System1, Inc.SST
System1, Inc. Income Taxes Disclosure
Income Taxes
Domestic and foreign components of our loss before income taxes were as follows (in thousands):
For the Year Ended | |||||||||||
December 31, 2025 | December 31, 2024 | ||||||||||
Domestic | $ | (78,167) | $ | (92,190) | |||||||
Foreign | (5,901) | (5,478) | |||||||||
Loss before income tax | $ | (84,068) | $ | (97,668) | |||||||
The components of the Income tax benefit were as follows (in thousands):
For the Year Ended | |||||||||||
December 31, 2025 | December 31, 2024 | ||||||||||
Current: | |||||||||||
Federal | $ | 35 | $ | 145 | |||||||
State | 35 | 291 | |||||||||
Foreign | (755) | 1,297 | |||||||||
Total current (benefit) provision | $ | (685) | $ | 1,733 | |||||||
Deferred: | |||||||||||
Foreign | $ | (2,190) | $ | (2,103) | |||||||
Total deferred benefit | (2,190) | (2,103) | |||||||||
Income tax benefit | $ | (2,875) | $ | (370) | |||||||
A reconciliation of the statutory tax rate to the effective income tax rate for the periods presented was as follows (in thousands):
For the Year Ended | |||||||||||||||||
December 31, 2025 | December 31, 2024 | ||||||||||||||||
Amount | % | Amount | % | ||||||||||||||
Expected income tax benefit at statutory tax rate | $ | (17,654) | 21.0 | % | $ | (20,510) | 21.0 | % | |||||||||
State tax, net of federal tax benefit | 35 | — | % | 189 | -0.2 | % | |||||||||||
Foreign tax effects | (1,258) | 1.5 | % | (104) | 0.1 | % | |||||||||||
Effects of cross-border tax laws | 709 | -0.8 | % | (162) | 0.2 | % | |||||||||||
Tax credits: | |||||||||||||||||
Research and development credits | (1,012) | 1.2 | % | (830) | 0.8 | % | |||||||||||
Other | 873 | -1.0 | % | 75 | -0.1 | % | |||||||||||
Change in valuation allowance | 6,278 | -7.5 | % | 15,496 | -15.9 | % | |||||||||||
Nontaxable or nondeductible items: | |||||||||||||||||
Stock-based compensation | 1,082 | -1.3 | % | 1,954 | -2.0 | % | |||||||||||
Non-Controlling interest | 3,710 | -4.4 | % | 6,661 | -6.8 | % | |||||||||||
Investment in partnership basis adjustments | 6,954 | -8.3 | % | (4,375) | 4.5 | % | |||||||||||
Liability reversal | (1,103) | 1.3 | % | — | — | ||||||||||||
Other nondeductibles | 56 | -0.1 | % | (190) | 0.2 | % | |||||||||||
Changes in unrecognized tax benefits | 828 | -1.0 | % | 754 | -0.8 | % | |||||||||||
Other adjustments | (2,373) | 2.8 | % | 672 | -0.7 | % | |||||||||||
Income tax benefit and effective income tax rate | $ | (2,875) | 3.4 | % | $ | (370) | 0.4 | % | |||||||||
On July 4, 2025, Public Law 119-21 was signed into law. Public Law 119-21 makes permanent key elements of the Tax Cuts and Jobs Act, including 100% bonus depreciation, domestic research cost expensing, and the business interest expense limitation. We do not expect these tax law changes to have a material impact on our financial statements however, we will continue to evaluate their impact as further information becomes available.
The aggregate amount of gross unrecognized tax benefits related to uncertain tax positions were as follows (in thousands):
December 31, 2025 | December 31, 2024 | ||||||||||
Beginning balance | $ | 2,532 | $ | 1,850 | |||||||
Increases based on tax positions related to prior periods | 995 | 490 | |||||||||
Increases based on tax positions related to current period | 326 | 192 | |||||||||
| Ending balance | $ | 3,853 | $ | 2,532 | |||||||
Interest and penalties related to our unrecognized tax benefits are recorded as components of the provision for income taxes. Interest or penalties accrued for the years ended December 31, 2025 and 2024 were not material.
Due to our full valuation allowance, the total amount of unrecognized benefits that, if recognized, would favorably affect the effective tax by $0.3 million (net of Federal benefit) at December 31, 2025.
