Sonos IncSONO
Sonos Inc Income Taxes Disclosure
10. Income Taxes
The Company’s income (loss) before provision for income taxes for fiscal 2025, 2024 and 2023 were as follows:
| September 27, 2025 | September 28, 2024 | September 30, 2023 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Domestic | $ | (70,672) | $ | (56,661) | $ | (9,904) | |||||||||||
| Foreign | 20,175 | 29,510 | 14,298 | ||||||||||||||
| Income (loss) before provision for income taxes | $ | (50,497) | $ | (27,151) | $ | 4,394 | |||||||||||
Components of the provision for income taxes consisted of the following:
| September 27, 2025 | September 28, 2024 | September 30, 2023 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Current: | |||||||||||||||||
| U.S. Federal | $ | 3,776 | $ | 8,094 | $ | 7,507 | |||||||||||
| U.S. State | 2,363 | 4,023 | 4,947 | ||||||||||||||
| Foreign | 4,500 | 17,798 | 2,810 | ||||||||||||||
| Total current | 10,639 | 29,915 | 15,264 | ||||||||||||||
| Deferred: | |||||||||||||||||
| U.S. Federal | — | — | — | ||||||||||||||
| U.S. State | — | — | — | ||||||||||||||
| Foreign | 8 | (18,920) | (596) | ||||||||||||||
| Total deferred | 8 | (18,920) | (596) | ||||||||||||||
| Provision for income taxes | $ | 10,647 | $ | 10,995 | $ | 14,668 | |||||||||||
The Company is subject to income taxes in the United States and foreign jurisdictions in which it operates. The Company’s tax provision is impacted by the jurisdictional mix of earnings as its foreign subsidiaries have statutory tax rates different from those in the United States. Accordingly, the Company's effective tax rate will vary depending on jurisdictional mix of earnings and changes in tax laws. For fiscal 2025, the Company’s U.S. tax expense was adversely impacted by the requirement to capitalize and amortize research and development expenses under Section 174 of the U.S. Internal Revenue Code ("Section 174") as the Company recorded a current U.S. tax expense with no corresponding deferred tax benefit due to the valuation allowance maintained against its U.S. deferred tax assets.
Components of the Company’s deferred income tax assets and liabilities are as follows:
| September 27, 2025 | September 28, 2024 | ||||||||||
| (In thousands) | |||||||||||
| Deferred tax assets | |||||||||||
| Capitalized research & development | $ | 131,858 | $ | 107,474 | |||||||
| Research & development tax credit carryforwards | 51,752 | 58,156 | |||||||||
| Accrued expenses and reserves | 18,979 | 17,070 | |||||||||
| Deferred revenue | 14,363 | 15,374 | |||||||||
| Operating lease liability | 13,165 | 14,259 | |||||||||
| Other capitalized costs | 12,448 | 12,030 | |||||||||
| Stock-based compensation | 6,973 | 8,195 | |||||||||
| Foreign net operating loss carryforwards | 5,293 | 5,783 | |||||||||
| Depreciation | 4,098 | 2,991 | |||||||||
| U.S. net operating loss carryforwards | 3,889 | 2,296 | |||||||||
| Other | 370 | 592 | |||||||||
| Total deferred tax assets | 263,188 | 244,220 | |||||||||
| Valuation allowance | (238,268) | (216,365) | |||||||||
| Deferred tax assets, net of valuation allowance | 24,920 | 27,855 | |||||||||
| Deferred tax liabilities | |||||||||||
| Right-of-use asset | (9,788) | (10,955) | |||||||||
| Intangibles | (2,675) | (3,392) | |||||||||
Capitalized inventory | (2,074) | (3,254) | |||||||||
| Total deferred tax liabilities | (14,537) | (17,601) | |||||||||
Net deferred tax assets | $ | 10,383 | $ | 10,254 | |||||||
| Reported as | |||||||||||
| Deferred tax assets | $ | 10,509 | $ | 10,314 | |||||||
| Deferred tax liabilities | (126) | (60) | |||||||||
Net deferred tax assets | $ | 10,383 | $ | 10,254 | |||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided to reduce the Company's deferred tax assets to amounts that are more-likely-than-not to be realized. The Company has assessed, on a jurisdictional basis, the realization of its net deferred tax assets, including the ability to carry back net operating losses, the existence of taxable temporary differences, the availability of tax planning strategies and available sources of future taxable income. The Company has concluded that based on cumulative taxable income and future taxable income that it is able to realize a benefit for net deferred tax assets in all non-U.S. jurisdictions. In addition, the Company has concluded that a valuation allowance on its net deferred tax assets in the U.S. continues to be appropriate considering cumulative taxable losses in recent years and uncertainty with respect to future taxable income. It is possible that within the next 12 months there may be sufficient positive evidence to release a portion or all of the remaining valuation allowance in the U.S. Release of the remaining valuation allowance would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment, as well as prospective earnings in the United States.
