16.

INCOME TAXES

Income tax provision (benefit) consists of the following (in thousands):


	Year Ended December 31,
	2025		2024			2023
Current income tax provision:
Federal	$	35,261	$	75,552		$	52,634
State		15,171		20,147			13,966
		50,432		95,699			66,600
Deferred income tax provision:
Federal		16,638		(11,113	)		2,633
State		476		(1,118	)		1,235
		17,114		(12,231	)		3,868
Total income tax provision	$	67,546	$	83,468		$	70,468

The income tax provision differs from the amount of income tax determined by applying the U.S. Federal statutory rate to income before taxes as a result of the following (in thousands):


	Year Ended December 31,
	2025						2024						2023
	$			%			$			%			$			%
U.S. federal statutory taxes	$	54,172			21.0	%	$	67,602			21.0	%	$	57,664			21.0	%
State and local taxes, net of U.S. federal income tax effect (a)		11,668			4.5	%		14,658			4.5	%		12,287			4.5	%
Foreign tax effects		—			0.0	%		—			0.0	%		—			0.0	%
Effect of changes in tax laws or rates enacted in the current period		(155	)		0.0	%		(30	)		0.0	%		(77	)		0.0	%
Effects of cross-border tax laws
Foreign-derived intangible income		(501	)		-0.2	%		(1,373	)		-0.4	%		(831	)		-0.3	%
Tax credits
Research and development		(433	)		-0.2	%		(444	)		-0.2	%		(484	)		-0.2	%
Energy related tax credits		—			0.0	%		—			0.0	%		(109	)		0.0	%
Other		(179	)		0.0	%		(192	)		-0.1	%		(162	)		-0.1	%
Changes in valuation allowances		(443	)		-0.2	%		(668	)		-0.2	%		411			0.1	%
Nontaxable or nondeductible items
Share-based payment awards		100			0.0	%		(756	)		-0.3	%		(656	)		-0.2	%
Other		2,472			1.0	%		2,321			0.8	%		2,151			0.8	%
Changes in unrecognized tax benefits		—			0.0	%		—			0.0	%		—			0.0	%
Other adjustments		845			0.3	%		2,350			0.8	%		274			0.1	%
Effective tax rate	$	67,546			26.2	%	$	83,468			25.9	%	$	70,468			25.7	%

(a) State Taxes in California, Illinois, Maryland, Massachusetts, Michigan, New Jersey, and Pennsylvania made up the majority (greater than 50% of the tax in this category).

The Company’s effective tax rate for the year ended December 31, 2025, was 26.2% and was comparable to the effective tax rate for the year ended December 31, 2024, of 25.9%, which resulted in income tax expense of $67.5 million and $83.5 million, respectively.

Taxes paid consist of the following (in thousands):


	As of December 31,
	2025		2024		2023
Federal		34,027		66,859		40,389
State *		16,029		18,312		11,951
Foreign		-		-		-
Total Taxes Paid		50,056		85,171		52,340

* No jurisdictions were paid in excess of 5 percent of total income taxes paid (net of refunds).

Deferred tax assets and liabilities consist of the following (in thousands):


	As of December 31,
	2025			2024
Deferred tax assets:
Operating lease liability		13,898			13,632
Product warranty reserves		7,591			5,833
State tax credit carryforwards		2,910			3,621
Deferred revenue		4,227			4,230
Tax Cut and Jobs Act capitalization of research and development costs		8			5,397
Stock-based compensation		2,030			1,828
Inventories		8,882			3,342
Gross deferred tax assets, before valuation allowance		39,546			37,883
Valuation allowance		(2,196	)		(2,638	)
Gross deferred tax assets, after valuation allowance		37,350			35,245
Deferred tax liabilities:
Depreciation		(93,274	)		(70,572	)
Inventories		(11,249	)		(14,837	)
Operating lease right-of-use asset		(13,433	)		(13,332	)
Goodwill amortization		(3,616	)		(3,584	)
Other		(1,611	)		(1,639	)
Gross deferred tax liabilities		(123,183	)		(103,964	)
Net deferred tax liability	$	(85,833	)	$	(68,719	)

The Company recognizes deferred tax assets and liabilities based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax laws and statutory tax rates. In accordance with accounting standards, the Company assesses the likelihood that its deferred tax assets will be realized. Deferred tax assets are reduced by a valuation allowance when, after considering all available positive and negative evidence, it is determined that it is more likely than not that some portion, or all, of the deferred tax asset will not be realized, primarily certain state income tax credits. As of December 31, 2025, the Company had a valuation allowance of $2.2 million against deferred tax assets it estimates will not be realized. The Company will analyze its position in subsequent reporting periods, considering all available positive and negative evidence, in determining the expected realization of its deferred tax assets.

The Company recognizes interest and penalties related to tax matters as a component of “Selling, general and administrative expenses” in the accompanying Consolidated Statements of Comprehensive Income. As of December 31, 2025, the Company has identified no uncertain tax position and, accordingly, has not recorded any unrecognized tax benefits or associated interest and penalties.

The Company operates in multiple tax jurisdictions and, in the normal course of business, its tax returns are subject to examination by various taxing authorities. Such examinations may result in future assessments by these taxing authorities, and the Company has accrued a liability when it believes that it is not more likely than not that it will realize the benefits of tax positions that it has taken or for the amount of any tax benefit that exceeds the cumulative probability threshold in accordance with accounting standards. As of December 31, 2025, for certain tax jurisdictions, tax years 2021 through 2025 remain subject to examination. The Company believes that adequate provisions have been made for all tax returns subject to examination. Sales made to foreign distributors are not taxable in any foreign jurisdictions as the Company does not have a taxable presence.

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.

TREX CO INC Income Taxes Disclosure

About Income Taxes Disclosures

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