Sprout Social, Inc.SPT
Sprout Social, Inc. Income Taxes Disclosure
The components of loss before income taxes are as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Domestic | $ | (44,078) | $ | (63,221) | $ | (64,497) | |||||||||||
| Foreign | 1,338 | 1,920 | (1,281) | ||||||||||||||
| Loss before income taxes | $ | (42,740) | $ | (61,301) | $ | (65,778) | |||||||||||
The components of income tax expense (benefit) are as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current taxes | |||||||||||||||||
| Federal | $ | 28 | $ | — | $ | — | |||||||||||
| State | 262 | 13 | — | ||||||||||||||
| Foreign | 888 | 657 | 820 | ||||||||||||||
| Current tax expense (benefit) | 1,178 | 670 | 820 | ||||||||||||||
| Deferred taxes | |||||||||||||||||
| Federal | 115 | 86 | — | ||||||||||||||
| State | (12) | — | — | ||||||||||||||
| Foreign | (694) | (86) | (171) | ||||||||||||||
| Deferred tax expense (benefit) | (591) | — | (171) | ||||||||||||||
| Income tax expense (benefit) | $ | 587 | $ | 670 | $ | 649 | |||||||||||
A reconciliation of the difference between the federal statutory rate and the effective income tax rate as a percentage of income before taxes after the adoption of ASU 2023-09 is as follows (in thousands):
| Year Ended December 31, | |||||||||||
| 2025 | |||||||||||
| Amount | Tax Rate | ||||||||||
| Federal statutory income tax | $ | (8,975) | 21.00 | % | |||||||
State and local income taxes (1) | 250 | (0.59) | |||||||||
| Foreign tax effects | |||||||||||
| Philippines | |||||||||||
| Changes in valuation allowance | (521) | 1.22 | |||||||||
| Other | 60 | (0.14) | |||||||||
| Other foreign jurisdictions | 530 | (1.24) | |||||||||
| Effects of cross-border tax laws: | |||||||||||
| Global intangible low-taxed income | 463 | (1.08) | |||||||||
| Other | 175 | (0.41) | |||||||||
| Tax credits | |||||||||||
| Research and development credits | (1,524) | 3.56 | |||||||||
| Changes in valuation allowance | (2,800) | 6.55 | |||||||||
| Nontaxable and Nondeductible items | |||||||||||
| Stock-based compensation | 12,172 | (28.48) | |||||||||
| Section 162(m) limitation | 608 | (1.42) | |||||||||
| Other | 417 | (0.98) | |||||||||
| Other adjustments | (268) | 0.64 | |||||||||
| Effective income tax rate | $ | 587 | (1.4) | % | |||||||
(1) The majority of the tax effect within the state and local income tax category relates to California.
A reconciliation of the difference between the federal statutory rate and the effective income tax rate as a percentage of income before taxes for years prior to the adoption of ASU 2023-09 is as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Amount | Tax Rate | Amount | Tax Rate | ||||||||||||||||||||
| Federal statutory income tax | $ | (12,873) | 21.00 | % | $ | (13,813) | 21.00 | % | |||||||||||||||
| State income tax, net of federal tax benefit | (329) | 0.54 | (2,423) | 3.68 | |||||||||||||||||||
| Foreign tax | 79 | (0.13) | (75) | 0.11 | |||||||||||||||||||
| Section 162(m) limitation | 845 | (1.38) | 1,693 | (2.57) | |||||||||||||||||||
| Other | 337 | (0.54) | 304 | (0.46) | |||||||||||||||||||
| Valuation allowance net of deferred tax assets | 5,367 | (8.76) | 18,389 | (27.96) | |||||||||||||||||||
| Stock-based compensation | 10,817 | (17.65) | 2,051 | (3.12) | |||||||||||||||||||
| R&D Credit | (2,696) | 4.40 | (6,100) | 9.27 | |||||||||||||||||||
| Acquisitions | — | — | 603 | (0.92) | |||||||||||||||||||
| Return to provision | (877) | 1.43 | 20 | (0.03) | |||||||||||||||||||
| Effective income tax rate | $ | 670 | (1.1) | % | $ | 649 | (1.0) | % | |||||||||||||||
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 used for income tax
purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2025 and 2024 are as follows (in thousands):
| As of December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred tax assets | |||||||||||
| Net operating loss carryforwards | $ | 84,758 | $ | 79,172 | |||||||
| Research & Development Costs | 17,947 | 22,629 | |||||||||
| Operating lease liability | 3,539 | 4,487 | |||||||||
| Stock-based compensation | 3,080 | 4,555 | |||||||||
| Research & Development Credits | 11,285 | 9,753 | |||||||||
| Other | 3,178 | 2,543 | |||||||||
| Total deferred tax assets | 123,787 | 123,139 | |||||||||
| Deferred tax liabilities | |||||||||||
| Fixed assets | (754) | (1,747) | |||||||||
| Intangible assets | (7,680) | (4,939) | |||||||||
| Deferred commissions and bonus | (21,734) | (18,634) | |||||||||
| Operating lease right-of-use asset | (2,407) | (2,785) | |||||||||
| Other | (1,367) | (1,303) | |||||||||
| Total deferred tax liabilities | (33,942) | (29,408) | |||||||||
| Less: Valuation allowance | (93,861) | (94,037) | |||||||||
| Net deferred tax asset (liability) | $ | (4,016) | $ | (306) | |||||||
The Company assesses all available positive and negative evidence to evaluate the realizability of its deferred tax assets and whether or not a valuation allowance is necessary. The Company’s three-year cumulative loss position was significant negative evidence in assessing the need for a valuation allowance. The weight given to positive and negative evidence is commensurate with the extent such evidence may be objectively verified. Given the weight of objectively verifiable historical losses from operations, the Company has recorded a full valuation allowance on its domestic deferred tax assets except for those from the Company’s NewsWhip acquisition in 2025, which do not have a valuation allowance. Due to the Company’s cost-plus intercompany transactions, no valuation allowance is recorded on the Company’s foreign deferred tax assets except for its Ireland net operating loss deferred tax asset that resulted from the Company’s NewsWhip acquisition in 2025. The Company may be able to reverse the valuation allowance on its domestic deferred tax assets when sufficient positive evidence exists to support the reversal of the valuation allowance.