For fiscal 2025, the Company had gross state net operating loss carryforwards of $58.2 million, which expire beginning in 2032, as well as $37.8 million in foreign net operating loss carryforwards with an indefinite life. As of September 27, 2025, the Company also had U.S. federal research and development tax credit carryforwards as filed of $30.1 million, and state research and development tax credit carryforwards as filed of $50.2 million, which will expire beginning in 2042 and 2026, respectively. The federal and state research and development tax credits are shown net of uncertain tax positions and net of federal benefit, as applicable, in the components of the Company's deferred income tax assets and liabilities. For fiscal 2025, the increase in capitalized research and development relates to the requirement to capitalize research and development expenses under Section 174.
Because of the change of ownership provisions of Sections 382 and 383 of the Internal Revenue Code, and similar state provisions, use of a portion of the Company’s U.S. federal and state net operating loss and research and development tax credit carryforwards may be limited in future periods if there are future changes in ownership. Further, a portion of the carryforwards may expire before being applied to reduce future taxable income and income tax liabilities if sufficient taxable income is not generated in future periods.
The following table summarizes changes in the valuation allowance for fiscal 2025, 2024 and 2023:
| September 27, 2025 | September 28, 2024 | September 30, 2023 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Beginning balance | $ | 216,365 | $ | 185,840 | $ | 162,267 | |||||||||||
| Increase during the period | 21,903 | 32,573 | 23,628 | ||||||||||||||
| Decrease during the period | — | (2,048) | (55) | ||||||||||||||
| Ending balance | $ | 238,268 | $ | 216,365 | $ | 185,840 | |||||||||||
Reconciliation of U.S. statutory federal income taxes to the Company’s provision for income taxes is as follows:
| September 27, 2025 | September 28, 2024 | September 30, 2023 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| U.S. federal income taxes at statutory rate | $ | (10,604) | $ | (5,702) | $ | 923 | |||||||||||
| U.S. state and local income taxes, net of federal benefit and state credits | (4,619) | (2,496) | (841) | ||||||||||||||
| Foreign income tax rate differential | 991 | 1,544 | 734 | ||||||||||||||
| Stock-based compensation | 5,068 | 2,726 | 104 | ||||||||||||||
| Federal research and development tax credits | (5,081) | (8,240) | (7,591) | ||||||||||||||
| Unrecognized federal tax benefits | 457 | 1,082 | 184 | ||||||||||||||
| Change in tax rate | (190) | (188) | — | ||||||||||||||
| Global intangible low taxed income, net of foreign tax credits | 715 | 944 | 1,234 | ||||||||||||||
| Foreign -derived intangible income (FDII) deduction | (1,000) | (1,519) | (6,863) | ||||||||||||||
| Subpart F income | 697 | 733 | 1,374 | ||||||||||||||
| 162(m) executive compensation limitation | 1,923 | 1,496 | 2,513 | ||||||||||||||
| Deferred adjustments | — | 504 | — | ||||||||||||||
| Intercompany IP sale | — | (10,412) | — | ||||||||||||||
| Other | 387 | (121) | (695) | ||||||||||||||
| Change in valuation allowance | 21,903 | 30,644 | 23,592 | ||||||||||||||
| Provision for income taxes | $ | 10,647 | $ | 10,995 | $ | 14,668 | |||||||||||
Change in gross unrecognized tax benefits, excluding interest and penalties, as a result of uncertain tax positions are as follows:
| September 27, 2025 | September 28, 2024 | September 30, 2023 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Beginning balance | $ | 18,910 | $ | 17,619 | $ | 17,021 | |||||||||||
Increase (decrease) - tax positions in prior periods | (207) | 147 | (566) | ||||||||||||||
| Increase - tax positions in current periods | 904 | 1,144 | 1,164 | ||||||||||||||
| Ending balance | $ | 19,607 | $ | 18,910 | $ | 17,619 | |||||||||||
The Company does not anticipate changes to its unrecognized benefits within the next 12 months that would result in a material change to the Company’s financial position. The unrecognized tax benefits as of September 27, 2025, would have no impact on the effective tax rate if recognized.
The Company conducts business in a number of jurisdictions and, as such, is required to file income tax returns in multiple jurisdictions globally. U.S. federal income tax returns for the 2021 tax year and earlier are no longer subject to examination by the
U.S. Internal Revenue Service (the "IRS"). All U.S. federal and state net operating losses as well as research and development tax credits generated to date, including 2021 and earlier, used in open tax years are subject to adjustment by the IRS and state tax authorities.
The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. There were no accrued interest or penalties as of September 27, 2025, and September 28, 2024.
As of September 27, 2025, the Company continues to assert that the unremitted earnings in our foreign subsidiaries are permanently reinvested and therefore no deferred taxes or withholding taxes have been provided. If, in the future, the Company decides to repatriate its $16.3 million of undistributed earnings from these subsidiaries in the form of dividends or otherwise, the Company could be subject to withholding taxes payable at that time. Outside basis differences in the Company's foreign subsidiaries including unremitted earnings and any related taxes are not material.
On July 4, 2025, H.R.1, commonly referred to as the One Big Beautiful Bill Act (“OBBBA”) was enacted. The legislation includes provisions such as accelerated cost recovery of qualified property, immediate expensing of U.S.-based research and development costs, and changes to the U.S. international taxation regime. The Company has evaluated the impact of the OBBBA and determined that it did not have a material effect on its fiscal 2025 consolidated financial statements.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.