The earliest tax years that remain subject to examination in the major tax jurisdictions in which we operate were as follows:
Tax year | |||||
United States | 2022 | ||||
California | 2021 | ||||
Netherlands | 2019 | ||||
The components of the deferred income taxes consisted of the following (in thousands):
December 31, 2025 | December 31, 2024 | ||||||||||
Deferred tax assets: | |||||||||||
Net operating loss and capital loss carryforwards | $ | 15,735 | $ | 6,638 | |||||||
Tax credits | 5,304 | 4,894 | |||||||||
Interest expense | 3,397 | 2,346 | |||||||||
Investment in partnerships | 21,764 | 24,760 | |||||||||
Other | 258 | 225 | |||||||||
Total deferred tax assets | 46,458 | 38,863 | |||||||||
Valuation allowance | (45,541) | (38,616) | |||||||||
Total net deferred tax assets | $ | 917 | $ | 247 | |||||||
Deferred tax liabilities: | |||||||||||
Intangibles | $ | (3,808) | $ | (6,026) | |||||||
Other | (1,122) | (420) | |||||||||
Total deferred tax liabilities | $ | (4,930) | $ | (6,446) | |||||||
Net deferred tax liability | $ | (4,013) | $ | (6,199) | |||||||
We assess available positive and negative evidence to estimate if it is more likely than not to use certain jurisdiction-based deferred tax assets including net operating loss carryovers. As of December 31, 2025, we had a full valuation allowance on our U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets would not be realized.
As of December 31, 2025, we had U.S. federal net operating loss carryovers ("NOLs") of $79.1 million that may be used indefinitely and various state NOLs that will expire at different times. Uncertainties that may affect the utilization of our tax attributes include future operating results, tax law changes, rulings by taxing authorities regarding whether certain transactions are taxable or deductible and expiration of carryforward periods.
We had an ownership change and as a result certain federal and state NOLs were limited pursuant to Section 382 of the Internal Revenue Code (the "Code"). This limitation has been accounted for in calculating our available NOL carryforwards.
The change in the valuation allowance was comprised of the following (in thousands):
December 31, 2025 | December 31, 2024 | ||||||||||
Valuation allowance, at beginning of year | $ | 38,616 | $ | 22,658 | |||||||
Increases in valuation allowance recorded through earnings | 7,290 | 15,798 | |||||||||
Increases in valuation allowance not recorded through earnings | (365) | 160 | |||||||||
| Valuation allowance, at end of year | $ | 45,541 | $ | 38,616 | |||||||
The income taxes paid (net of refunds received) was comprised of the following (in thousands):
For the Year Ended | |||||||||||
December 31, 2025 | December 31, 2024 | ||||||||||
Federal taxes | $ | 47 | $ | (152) | |||||||
States taxes: | |||||||||||
California | 32 | (89) | |||||||||
Texas | (32) | 56 | |||||||||
| Other state jurisdictions | (18) | (31) | |||||||||
Foreign taxes: | |||||||||||
Canada | (770) | 615 | |||||||||
Netherlands | 698 | (1,216) | |||||||||
Other foreign jurisdictions | — | 8 | |||||||||
Total cash taxes paid | $ | (43) | $ | (809) | |||||||
Tax Receivable Agreement
Pursuant to our election under Section 754 of the Code, we expect to obtain an increase in our share of the tax basis in the net assets of System1 Holdings when LLC interests are redeemed or exchanged by the other members of System1 Holdings. We intend to treat any redemptions and exchanges of LLC interests as direct purchases of LLC interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that would otherwise be paid in the future to various tax authorities.
On January 27, 2022, we entered into a Tax Receivable Agreement ("TRA") with certain of the then-existing members of System1 Holdings that provides for the payment by us of 85% of the amount of any tax benefits that are actually realized, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of System1 Holdings resulting from any redemptions or exchanges of LLC interests, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA. We expect to benefit from the remaining 15% of any tax benefits that we may actually realize.
As a result of the full valuation allowance on the deferred tax assets, and projected inability to fully utilize all or part of the related tax benefits, we determined that certain payments to the TRA parties related to unrealized tax benefits under the TRA are no longer probable and estimable. Based on this assessment, we reduced our TRA liability as of December 31, 2025, to zero, and recognized a gain of $5.3 million within our consolidated statements of operations for the year ended December 31, 2025. If utilization of the deferred tax asset subject to the TRA becomes more likely than not in the future, we will record a liability related to the TRA which will be recognized as expense within its consolidated statements of operations.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 11, 2026 | Showing above |
| 2024 | Mar 10, 2025 | |
| 2023 | Mar 15, 2024 | |
| 2022 | Jun 6, 2023 | |
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.