Note 12 — Income Taxes

Income Tax Expense (Benefit)

The components of income tax expense (benefit) were as follows (in thousands):


	Year Ended December 31,
	2025			2024			2023
Current income tax expense (benefit):
Federal	$	(140	)	$	(2,180	)	$	18
State		739			103			58
Mexico		73			309			31
Total current income tax expense (benefit)	$	672		$	(1,768	)	$	107

Deferred income tax expense (benefit):
Federal	$	(94,409	)	$	(10,874	)	$	(61,182	)
State		(15,432	)		17,645			478
Mexico		—			—			—
Total deferred income tax expense (benefit)	$	(109,841	)	$	6,771		$	(60,704	)

Total income tax expense (benefit)	$	(109,169	)	$	5,003		$	(60,597	)

A reconciliation of income tax expense (benefit) computed at the U.S. federal statutory tax rate to the Company’s income tax expense (benefit) is as follows (in thousands, except percentages):


	Year Ended December 31,
	2025					2024					2023
Income tax expense (benefit) at the federal statutory tax rate	$	(126,944	)	21.0	%	$	(14,992	)	21.0	%	$	26,614		21.0	%
State and local income taxes, net of federal benefit(1)		(14,849	)	2.5	%		17,726		(24.8	)%		524		0.4	%
Foreign tax effects
Mexico
Statutory tax rate difference between Mexico and U.S.		169		(0.0	)%		295		(0.4	)%		436		0.4	%
Other		(565	)	0.1	%		(671	)	0.9	%		(1,452	)	(1.1	)%
Change in valuation allowance		28,800		(4.8	)%		—		—	%		(93,726	)	(74.0	)%
Nontaxable or nondeductible items		2,848		(0.5	)%		4,925		(6.9	)%		4,419		3.5	%
Effect of cross-border tax laws		395		(0.1	)%		620		(0.9	)%		1,016		0.8	%
Change in unrecognized tax benefits		73		(0.0	)%		65		(0.1	)%		31		0.0	%
Other adjustments		904		(0.1	)%		(2,965	)	4.2	%		1,541		1.2	%
Total income tax expense (benefit)	$	(109,169	)	18.1	%	$	5,003		(7.0	)%	$	(60,597	)	(47.8	)%
Effective tax rate		18.1	%				(7.0	)%				(47.8	)%

(1)

State and local taxes in Louisiana made up the majority (greater than 50%) of the tax effect in this category.

The Company’s effective tax rate for the year ended December 31, 2025 differed from the federal statutory rate of 21.0% primarily due to recording an income tax expense of $28.8 million related to recording a valuation allowance on its U.S. federal deferred tax assets offset with a state income tax benefit of $14.8 million.

The Company’s effective tax rate for the year ended December 31, 2024 differed from the federal statutory rate of 21.0% primarily due to state income tax expense of $17.7 million and income tax expense of $4.9 million related to nontaxable or nondeductible items.

The Company’s effective tax rate for the year ended December 31, 2023 differed from the federal statutory rate of 21.0% primarily due to a non-cash tax benefit of $93.7 million related to the release of the valuation allowance for its federal deferred tax assets offset with income tax expense of $4.4 million related to nontaxable or nondeductible items.

Deferred Tax Assets and Liabilities

Net deferred tax assets and liabilities 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. Net deferred tax assets and liabilities is included in “Other liabilities” on the Consolidated Balance Sheets as of December 31, 2025. Significant components of deferred tax assets and liabilities were as follows (in thousands):


	Year Ended December 31,
	2025			2024
Deferred tax assets:
Federal net operating loss	$	139,330		$	108,717
Foreign tax loss carryforward		544			452
State net operating loss		16,359			12,426
Interest expense carryforward		40,177			74,957
Asset retirement obligations		302,222			262,773
Finance lease liability		25,389			29,926
Other		19,286			25,347
Total deferred tax assets		543,307			514,598
Valuation allowance		(32,735	)		(3,325	)
Total deferred tax assets, net	$	510,572		$	511,273

