16.INCOME TAXES

The components of net income (loss) before income taxes, by geography, are as follows:


	For the year ended December 31,
	2025			2024			2023
U.S.	$	30,742		$	9,174		$	(3,126)
Foreign		(23,163)			(7,265)			(18,548)
Net income (loss) before income taxes	$	7,579		$	1,909		$	(21,674)

Income tax expense (benefit) consists of the following:


	For the year ended December 31,
	2025			2024			2023
Current income taxes:
Federal	$	3,416		$	1,448		$	(279)
State and local		2,712			855			1,568
Foreign		1,828			2,204			1,347
Total current		7,956			4,507			2,636
Deferred income taxes:
Federal		(1,740)			42,346			(9,224)
State and local		(359)			9,111			(1,552)
Foreign		(5,489)			(1,326)			(441)
Total deferred		(7,588)			50,131			(11,217)
Income tax expense (benefit)	$	368		$	54,638		$	(8,581)

During the year ended December 31, 2025, the Company recognized a $70 income tax expense in accumulated other comprehensive loss relating to unrealized gains (losses) from foreign currency translation adjustments and revaluations, and available-for-sale securities, and in stockholder's equity related to increases in contributed capital. During the year ended December 31, 2024, the Company recognized a $37 income tax benefit in accumulated other comprehensive loss relating to unrealized gains (losses) from foreign currency translation adjustments and revaluations, and available-for-sale securities, and in stockholder's equity related to increases in contributed capital.

The reconciliation of the effective tax rate to tax at the statutory rates for the years ended December 31 is as follows:


		2025				2024				2023
		Total		Tax Rate		Total		Tax Rate		Total		Tax Rate
Pretax net income (loss)		$	7,579			$	1,909			$	(21,674)
Taxes:
U.S. federal income tax at statutory rate		$	1,591	21.0	%	$	401	21.0	%	$	(4,552)	21.0	%
State and local income taxes, net of federal income tax effect⁽¹⁾			1,783	23.5	%		9,835	515.2	%		(314)	1.4	%
Foreign tax effects
Austria
Statutory tax rate difference between Austria and United States			(481)	(6.3)	%		(87)	(4.6)	%		—	0.0	%
Nontaxable or nondeductible items
Stock-based compensation expense			862	11.4	%		50	2.6	%		—	0.0	%
Other adjustments			44	0.6	%		(5)	(0.3)	%		—	0.0	%
Brazil
Statutory tax rate difference between Brazil and United States			327	4.3	%		45	2.4	%		(367)	1.7	%
Changes in valuation allowances			1,120	14.8	%		(1,412)	(74.0)	%		1,448	(6.7)	%
Nontaxable or nondeductible items
Purchase commitment and contingent consideration liabilities			(1,708)	(22.5)	%		1,747	91.5	%		—	0.0	%
Other adjustments			50	0.7	%		119	6.2	%		(127)	0.6	%
Germany
Trade tax			85	1.1	%		64	3.4	%		101	(0.5)	%
Nontaxable or nondeductible items
Stock-based compensation expense			96	1.3	%		22	1.2	%		15	(0.1)	%
Other adjustments			(13)	(0.2)	%		41	2.1	%		85	(0.4)	%
Ireland
Statutory tax rate difference between Ireland and United States			79	1.0	%		572	30.0	%		1,602	(7.4)	%
Changes in valuation allowances			97	1.3	%		929	48.7	%		1,938	(8.9)	%
Other adjustments			71	0.9	%		59	3.1	%		87	(0.4)	%
Netherlands
Statutory tax rate difference between Netherlands and United States			197	2.6	%		95	5.0	%		31	(0.1)	%
Other adjustments			20	0.3	%		50	2.6	%		25	(0.1)	%
United Kingdom
Statutory tax rate difference between United Kingdom and United States			81	1.1	%		120	6.3	%		(3)	0.0	%
Other adjustments			50	0.7	%		(12)	(0.6)	%		(59)	0.3	%
Other foreign jurisdictions			41	0.5	%		11	0.6	%		5	0.0	%
Effect of cross-border tax laws			(131)	(1.7)	%		(17)	(0.9)	%		(232)	1.1	%
Tax credits
Research and development tax credits			(4,508)	(59.5)	%		(4,920)	(257.7)	%		(5,818)	26.8	%
Changes in valuation allowances			11,089	146.3	%		56,631	2,966.5	%		—	0.0	%
Nontaxable or nondeductible items
Nondeductible compensation			5,350	70.6	%		3,269	171.2	%		2,312	(10.7)	%
Purchase commitment and contingent consideration liabilities			(3,570)	(47.1)	%		3,675	192.5	%		—	0.0	%
Stock-based compensation expense			(12,881)	(170.0)	%		(17,213)	(901.7)	%		(5,228)	24.1	%
Transaction costs			8	0.1	%		357	18.7	%		—	0.0	%
Other			369	4.9	%		272	14.2	%		183	(0.8)	%
Changes in unrecognized tax benefits			172	2.3	%		98	5.1	%		451	(2.1)	%
Other adjustments			78	0.9	%		(158)	(8.2)	%		(164)	0.8	%
Taxes and effective tax rate		$	368	4.9	%	$	54,638	2,862.1	%	$	(8,581)	39.6	%
⁽¹⁾For December 31, 2025, taxes in California, Texas, and Illinois made up the majority (greater than 50%) of the state income taxes. For December 31, 2024, taxes in California, Illinois, New Jersey, New York, Pennsylvania, and Minnesota made up the majority of the state income taxes. For December 31, 2023, taxes in Georgia, Texas, Illinois, and Indiana made up the majority of the state income taxes.

