Solstice Advanced Materials Inc.SOLS
Solstice Advanced Materials Inc. Income Taxes Disclosure
Income Taxes
The Company’s income tax provision for the first three quarters of 2025 and the years ended December 31, 2024 and 2023 were prepared using a separate return method. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone entity. The Company believes the assumptions supporting the allocation and presentation of income taxes on a separate return basis are reasonable.
For all periods prior to the Spin-off, the Company was part of Honeywell’s consolidated U.S. federal income tax return, as well as separate and combined Honeywell’s income tax returns in numerous state and international jurisdictions. The Company’s current tax liabilities computed under the separate return method are considered to be effectively settled in the Consolidated Financial Statements at the time the transaction is recorded, with the offset recorded against Net investment from Honeywell.
Income Before Taxes
The sources of income from continuing operations before income taxes are as follows:
| Years Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| U.S. | $ | 348 | $ | 553 | $ | 569 | |||||||||||
| Non-U.S. | 299 | 244 | 245 | ||||||||||||||
Total | $ | 647 | $ | 797 | $ | 814 | |||||||||||
Tax Expense
Tax expense consists of the following:
| Years Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| U.S. Federal | $ | 83 | $ | 97 | $ | 131 | |||||||||||
| U.S. State | 24 | 36 | 40 | ||||||||||||||
| Non-U.S. | 281 | 65 | 60 | ||||||||||||||
Total current tax expense | 388 | 198 | 231 | ||||||||||||||
| Deferred: | |||||||||||||||||
| U.S. Federal | (27) | (3) | (31) | ||||||||||||||
| U.S. State | (1) | (2) | (6) | ||||||||||||||
| Non-U.S. | 2 | (1) | 1 | ||||||||||||||
Total deferred tax (benefit) expense | (26) | (6) | (36) | ||||||||||||||
Total Tax expense | $ | 362 | $ | 192 | $ | 195 | |||||||||||
Following the Company’s adoption of ASU 2023-09, the U.S. federal statutory income tax rate is reconciled to the effective income tax rate for 2025 as follows:
| Year Ended December 31, 2025 | |||||||||||
| $ | % | ||||||||||
| US Federal Statutory Tax Rate | $ | 136 | 21.0 | % | |||||||
State and local income taxes, net of Federal income tax effects1 | 17 | 2.6 | % | ||||||||
| Foreign tax effects | |||||||||||
| China | |||||||||||
Discrete tax adjustments - restructuring in advance of the Spin-off | 180 | 27.8 | % | ||||||||
Withholding taxes on unremitted earnings | (15) | (2.3) | % | ||||||||
Other | 2 | 0.3 | % | ||||||||
United Arab Emirates | |||||||||||
Valuation Allowance | 10 | 1.5 | % | ||||||||
| Other | 1 | 0.2 | % | ||||||||
Japan | |||||||||||
| Withholding taxes on unremitted earnings | 13 | 2.0 | % | ||||||||
| Other | 7 | 1.1 | % | ||||||||
Taiwan | |||||||||||
| Withholding taxes on unremitted earnings | 9 | 1.4 | % | ||||||||
| Other | 5 | 0.8 | % | ||||||||
| Other foreign jurisdictions | 11 | 1.7 | % | ||||||||
| Effect of cross-border tax laws | |||||||||||
Global intangible low-taxed income | 2 | 0.3 | % | ||||||||
| Foreign-derived intangible income benefit | (6) | (0.9) | % | ||||||||
| Tax credits | |||||||||||
| U.S. research and development tax credit | (10) | (1.5) | % | ||||||||
| Nontaxable or nondeductible items | |||||||||||
Transaction costs | 10 | 1.5 | % | ||||||||
Other | (2) | (0.3) | % | ||||||||
| Changes in unrecognized tax benefits | 2 | 0.3 | % | ||||||||
| Other adjustments | |||||||||||
Non-controlling interest and partnership | (11) | (1.7) | % | ||||||||
| Other | 1 | 0.2 | % | ||||||||
| Effective tax rate | $ | 362 | 56.0 | % | |||||||
__________________
1.State taxes in Illinois, Virginia, and Pennsylvania make up the majority (greater than 50%) of the tax effect in this category.
The effective tax rate in 2025 was higher than the U.S. federal statutory rate of 21% and increased during 2025 compared to 2024 as a result of discrete tax adjustments related to restructuring in advance of the Spin-off from Honeywell.
The U.S. federal statutory income tax rate is reconciled to the effective income tax rate for prior years as follows:
| Years Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
U.S. federal statutory income tax rate | 21.0 | % | 21.0 | % | |||||||
Taxes on non-U.S. earnings1 | 2.9 | 2.3 | |||||||||
| Foreign-derived intangible income benefit | (1.4) | (1.8) | |||||||||
U.S. state income taxes | 3.3 | 3.2 | |||||||||
| Research and development credits | (1.1) | (1.1) | |||||||||
| Other | (0.6) | 0.4 | |||||||||
Effective income tax rate | 24.1 | % | 24.0 | % | |||||||
__________________
1.Includes U.S. taxes on non-U.S. earnings, net of foreign tax credits.
