TRUPANION, INC.TRUP
TRUPANION, INC. Income Taxes Disclosure
Income Taxes
Loss before income taxes was as follows for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| United States | $ | (43,794) | $ | (34,052) | $ | (5,408) | ||||||||||||||
| Foreign | (402) | (1,168) | (319) | |||||||||||||||||
| $ | (44,196) | $ | (35,220) | $ | (5,727) | |||||||||||||||
The components of income tax expense (benefit) were as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Current: | ||||||||||||||||||||
| U.S. federal & state | $ | 82 | $ | 58 | $ | 198 | ||||||||||||||
| Foreign | 814 | 2,066 | 45 | |||||||||||||||||
| 896 | 2,124 | 243 | ||||||||||||||||||
| Deferred: | ||||||||||||||||||||
| U.S. federal & state | 11 | (15) | (9) | |||||||||||||||||
| Foreign | (431) | (1,799) | (121) | |||||||||||||||||
| (420) | (1,814) | (130) | ||||||||||||||||||
| Income tax expense (benefit) | $ | 476 | $ | 310 | $ | 113 | ||||||||||||||
A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the financial statements is presented below:
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Federal income taxes at statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||||||||||
| U.S. state income taxes | 3.5 | 7.5 | (2.6) | |||||||||||||||||
| Equity compensation | 2.5 | 30.4 | 122.3 | |||||||||||||||||
| Change in valuation allowance | (26.7) | (58.4) | (136.0) | |||||||||||||||||
| Other, net | (1.7) | (1.7) | (4.1) | |||||||||||||||||
| Credits | 0.3 | 0.3 | (2.6) | |||||||||||||||||
| Effective income tax rate | (1.1) | % | (0.9) | % | (2.0) | % | ||||||||||||||
The principal components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
| As of December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Deferred tax assets: | ||||||||||||||
| Deferred revenue | $ | 8,610 | $ | 6,232 | ||||||||||
| Accruals and reserves | 1,860 | 2,294 | ||||||||||||
| Net operating loss carryforwards | 63,772 | 52,796 | ||||||||||||
| Depreciation and amortization | 1,421 | 833 | ||||||||||||
| Equity compensation | 3,179 | 4,126 | ||||||||||||
| Credits | 997 | 847 | ||||||||||||
| Other | 1,661 | 381 | ||||||||||||
| Total deferred tax assets | 81,500 | 67,509 | ||||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Deferred costs | (1,322) | (887) | ||||||||||||
| Intangible assets | (3,603) | (2,802) | ||||||||||||
| Other | (2,398) | (1,817) | ||||||||||||
| Total deferred tax liabilities | (7,323) | (5,506) | ||||||||||||
| Total deferred taxes | 74,177 | 62,003 | ||||||||||||
| Less deferred tax asset valuation allowance | (77,507) | (64,791) | ||||||||||||
| Net deferred tax liability | $ | (3,330) | $ | (2,788) | ||||||||||
At December 31, 2022, the Company had U.S. federal and state net operating loss carryforwards of $63.8 million (tax-effected) and U.S. federal income tax credits of $1.0 million. Use of carryforwards is limited based on the future income of the Company. The federal net operating loss carryforwards will begin to expire in 2026. Foreign net operating loss carryforwards will begin to expire in 2023. U.S. federal income tax credits will begin to expire in 2036. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company’s net operating loss carryforwards and credit carryforwards may be limited if the Company experiences an ownership change. As of December 31, 2022, the utilization of approximately $0.5 million of net operating losses are subject to limitation as a result of prior ownership changes; however, subsequent ownership changes may further affect the limitation in future years.
A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, the Company has recorded a full valuation allowance against its U.S. Federal and the majority of its U.S. State deferred tax assets as of December 31, 2022, 2021, and 2020 because the Company’s management has determined that it is more likely than not that these assets will not be fully realized.
For the year ended December 31, 2022, the Company recognized a net increase of $13.0 million in valuation allowance against its net deferred tax assets associated with U.S. federal and certain state jurisdictions, primarily attributable to current year activity.
The Company is open to examination by the U.S. federal tax jurisdiction for the years ended December 31, 2019 through 2022, and is also open to examination for 2006 and forward with respect to net operating loss carryforwards generated and carried forward from those years in the United States. The Company is subject to taxation in various states and countries, and may be subject to audit or examination by the relevant authorities in respect to those particular jurisdictions primarily for 2017 and thereafter.
For the year ended December 31, 2022, the Company intends to invest substantially all of its foreign subsidiary earnings, as well as its capital in its foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which it would incur significant, additional costs upon repatriation of such amounts. A deferred tax liability related to taxes due upon repatriation to the U.S. has not been recorded.
The Company is booking Global Intangible Low-Taxed Income ("GILTI") on a current basis and is not booking deferred taxes related to GILTI.
The Company accounts for uncertain tax positions based on a two-step process of evaluating recognition and measurement criteria. The first step assesses whether the tax position is more likely than not to be sustained upon examination by the taxing authority, including resolution of any appeals or litigation, on the basis of the technical merits of the position. If the tax position meets the more-likely-than-not criteria, the portion of the tax benefit greater than 50% likely to be realized upon settlement with the relevant taxing authority is recognized in the financial statements. No significant changes in uncertain tax positions are expected in the next twelve months.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Balance, beginning of year | $ | 138 | $ | 133 | $ | 113 | ||||||||||||||
| Increases (decreases) to tax positions related to prior periods | 8 | — | 15 | |||||||||||||||||
| Increases to tax positions related to the current year | 5 | 5 | 5 | |||||||||||||||||
| Balance, end of year | $ | 151 | $ | 138 | $ | 133 | ||||||||||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2022 | Feb 16, 2023 | Showing above |
| 2021 | Feb 17, 2022 | |
| 2020 | Feb 12, 2021 | |
| 2019 | Feb 14, 2020 | |
| 2018 | Feb 14, 2019 | |
| 2017 | Feb 14, 2018 | |
| 2016 | Feb 15, 2017 | |
| 2015 | Feb 17, 2016 | |
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.