The effective tax rate in 2025 decreased to 4.9% from 2,862.1% in 2024. The decrease in income tax expense in 2025 was primarily driven by reduced increases in valuation allowances on net deferred tax assets established for U.S. and certain foreign jurisdictions, favorable adjustments for nondeductible purchase commitment and contingent consideration liabilities, partially offset by increased pre-tax income and reduced favorable impact of tax benefits on exercises vesting of stock awards, net of increased limitations on deductions of certain employees’ compensation under Internal Revenue Code (“IRC”) Section 162(m).

The effective tax rate in 2024 increased to 2,862.1% from 39.6% in 2023. The increase in income tax expense in 2024 was primarily driven by changes in valuation allowances on net deferred tax assets established for U.S. and certain foreign jurisdictions, nondeductible purchase commitment and contingent consideration liabilities, and pre-tax income, partially offset by the favorable impact of tax benefits on exercises and vesting of stock awards, net of limitations on deductions of certain employees’ compensation under IRC Section 162(m).

Significant components of the Company’s net deferred tax assets (liabilities) are as follows:


	As of December 31,
Deferred tax assets:	2025			2024
Deferred revenue	$	1,342		$	1,512
State operating loss carry forwards		3,318			3,674
Federal and foreign loss carry forwards		13,495			8,651
Accrued expenses		2,923			1,754
Accrued compensation		7,875			9,223
Stock-based compensation		12,565			13,826
Operating lease liabilities		3,310			4,185
Tax credits		4,519			5,160
Original issue discount		7,353			9,396
Depreciation and amortization		34,182			14,964
Other		2,927			687
Deferred tax assets		93,809			73,032
Valuation allowance		(87,635)			(72,285)
Total deferred tax assets		6,174			747
Deferred tax liabilities:
Prepaid expenses		(1,214)			(671)
Right of use asset		(2,443)			(3,006)
Deferred commissions		(8,096)			(6,969)
Total deferred tax liabilities		(11,753)			(10,646)
Net deferred tax assets (liabilities)	$	(5,579)		$	(9,899)

Classification in the consolidated balance sheets:
Deferred income tax assets	$	85		$	19
Deferred income tax liabilities		(5,664)			(9,918)
Net deferred tax assets (liabilities)	$	(5,579)		$	(9,899)

At December 31, 2025, the Company has U.S. state operating loss carry forwards of $53,157. The state operating losses will expire at varying dates beginning in 2035 through 2045 or will carry forward indefinitely. A full valuation allowance is recorded for the U.S. state operating losses at December 31, 2025.

At December 31, 2025, the Company has available foreign operating losses of approximately $71,426 and nontrading losses of $69, which generally carry forward indefinitely. A valuation allowance for a portion of the foreign operating and non-operating losses is recorded at December 31, 2025. A portion of the foreign operating losses could be forfeited if certain changes in the business occur in future years, which the Company continues to monitor.

