USA Compression Partners, LPUSAC
USA Compression Partners, LP Income Taxes Disclosure
Income Tax Expense
We are subject to the Texas Margin Tax, which applies a tax to our gross margin. We do not conduct business in any other state where a similar tax is applied. The Texas Margin Tax requires certain forms of legal entities, including limited partnerships, to pay a tax of 0.75% on its “margin,” as defined in the law, based on annual results. The tax base to which the tax is applied is the least of (i) 70% of total revenues for federal income tax purposes, (ii) total revenue less cost of goods sold, (iii) total revenue less compensation for federal income tax purposes, or (iv) total revenue less $1 million.
Components of our income tax expense are as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current tax expense: | |||||||||||||||||
| Federal | $ | 2,877 | $ | — | $ | — | |||||||||||
| State | 1,526 | 1,657 | 1,417 | ||||||||||||||
| Total | 4,403 | 1,657 | 1,417 | ||||||||||||||
| Deferred tax expense (benefit): | |||||||||||||||||
| State | 466 | 574 | (52) | ||||||||||||||
| Total | 466 | 574 | (52) | ||||||||||||||
| Total income tax expense | $ | 4,869 | $ | 2,231 | $ | 1,365 | |||||||||||
Historically, our effective tax rate has differed from the statutory rate primarily due to partnership earnings that are not subject to United States federal and most state income taxes at the partnership level. A reconciliation of income tax expense at the United States statutory rate to the Partnership’s income tax benefit for the years ended December 31, 2025, 2024 and 2023 is as follows (dollars in thousands):
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
| Income tax expense at United States statutory rate | $ | 24,400 | 21.00 | % | $ | 21,379 | 21.00 | % | $ | 14,623 | 21.00 | % | |||||||||||||||||||||||
| State and local income tax, net of federal income tax effect* | 1,992 | 1.71 | % | 2,231 | 2.19 | % | 1,365 | 1.96 | % | ||||||||||||||||||||||||||
| Nontaxable or nondeductible items: | |||||||||||||||||||||||||||||||||||
| Partnership earnings not subject to tax | (24,400) | (21.00) | % | (21,379) | (21.00) | % | (14,623) | (21.00) | % | ||||||||||||||||||||||||||
| Federal audit accrual | 2,877 | 2.48 | % | — | — | — | — | ||||||||||||||||||||||||||||
| Income tax expense | $ | 4,869 | 4.19 | % | $ | 2,231 | 2.19 | % | $ | 1,365 | 1.96 | % | |||||||||||||||||||||||
*State taxes in Texas made up the majority (greater than 50 percent) of the tax effect in this category for the years ended December 31, 2025, 2024 and 2023.
Deferred income tax balances are the direct effect of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the taxes are actually paid or recovered.
The tax effects of temporary differences related to property and equipment, identifiable intangible assets, and goodwill that gives rise to deferred tax assets (liabilities), included net within other liabilities, are as follows (in thousands):
| December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| Goodwill | $ | 10 | $ | 11 | |||||||
| Deferred tax liabilities: | |||||||||||
| Property and equipment | (5,230) | (4,763) | |||||||||
| Identifiable intangible assets | (21) | (23) | |||||||||
| Total deferred tax liabilities | (5,251) | (4,786) | |||||||||
| Deferred tax liabilities, net | $ | (5,241) | $ | (4,775) | |||||||
Accounting Standard Codification (“ASC”) Topic 740 Income Taxes (“Topic 740”) provides guidance on measurement and recognition in accounting for income tax uncertainties and provides related guidance on derecognition, classification, disclosure, interest, and penalties. As of December 31, 2025, we had no material unrecognized tax benefits (as defined in Topic 740). We do not expect to incur interest charges or penalties related to our tax positions, but if such charges or penalties are incurred, our policy is to account for interest charges and penalties as income tax expense within the Consolidated Statements of Operations. Our U.S. Federal income tax returns for years 2019 and 2020 currently are under examination by the Internal Revenue Service (“IRS”). Refer to Note 17 for more detailed information about our IRS examinations. Examinations of our Texas Margin Tax returns for report years 2018 through 2021 were completed in 2023 by the Texas Comptroller of Public Accounts with no material adjustments. In general, USA Compression and its subsidiaries are no longer subject to examination by the IRS, and most state jurisdictions, for the 2018 and prior years.
The Bipartisan Budget Act of 2015 provides that any tax adjustments (including any applicable penalties and interest) resulting from partnership audits generally will be determined at the partnership level for tax years beginning after December 31, 2017. To the extent possible under these rules, our General Partner may elect to either pay the taxes (including any applicable penalties and interest) directly to the IRS or, if eligible, issue a revised information statement to each unitholder, and former unitholder, with respect to an audited and adjusted return. The Bipartisan Budget Act of 2015 allows a partnership to elect to apply these provisions to any return of the partnership filed for partnership taxable years beginning after the date of the enactment, November 2, 2015. We do not intend to elect to apply these provisions for any tax return filed for partnership taxable years beginning before January 1, 2018.
Cash paid for income taxes were as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Cash paid for income taxes, net of refunds: | |||||||||||||||||
| State: | |||||||||||||||||
| Texas | $ | 1,700 | $ | 1,461 | $ | 1,146 | |||||||||||
| Total | $ | 1,700 | $ | 1,461 | $ | 1,146 | |||||||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 17, 2026 | Showing above |
| 2024 | Feb 11, 2025 | |
| 2023 | Feb 13, 2024 | |
| 2022 | Feb 14, 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.