WATSCO INC Income Taxes Disclosure

9. INCOME TAXES

We calculate our income tax expense and our effective tax rate for 100% of income attributable to our wholly owned operations and for our controlling interest of income attributable to our joint ventures with Carrier, which are primarily taxed as partnerships for income tax purposes.

Cash paid for income taxes, net of refunds, during the years ended December 31, 2024 and 2023 was $124,599 and $188,443, respectively.

On March 11, 2021, the America Rescue Plan Act of 2021 (the “ARPA”) was enacted. The ARPA expanded Internal Revenue Code (“IRC”) Section 162(m) to include five additional most highly compensated individuals. The expansion of Section 162(m) coverage is effective for tax years beginning after December 31, 2026. Unlike the employees subject to Section 162(m) by virtue of being the Chief Executive Officer (“CEO”), Chief Financial Officer, or three most highly compensated named executive officers, an employee who is identified as one of the “additional” five employees is not considered to be a covered employee indefinitely. The five additional employees will be subject to the annual $1,000 cap on compensation and will be determined annually.

Pursuant to provisions of the Inflation Reduction Act of 2022, we purchased transferable federal tax credits during 2025 and 2024. Such federal tax credits were purchased at negotiated discounts, resulting in an income tax benefit recognized during the year ended December 31, 2025.

The Organization for Economic Cooperation and Development (“OECD”) has a framework to implement a global minimum corporate tax rate of 15% for companies with global revenues and profits above certain thresholds (“Pillar Two”), with certain aspects of Pillar Two effective January 1, 2024 and other aspects effective January 1, 2025. In January 2026, the OECD introduced new guidance including a “Side-by-Side Safe Harbor” which, if elected, exempts U.S. domestic operations from being taxed by global minimum tax rules. Since we do not have any operations in jurisdictions with tax rates below the 15% minimum, Pillar Two did not impact our global tax costs in 2025 and it is not expected to be material in future periods. We will monitor evolving tax legislation related to global minimum tax rules in the jurisdictions in which we operate for impacts on our tax provision and effective tax rate.

On July 4, 2025, the act commonly referred to as the One Big Beautiful Bill (“OBBB”) was signed into law. The OBBB created new provisions that are applicable to the Company, including 100% bonus depreciation for qualifying assets placed in service after January 19, 2025, and full expensing of domestic research and experimental expenditures incurred in taxable years beginning after December 31, 2024.The OBBB did not have a material impact on our effective income tax rate for 2025 and we do not expect it to have a material impact in 2026.

Valuation allowances are provided to reduce the related deferred income tax assets to an amount which will, more likely than not, be realized. The valuation allowance was $14,178 and $11,554 at December 31, 2025 and 2024, respectively. The increase was primarily attributable to the impact on U.S. deferred tax assets from share-based compensation deduction limitations related to the expansion of IRC Section 162(m).

As of December 31, 2025, we have accumulated undistributed earnings generated by our foreign subsidiaries of approximately $163,000. Any additional taxes due with respect to such previously taxed earnings, if repatriated, would generally be limited to certain state income taxes and foreign withholding. Deferred taxes have been recorded for state taxes and foreign withholding taxes on certain earnings of our foreign consolidated subsidiaries expected to be repatriated. We do not intend to distribute the remaining previously taxed foreign earnings and therefore have not recorded deferred taxes for certain state income taxes and foreign withholding on such earnings. The amount of certain state income taxes and foreign withholding that might be payable on the remaining amounts at December 31, 2025 is not practicable to estimate.

At December 31, 2025, there were state net operating loss carryforwards of $24,633, with the majority having an indefinite carryforward period. At December 31, 2025, there were foreign net operating loss carryforwards of $19,311, which expire in varying amounts from 2036 through 2044. These amounts are available to offset future taxable income. There were no federal net operating loss carryforwards at December 31, 2025.

We are subject to U.S. federal income tax, income tax of multiple state jurisdictions and foreign income tax. We are subject to tax audits in the various jurisdictions until the respective statutes of limitations expire. We are no longer subject to U.S. federal tax examinations for tax years prior to 2022. For the majority of states and foreign jurisdictions, we are no longer subject to tax examinations for tax years prior to 2021.

At December 31, 2025 and 2024, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $8,328 and $7,783, respectively. Of these totals, $6,698 and $6,263, respectively, (net of the federal benefit received from state positions) represent the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. Our policy is to recognize penalties within selling, general and administrative expenses and interest related to income tax matters within income tax expense in the consolidated statements of income. At December 31, 2025 and 2024, the cumulative amount of estimated accrued interest and penalties resulting from such unrecognized tax benefits was $1,220 and $1,196, respectively, and is included in deferred income taxes and other liabilities in the accompanying consolidated balance sheets.