Deferred tax liabilities:
Oil and gas properties	$	656,457		$	772,439
Derivatives		10,851			5,411
Total deferred tax liabilities		667,308			777,850
Net deferred tax liability	$	(156,736	)	$	(266,577	)

Net Operating Loss

The table below presents the details of the Company’s net operating loss carryovers as of December 31, 2025 (in thousands):


	Amount		Expiration Year
Federal net operating losses	$	263,501	2036 - 2037
Federal net operating losses	$	399,976	Unlimited
Foreign tax loss carryforward	$	1,812	2026 - 2035
State net operating losses	$	373,383	Unlimited

As of December 31, 2025, the Company had U.S. federal net operating loss carryforwards (“NOLs”) of approximately $663.5 million, $569.8 million of which are subject to limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Section 382 of the Code provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, against future U.S. taxable income in the event of a change in ownership. If not utilized, such carryforwards would begin to expire at the end of 2036.

Valuation Allowance

The Company recorded a valuation allowance of $32.7 million and $3.3 million as of December 31, 2025 and 2024, respectively. Deferred income tax assets and liabilities are recorded related to NOLs and temporary differences between the book and tax basis of assets and liabilities expected to produce tax deductions and income in the future. The realization of these assets depends on recognition of sufficient future taxable income in specific tax jurisdictions in which those NOLs or temporary differences relate. At December 31, 2025, the Company’s valuation allowance primarily related to the temporary differences related to the Company’s asset retirement obligations. At December 31, 2024, the company’s valuation allowance related to state operating loss carryforwards.

In assessing the need for a valuation allowance, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized using available positive and negative evidence, including future reversals of temporary differences, tax-planning strategies and future taxable income, to estimate whether sufficient future taxable income will be generated to permit use of deferred tax assets. A significant piece of objective negative evidence evaluated is the cumulative loss incurred over recent years. Such objective negative evidence limits the Company’s ability to consider other subjective positive evidence.

Uncertain Tax Positions

The table below sets forth the beginning and ending balance of the total amount of unrecognized tax benefits.

Balances in the uncertain tax positions are as follows (in thousands):


	Year Ended December 31,
	2025		2024			2023
Total unrecognized tax benefits, beginning balance	$	1,592	$	989		$	835
Increases in unrecognized tax benefits as a result of:
Tax positions taken during a prior period		277		(120	)		154
Tax positions taken during the current period		—		723			—
Total unrecognized tax benefits, ending balance	$	1,869	$	1,592		$	989

The Company recognizes interest and penalties related to uncertain tax positions as “Interest Expense” and “General and administrative expense” on the Consolidated Statements of Operations, respectively.

Income Taxes Paid

The components of income taxes paid (net of refunds) were as follows (in thousands):


	Year Ended December 31,
	2025		2024			2023
Income taxes paid (net of refunds)
Federal (U.S.)	$	179	$	5,215		$	(18	)
Louisiana		418		1			—
Other		34		(297	)		12
Total income taxes paid (net of refunds)	$	631	$	4,919		$	(6	)

Years Open to Examination

The 2022 through 2025 tax years remain open to examination by the tax jurisdictions in which the Company is subject to tax. The statute of limitations with respect to the U.S. federal income tax returns of the Company for years ending on or before December 31, 2020 are closed, except to the extent of any NOL carryover balance.

Historical Timeline

Fiscal Year	Filed
2025	Feb 25, 2026	Showing above
2024	Feb 27, 2025

2023	Feb 29, 2024

2022	Mar 1, 2023

2021	Feb 25, 2022

2020	Mar 11, 2021

2019	Mar 12, 2020

2018	Mar 13, 2019

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.

TALOS ENERGY INC. Income Taxes Disclosure

Historical Timeline

About Income Taxes Disclosures

Other Available Disclosures