Income Taxes

12 Months Ended

Sep. 30, 2024

Income Tax Disclosure [Abstract]

Income Taxes

8. Income Taxes

Our Income (loss) before income taxes consisted of the following:

(in thousands)	Year ended September 30,
	2024		2023			2022
Domestic	$	43,504	$	(49,193	)	$	97,460
Foreign		425,458		381,759			299,638
Total income before income taxes	$	468,962	$	332,566		$	397,098

Our Provision for income taxes consisted of the following:

(in thousands)	Year ended September 30,
	2024			2023			2022
Current:
Federal	$	44,642		$	7,311		$	767
State		25,359			10,020			6,675
Foreign		61,668			53,019			33,612
		131,669			70,350			41,054
Deferred:
Federal		(60,378	)		(11,821	)		25,730
State		(7,387	)		(10,028	)		(3,177	)
Foreign		28,725			38,525			20,410
		(39,040	)		16,676			42,963
Provision for income taxes	$	92,629		$	87,026		$	84,017

Taxes computed at the statutory federal income tax rates are reconciled to the Provision for income taxes as follows:

(in thousands)	Year ended September 30,
	2024					2023					2022
Statutory federal income tax rate	$	98,482		21	%	$	69,839		21	%	$	83,391		21	%
State income taxes, net of federal tax benefit		4,631		1	%		577		0	%		6,518		2	%
Federal research and development credits		(11,203	)	(2	)%		(7,751	)	(2	)%		(7,477	)	(2	)%
Uncertain tax positions		7,268		2	%		23,302		7	%		2,418		1	%
Foreign tax credit		(30,119	)	(7	)%		(11,415	)	(3	)%		(9,078	)	(2	)%
Foreign rate differences		(15,368	)	(3	)%		(20,829	)	(6	)%		(8,982	)	(2	)%
Foreign tax on U.S. provision		15,120		3	%		11,415		3	%		9,078		2	%
Excess tax benefits from restricted stock		(9,225	)	(2	)%		(6,963	)	(2	)%		(8,278	)	(2	)%
U.S. permanent items		2,711		0	%		5,341		2	%		3,453		—
Non-deductible compensation		10,157		2	%		8,344		3	%		11,851		3	%
Base Erosion Anti-Abuse Tax (BEAT)		3,264		1	%		—		—			—		—
GILTI, net of foreign tax credits		31,388		7	%		17,861		5	%		2,705		1	%
Foreign-Derived Intangible Income (FDII)		(15,148	)	(3	)%		(8,987	)	(3	)%		(6,848	)	(2	)%
Non-deductible imputed interest		—		—			6,292		2	%		—		—
Sale of a portion of the PLM services business		—		—			—		—			6,844		2	%
Other, net		671		0	%		—		(1	)%		(1,578	)	(1	)%
Provision for income taxes	$	92,629		20	%	$	87,026		26	%	$	84,017		21	%

In 2024, 2023, and 2022, our effective tax rate is impacted by our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands. In 2024, 2023, and 2022, the foreign rate differential predominantly relates to these earnings. In addition to the foreign rate differential, our tax rate differed from the U.S. statutory federal income tax due to the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes (together referred to as U.S. Tax reform), and the excess tax benefit related to stock-based compensation.

In 2024, the rate was impacted by a U.S. Tax Court ruling in Varian Medical Systems, Inc. v. Commissioner, issued on August 26, 2024. The ruling related to the U.S. taxation of deemed foreign dividends in the transition year of the Tax Act (our fiscal 2018). As a result, we recorded a $14.4 million benefit for additional foreign tax credits that have become available to us. Additionally, our rate included a net benefit of $4.4 million for the effects of IRS procedural guidance requiring consent for previously automatic changes of accounting method. The IRS procedural guidance change significantly increased our estimated taxable income in the year ended September 30, 2024, resulting in an increase to the estimated tax benefit for the deductions associated with Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income. The benefit from this IRS procedural guidance change will reverse in a future fiscal period if we receive IRS consent for a change in the treatment of these deductions. These benefits were offset by a tax expense of $4.6 million related to a tax reserve in a foreign jurisdiction.

Additionally in 2023, our results include tax expense of $21.8 million relating to an uncertain tax position regarding transfer pricing in a foreign jurisdiction where we are currently under audit. Our rate was also impacted by non-deductible imputed interest related to the deferred payment on the acquisition of ServiceMax, Inc.

