Zscaler, Inc.ZS
Zscaler, Inc. Income Taxes Disclosure
Income Taxes
The following table sets forth the geographical breakdown of the income (loss) before the provision for income taxes:
| Year ended July 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Domestic | $ | (87,892) | $ | (112,758) | $ | (228,715) | |||||||||||
| International | 69,601 | 83,529 | 46,151 | ||||||||||||||
| Loss before provision for income taxes | $ | (18,291) | $ | (29,229) | $ | (182,564) | |||||||||||
The following table sets forth the components of the provision for income taxes:
| Year ended July 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | (in thousands) | ||||||||||||||||
| Federal | $ | (331) | $ | 203 | $ | 1,091 | |||||||||||
| State | 4,272 | 1,337 | 3,890 | ||||||||||||||
| Foreign | 32,747 | 32,620 | 14,438 | ||||||||||||||
| Total current tax expense | 36,688 | 34,160 | 19,419 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 74 | (4,526) | — | ||||||||||||||
| State | 129 | (693) | — | ||||||||||||||
| Foreign | (13,704) | (464) | 352 | ||||||||||||||
| Total deferred tax benefit (expense) | (13,501) | (5,683) | 352 | ||||||||||||||
| Total provision for income taxes | $ | 23,187 | $ | 28,477 | $ | 19,771 | |||||||||||
During fiscal 2025, fiscal 2024 and fiscal 2023, we recognized tax benefits on total stock-based compensation expense of $31.5 million, $23.0 million and $13.4 million, respectively, which are reflected within the provision for income taxes in the consolidated statements of operations.
The following table presents the reconciliation of the statutory federal income tax rate to our effective rate:
| Year ended July 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Tax at federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| State taxes | (20.5) | % | (0.4) | % | (2.1) | % | |||||||||||
| Impact of foreign rate differential | 139.6 | % | 48.7 | % | 11.3 | % | |||||||||||
| Meals and entertainment | (17.1) | % | (7.0) | % | (0.8) | % | |||||||||||
| Stock-based compensation | 187.7 | % | 162.6 | % | (0.8) | % | |||||||||||
| Transaction costs | (0.2) | % | (1.3) | % | — | % | |||||||||||
| U.S. tax credits | 199.9 | % | 89.3 | % | 7.8 | % | |||||||||||
| Change in valuation allowance | (611.7) | % | (471.3) | % | (34.1) | % | |||||||||||
| Withholding tax | (31.5) | % | (12.5) | % | (1.3) | % | |||||||||||
| Waived deductions under Section 59A | — | % | 72.1 | % | (11.8) | % | |||||||||||
| Nondeductible penalties | (2.0) | % | (0.2) | % | — | % | |||||||||||
| Return to provision true ups | (0.2) | % | 2.2 | % | — | % | |||||||||||
| Other | (1.5) | % | (0.6) | % | (0.1) | % | |||||||||||
| Effective tax rate | (136.5) | % | (97.4) | % | (10.9) | % | |||||||||||
Our effective tax rate for fiscal 2025 differs from the U.S. statutory rate primarily due to a portion of our earnings that are taxed at different rates from the U.S. statutory rate, the benefit of stock based compensation deductions, withholding taxes related to customer payments in certain foreign jurisdictions in which we conduct business, and the impact in the valuation allowance against deferred tax assets, including the release of the UK valuation allowance.
Our effective tax rate for fiscal 2024 differs from the U.S. statutory rate primarily due to a portion of our earnings that are taxed at different rates from the U.S. statutory rate, the benefit of stock based compensation deductions, withholding taxes related to customer payments in certain foreign jurisdictions in which we conduct business, and the impact of the valuation allowance we maintain against our U.S. federal and state deferred tax assets. During fiscal 2024, we also effectuated certain tax planning actions which reduced the amount of waived deductions under Section 59A related to our fiscal 2023.
Our effective tax rate for fiscal 2023 differs from the U.S. statutory rate primarily due to a portion of our earnings that are taxed at different rates from the U.S. statutory rate, the effect of waived deductions under Section 59A, the benefit of stock based compensation deductions, withholding taxes related to customer payments in certain foreign jurisdictions in which we conduct business, and the impact of the valuation allowance we maintain against our U.S. federal and state deferred tax assets.
During fiscal 2024 we recognized an income tax benefit of $5.2 million as a result of a release in our valuation allowance on deferred tax assets due to deferred taxes recorded as part of the acquisition accounting of business combinations. During fiscal 2025 and 2023, we did not recognize income tax benefits from business combinations. Refer to Note 6, Business Combinations, for further information.
The following table presents the tax effects of temporary differences that give rise to significant portions of our deferred tax assets and liabilities:
| July 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Deferred tax assets: | |||||||||||
| Net operating losses and credit carryovers | $ | 277,413 | $ | 373,611 | |||||||
| Deferred revenue | 246,181 | 181,654 | |||||||||
| Research and development capitalization | 289,735 | 168,918 | |||||||||
| Tax credits carryovers | 226,685 | 157,861 | |||||||||
| Other | 137,987 | 100,930 | |||||||||
| Gross deferred tax assets | 1,178,001 | 982,974 | |||||||||
| Less: Valuation allowance | (995,412) | (833,908) | |||||||||
| Total deferred tax assets | $ | 182,589 | $ | 149,066 | |||||||
| Deferred tax liabilities: | |||||||||||
| Intangible assets | $ | (6,489) | $ | (10,273) | |||||||
| Deferred contract acquisition costs | (114,182) | (99,123) | |||||||||
| Property and equipment | (17,004) | (9,929) | |||||||||
| Operating lease right-of-use assets | (29,959) | (29,137) | |||||||||
| Total deferred tax liabilities | $ | (167,634) | $ | (148,462) | |||||||
| Net deferred tax assets | $ | 14,955 | $ | 604 | |||||||
A deferred tax liability has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are indefinitely reinvested outside the U.S. Income taxes are generally incurred upon a repatriation of assets, a sale, or a liquidation of the subsidiary. The excess of the amount for financial reporting over the tax basis in the investments in foreign subsidiaries, as well as the unrecognized deferred tax liability, are not material for the periods presented.