At December 31, 2025, the Company has available U.S. federal R&D tax credit carryovers of $4,519. The credits will expire from 2044 through 2045. A full valuation allowance is recorded for the U.S. federal R&D tax credit carryovers at December 31, 2025.

At December 31, 2025 and 2024, the Company has a valuation allowance of $(87,635) and $(72,285), respectively, primarily against certain U.S. and foreign deferred tax assets. The increase in the total valuation allowance of $(15,350) during December 31, 2025, primarily related to increasing the valuation allowance on the U.S. and certain foreign deferred tax assets, partially offset by decreases in valuation allowances in certain foreign jurisdictions as well as changes in foreign exchange rates.

During the fourth quarter of 2024, the Company established a valuation allowance against its U.S. deferred tax assets as it was determined to be more likely than not that these assets will not be realized. This determination was made based on weighing all negative evidence, specifically cumulative losses recognized in our U.S. entity over the past three years. These cumulative losses were mainly due to significant windfall tax benefits realized from the exercises of stock options during the fourth quarter of 2024, driven by an increase in the Company’s Class A common stock price during that period. Despite positive evidence of projected future business profitability in the Company’s U.S. entity, management determined that this did not outweigh the negative evidence to allow the Company to conclude it was more likely than not the deferred tax assets would be realized and therefore the Company recorded a full valuation allowance against these U.S. deferred tax assets as of December 31, 2024, which has been maintained through December 31, 2025.

The changes in the valuation allowance were as follows:


	For the year ended December 31,
	2025			2024			2023
Valuation allowance, at beginning of year	$	(72,285)		$	(5,941)		$	(2,285)
Increase in valuation allowance recorded through earnings		(15,891)			(68,377)			(3,656)
Decrease in valuation allowance recorded through earnings		541			2,033			—
Valuation allowance, at end of year	$	(87,635)		$	(72,285)		$	(5,941)

The Company does not assert any earnings to be permanently reinvested with respect to the undistributed earnings of its foreign subsidiaries.

Significant judgement is required in evaluating the Company’s uncertain tax positions and determining the provision for income taxes. The total amount of gross unrecognized tax benefits was $2,016, $1,427, and $666 as of December 31, 2025, 2024, and 2023, respectively, which would affect the Company’s effective tax rate if recognized. The Company accrued interest and penalties of $97 in the year ended December 31, 2025, as other operating expenses in the consolidated statements of comprehensive income (loss). Accrued interest and penalties were not material for the years ended December 31, 2024, or 2023. The reconciliation of the beginning and ending amounts of gross unrecognized tax benefits are presented in the table below:


		For the year ended December 31,
		2025		2024		2023
Balance at beginning of period	$	1,427	$	666	$	—
Increases related to current year tax positions		387		362		215
Increases related to prior year tax positions		177		402		451
Impact of foreign exchange fluctuation		26		—		—
Lapse of statute		(1)		(3)		—
Balance at end of period	$	2,016	$	1,427	$	666

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which the Company operates. Under applicable U.S. federal statutes, tax years ended December 31, 2022 through December 31, 2025 remain subject to examination. Under applicable statutes, state and foreign corporate tax returns filed for the Company and its respective foreign subsidiaries for years ended December 31, 2020 through December 31, 2025 remain subject to examination by the respective authorities.

Amounts paid for income taxes, net of refunds received are presented in the table below:


		For the year ended December 31,
		2025		2024		2023
Federal	$	(345)	$	4,319	$	3,045
State
Illinois		—		418		329
Texas		251		186		162
Other		31		2,062		1,213
Foreign
Brazil		453		527		545
India		127		24		6
Netherlands		497		810		38
United Kingdom		750		250		243
Other		152		(3)		71
Total paid for income taxes, net of refunds	$	1,916	$	8,593	$	5,652

Historical Timeline

Fiscal Year	Filed
2025	Feb 24, 2026	Showing above
2024	Feb 27, 2025

2023	Feb 29, 2024

2022	Mar 10, 2023

2021	Mar 16, 2022

2020	Mar 15, 2021

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.

Vertex, Inc. Income Taxes Disclosure

Historical Timeline

About Income Taxes Disclosures

Other Available Disclosures