Deferred Tax Assets (Liabilities)
The tax effects of temporary differences and tax carryforwards which give rise to future income tax benefits and payables are as follows:
| December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred tax assets | |||||||||||
| Pension | $ | 7 | $ | 7 | |||||||
| Other accruals and reserves | 27 | 29 | |||||||||
| Environmental reserves | 12 | 14 | |||||||||
Lease liabilities | 59 | 38 | |||||||||
Capitalized research & development | — | 48 | |||||||||
| Other | 17 | 11 | |||||||||
Gross deferred tax assets | 122 | 147 | |||||||||
| Valuation allowance | (10) | — | |||||||||
Total deferred tax assets | 112 | 147 | |||||||||
| Deferred tax liabilities | |||||||||||
Pension | (9) | — | |||||||||
Right-of-use assets | (68) | (47) | |||||||||
Outside basis difference | (2) | (9) | |||||||||
Intangible assets | (15) | (26) | |||||||||
| Unremitted earnings of foreign subsidiaries | (56) | (44) | |||||||||
| Property, plant and equipment | (189) | (197) | |||||||||
Total deferred tax liabilities | (339) | (323) | |||||||||
Net deferred tax liability | $ | (227) | $ | (176) | |||||||
Deferred tax assets as of December 31, 2025 were reduced by a valuation allowance provided for certain non-U.S. deferred tax assets. The change in the valuation allowance resulted in an increase of $10 million to income tax expense in 2025. If the Company determines that the likelihood of realization of existing deferred tax assets changes, a corresponding increase or decrease to the valuation allowance will be recognized as an increase or reduction to income tax expense in the period that determination is made.
The Company recorded a $56 million and $44 million deferred tax liability on all unremitted foreign earnings as of December 31, 2025 and 2024, respectively.
Cash Paid for Income Taxes
The following table reconciles cash paid for income taxes for the year ended December 31, 2025:
| Federal | $ | — | |||
| State | — | ||||
Non-U.S. | |||||
| China | 22 | ||||
| Japan | 18 | ||||
| Ireland | 5 | ||||
| Other foreign | 5 | ||||
| Total Cash Paid for Income Taxes | 50 | ||||
Unrecognized Tax Benefits
| December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Change in unrecognized tax benefits | |||||||||||||||||
Balance at beginning of year | $ | 8 | $ | 8 | $ | 8 | |||||||||||
| Gross increases related to current period tax positions | 1 | 1 | 1 | ||||||||||||||
| Gross increases related to prior period tax positions | 2 | — | — | ||||||||||||||
Settlements | (1) | — | — | ||||||||||||||
| Foreign currency translation | 1 | — | — | ||||||||||||||
Settled with Parent through Net Parent investment | (3) | (1) | (1) | ||||||||||||||
Balance at end of year | $ | 8 | $ | 8 | $ | 8 | |||||||||||
As of December 31, 2025, 2024 and 2023, there were $8 million, $8 million and $8 million, respectively, of unrecognized tax benefits that if recognized would affect the effective tax rate.
Prior to the Spin-Off, the Company was part of Honeywell’s consolidated U.S. federal income tax return, as well as separate and combined Honeywell income tax returns in numerous state and foreign jurisdictions. In connection with the Spin-off, we entered into a Tax Matters Agreement with Honeywell allocating responsibility and providing for the payment of tax liabilities and entitlement to refunds, cooperation in the filing of tax returns, and providing for certain other matters relating to taxes, including indemnities, and preservation of the intended tax treatment. Honeywell is under examination by numerous tax authorities in various jurisdictions globally.
The following table summarizes tax years that remain subject to examination by major tax jurisdictions as of December 31, 2025:
| Open Tax Years | |||||||||||
| Jurisdiction | Examination in progress | Examination not yet initiated | |||||||||
| China | 2013-2024 | 2025 | |||||||||
| Germany | 2017-2020 | 2021-2025 | |||||||||
Based on the outcome of these examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible that certain unrecognized tax benefits for tax positions taken on previously filed tax returns will materially change from those recorded as liabilities in the Company's financial statements.
Estimated interest and penalties related to the underpayment of income taxes are classified as a component of Income tax expense in the Consolidated Statements of Operations and totaled less than $1 million for the years ended December 31, 2025, 2024 and 2023, respectively. Accrued interest and penalties were $0 million, $1 million, and $1 million as of December 31, 2025, 2024 and 2023, respectively.
The Company’s unrecognized tax positions are recorded within Other noncurrent liabilities in the Consolidated Balance Sheets.
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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.