||||||||
| Reductions for tax positions of prior years | (1.9) | (2.1) | (5.0) | ||||||||||||||
Balance, end of period (1) | $ | 57.0 | $ | 63.6 | $ | 64.9 | |||||||||||
(1) Included within non-current liabilities in the Consolidated Balance Sheets
Of the total amount of unrecognized tax benefits as of December 31, 2022, 2023 and 2024, $41.6 million, $47.0 million and $57.1 million, respectively, if recognized, would favorably impact our effective tax rate. We do not expect the amount of unrecognized tax benefits disclosed above to change significantly over the next 12 months.
We recognize interest expense and penalties related to income tax matters within “Benefit for income taxes” on our Consolidated Statements of Comprehensive Loss. Accrued interest and penalties as of December 31, 2022, 2023 and 2024 were $4.4 million, $6.6 million and $8.5 million, respectively.
We are subject to U.S. federal income tax and various state, local, and international income taxes in numerous jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenue and expenses in different jurisdictions and the timing of recognizing revenue and expenses. As such, our effective tax rate is impacted by the geographical distribution of income and mix of profits in the various jurisdictions. Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file.
We currently file income tax returns in the U.S. and all foreign jurisdictions in which we have entities, which are periodically under audit by federal, state, and foreign tax authorities. These audits can involve complex matters that may require an extended period of time for resolution. We remain subject to U.S. federal and state income tax examinations for the tax years 2018 through 2024 and in the foreign jurisdictions in which we operate for varying periods from 2007 through 2024. We currently have income tax examinations open in Texas for tax years 2014 through 2021 and New York City for 2017 through 2019.
Although the outcome of open tax audits is uncertain, in management’s opinion, adequate provisions for income taxes have been made. If actual outcomes differ materially from these estimates, they could have a material impact on our financial condition and results of operations. Differences between actual results and assumptions or changes in assumptions in future periods are recorded in the period they become known. To the extent additional information becomes available prior to resolution, such accruals are adjusted to reflect probable outcomes.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.