The following table presents the change in the valuation allowance:
| Year ended July 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance as of the beginning of the period | $ | 833,908 | $ | 671,381 | $ | 553,916 | |||||||||||
| Change during the period | 161,504 | 162,527 | 117,465 | ||||||||||||||
| Balance as of the end of the period | $ | 995,412 | $ | 833,908 | $ | 671,381 | |||||||||||
The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. We regularly assess our ability to realize the deferred tax assets on a quarterly basis and we establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively verifiable negative evidence, including our history of losses, we believe that it is more likely than not that our U.S. federal and state deferred tax assets will not be realized as of July 31, 2025 and 2024. Accordingly, we have maintained
a full valuation allowance against such deferred tax assets. The portion of the valuation allowance for deferred tax assets for which subsequently recognized tax benefits will be credited directly to contributed capital was $46.1 million in fiscal 2025.
The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth. In the event we determine that we will be able to realize all or part of our net deferred tax assets in the future, the valuation allowance against our deferred tax assets will be reversed in the period in which we make such determination. The release of a valuation allowance may cause greater volatility in the effective tax rate in the periods in which the valuation allowance is released.
During fiscal 2025, based on an analysis of all positive and negative evidence, we concluded it is more likely than not that our U.K. deferred tax assets will be realizable. This conclusion is based on a demonstrated return to sustained profitability when considering pre-tax income adjusted for permanent differences, as well as anticipated future earnings. The change in judgment as to the realizability of U.K. deferred tax assets in future years resulted in the release of the U.K. valuation allowance of $18.4 million.
As of July 31, 2025, we have net operating loss carryforwards for U.S. federal income tax purposes of $1,057.0 million, which are available to offset future federal taxable income. These net operating losses will carry forward indefinitely. As of July 31, 2025, we have net operating loss carryforwards for state income tax purposes of $504.7 million. Beginning in 2025, $426.8 million of state net operating losses will begin to expire at different periods. The remaining $77.9 million of state net operating losses will carry forward indefinitely. As of July 31, 2025, we had foreign net operating loss carryforward of $87.7 million, all of which will be carried forward indefinitely.
As of July 31, 2025, we also had U.S. federal, California and foreign research and development and other tax credit carryforwards of $192.8 million, $102.6 million and $2.1 million respectively. If not utilized, the federal research and development tax credit carryforwards will begin expiring at different periods beginning in 2037. Our California research and development tax credits may be carried forward indefinitely. Foreign tax credits will begin to expire in the fiscal year ending 2033.
Federal and state tax laws impose restrictions on the utilization of net operating loss carryforwards in the event of a change in our ownership as defined by the Internal Revenue Code, Sections 382. Under Section 382 of the Code, substantial changes in our ownership and the ownership of acquired companies may limit the amount of net operating loss carryforwards that are available to offset taxable income. The annual limitation would not automatically result in the loss of net operating loss carryforwards but may limit the amount available in any given future period.
We are subject to income taxes in the U.S. and various foreign jurisdictions. As of July 31, 2025, all years are open for examination and may become subject to examination in the future. Significant judgment is required in evaluating our tax positions and determining our income tax expense for the fiscal year. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. Our estimate of the potential outcome of any tax position is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. These unrecognized tax benefits are established when we believe that certain positions might be challenged despite the belief that our tax return positions are fully supportable. We recognize interest and penalties associated with our unrecognized tax benefits as a component of our income tax expense. For the periods presented, we did not have material interest or penalties associated with the unrecognized tax benefits in the consolidated financial statements.
We had $87.2 million of gross unrecognized tax benefits as of July 31, 2025, of which $5.3 million would affect our effective tax rate if recognized. The remaining gross unrecognized tax benefits relate to income tax positions which, if recognized, would be in the form of additional deferred tax assets that would be offset by a valuation allowance. As of July 31, 2025, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or
decrease within the next twelve months. We recognize interest and penalties related to our unrecognized tax benefits within our provision for income taxes. The amount of interest and penalties accrued as of July 31, 2025 was insignificant.
The changes in our gross unrecognized tax benefits consisted of the following:
| Amount | |||||
| (in thousands) | |||||
| Balance as of July 31, 2023 | $ | 40,689 | |||
Gross increase for tax positions of prior years | 6,960 | ||||
Gross (decrease) for tax positions of prior years | (2,102) | ||||
Gross increase for tax positions of current year | 18,378 | ||||
| Balance as of July 31, 2024 | 63,925 | ||||
Gross increase for tax positions of prior years | 861 | ||||
Gross (decrease) for tax positions of prior years | (2,592) | ||||
Gross increase for tax positions of current year | 24,967 | ||||
| Balance as of July 31, 2025 | $ | 87,161 | |||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Sep 11, 2025 | Showing above |
| 2024 | Sep 12, 2024 | |
| 2023 | Sep 14, 2023 | |
| 2022 | Sep 15, 2022 | |
| 2021 | Sep 16, 2021 | |
| 2020 | Sep 17, 2020 | |
| 2019 | Sep 18, 2019 | |
| 2018 | Sep 13, 2018 | |
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.