The net change in the valuation allowance for deferred tax assets was approximately $0.2 million decrease for the year ended December 31, 2025, $5.4 million increase for the year ended December 31, 2024, and $19.4 million increase for the year ended December 31, 2023. The net change during 2025 was primarily due to a decrease in capitalized research and development (R&D) costs and stock-based compensation deferred tax assets, as well as an increase in the deferred tax liabilities with known reversal periods that will generate future sources of taxable income. The net change during 2025 also included a $3.8 million increase related to acquired Ireland net operating losses that were brought into NewsWhip purchase accounting with a full valuation allowance.
The Company elected to account for Global Intangible Low-Taxed Income (“GILTI”) as a current-period expense when incurred. As of December 31, 2025, the Company does not expect to incur material additional income taxes upon the distribution of earnings from its foreign subsidiaries. While the Company intends to repatriate these foreign earnings, there may be local withholding taxes due to various foreign countries and/or U.S. state taxes payable upon distribution of certain lower-tier earnings. The estimated impact of these taxes is currently immaterial to the Company’s consolidated financial statements.
As of December 31, 2025, the Company has gross federal net operating losses of $316.2 million which begin to expire in 2030, state net operating losses of $217.8 million which begin to expire in 2027, and foreign net operating losses of $33.1 million which begin to expire in 2026. The increase in foreign net operating losses was primarily driven by acquired Ireland net operating losses from the NewsWhip acquisition. Net operating loss carryforwards may be limited due to a change in control in the Company’s ownership as defined by the Internal Revenue Code Section 382. Any future changes in the Company’s ownership may limit the use of such carryforward benefits.
The Company recognizes tax benefits from uncertain tax positions if it is more likely than not that the tax position will be sustained by the tax authority upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. If a tax position meets the more-likely-than-not threshold, the Company measures the tax position as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement.
The reconciliation of uncertain tax positions at the beginning and end of the years below is as follows (in thousands):
| As of December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Beginning balance | 3,354 | 2,456 | — | ||||||||||||||
| Gross increase (decrease) related to prior year positions | (100) | — | — | ||||||||||||||
| Gross decrease related to settlements | — | — | — | ||||||||||||||
| Gross increase related to current year positions | 508 | 898 | 2,456 | ||||||||||||||
| Ending balance | 3,762 | 3,354 | 2,456 | ||||||||||||||
At December 31, 2025, approximately $3.8 million would reduce the Company’s annual effective tax rate, if recognized. The Company recognizes interest and, if applicable, penalties for any uncertain tax positions. Interest and penalties related to uncertain tax positions are recorded as a component of income tax expense. In the years ended December 31, 2025, 2024, and 2023, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Due to its operating loss carryforwards, the U.S. federal statute of limitations remains open for tax year 2010 and onward and the Company continues to be subject to examination by the Internal Revenue Service for tax years 2010 and later. The resolutions of any examinations are not expected to be material to these financial statements.
The amounts of cash income taxes paid (net of refunds) by the Company were as follows (in thousands):
| Year Ended December 31, | |||||
| 2025 | |||||
| Canada | $ | 648 | |||
Other jurisdictions (1) | 723 | ||||
| Income taxes, net of amounts refunded | $ | 1,371 | |||
(1) Income taxes paid to other jurisdictions are individually immaterial.
The amount of cash income taxes paid by the Company during the years ended December 31, 2024 and 2023 was $0.8 million and $0.7 million, respectively.
Enactment of the One Big Beautiful Bill Act of 2025
On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was signed into law, extending key provisions of the 2017 Tax Cuts and Jobs Act including, but not limited to, deductions for domestic research and development expenditures. For the year ended December 31, 2025, the impact of the OBBBA on our consolidated financial statements was not material. The Company will continue to monitor any forthcoming guidance or interpretations of the Act that could affect its financial position, results of operations, and cash flows.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 27, 2026 | Showing above |
| 2024 | Feb 26, 2025 | |
| 2023 | Feb 23, 2024 | |
| 2022 | Feb 22, 2023 | |
| 2021 | Feb 23, 2022 | |
| 2020 | Feb 24, 2021 | |
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.