In 2022, our results include tax expense relating to the book over tax basis difference in goodwill disposed of as part of the sale of a portion of the PLM services business.

At September 30, 2024 and 2023, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $75.3 million ($40.0 million in Accrued income taxes, $6.2 million in Accrued expenses and other current liabilities and $29.1 million in Other liabilities) and $30.4 million ($14.9 million in Accrued income taxes, $4.8 million in Accrued expenses and other current liabilities and $10.7 million in Other liabilities), respectively. At September 30, 2024 and 2023, prepaid taxes recorded in Prepaid expenses on the accompanying Consolidated Balance Sheets were $14.0 million and $22.7 million, respectively. We made net income tax payments of $68.6 million, $65.9 million and $55.0 million in 2024, 2023 and 2022, respectively.

The significant temporary differences that created deferred tax assets and liabilities are shown below:

(in thousands)	September 30,
	2024			2023
Deferred tax assets:
Net operating loss carryforwards	$	14,141		$	22,272
Foreign tax credits		2,028			3,750
Capitalized research and development		136,001			83,748
Pension benefits		7,629			5,327
Prepaid expenses		18,551			15,040
Deferred revenue		2,607			5,902
Stock-based compensation		22,231			19,684
Other reserves not currently deductible		34,422			19,604
Amortization of intangible assets		60,527			90,888
Research and development and other tax credits		25,706			64,618
Lease liabilities		46,460			50,102
Fixed assets		106,741			83,796
Capital loss carryforward		3,875			3,700
Other		3,528			2,279
Gross deferred tax assets		484,447			470,710
Valuation allowance		(21,755	)		(21,695	)
Total deferred tax assets		462,692			449,015
Deferred tax liabilities:
Acquired intangible assets not deductible		(257,731	)		(263,178	)
Lease assets		(34,160	)		(37,332	)
Pension prepayments		(3,283	)		(1,808	)
Deferred revenue		(1,243	)		(17,400	)
Depreciation		(4,683	)		(5,779	)
Deferred income		(11,636	)		(8,656	)
Prepaid commissions		(13,738	)		(13,757	)
Other		(9,030	)		(7,294	)
Total deferred tax liabilities		(335,504	)		(355,204	)
Net deferred tax assets	$	127,188		$	93,811

We reassess our valuation allowance requirements each financial reporting period. We assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to use our existing deferred tax assets.

For U.S. tax return purposes, net operating loss (NOL) carryforwards and tax credits are generally available to be carried forward to future years, subject to certain limitations. At September 30, 2024, we had U.S. federal tax effected NOL carryforwards from acquisitions of $0.8 million which expire in 2025 to 2034. The use of these NOL carryforwards is limited as a result of the change in ownership rules under Internal Revenue Code Section 382. Additionally, we have state NOL carryforwards, net of federal benefit, of $6.9 million, with various expiration dates beginning in 2027, a number of which never expire.

As of September 30, 2024, we had federal R&D credit carryforwards of $4.6 million, which expire beginning in 2026 and ending in 2044, and Massachusetts R&D credit carryforwards of $29.2 million, which expire beginning in 2025 and ending in 2039. We also had foreign tax credits of $2.0 million, which expire beginning in 2032 and ending in 2034.

We also have tax effected NOL carryforwards in non-U.S. jurisdictions totaling $6.9 million, the majority of which do not expire, and non-U.S. tax credit carryforwards of $2.2 million that expire beginning in 2031 and ending in 2042. Additionally, we have tax effected amortization carryforwards of $66.1 million in a foreign jurisdiction. There are limitations imposed on the use of such attributes that could restrict the recognition of any tax benefits.

As of September 30, 2024, we have a valuation allowance of $17.4 million against net deferred tax assets in the United States and a valuation allowance of $4.4 million against net deferred tax assets in certain foreign jurisdictions. The $17.4 million U.S. valuation allowance relates to Massachusetts tax credit carryforwards which we do not expect to realize a benefit from prior to expiration. The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily

for our capital loss carryforwards, the majority of which do not expire. However, there are limitations imposed on the utilization of such capital losses that could restrict the recognition of any tax benefits.

The changes to the valuation allowance were primarily due to the following:

(in thousands)	Year ended September 30,
	2024		2023			2022
Valuation allowance, beginning of year	$	21,695	$	22,283		$	52,085
Net increase (decrease) in deferred tax assets with a full valuation allowance(1)		60		(588	)		(29,802	)
Valuation allowance, end of year	$	21,755	$	21,695		$	22,283

(1)In 2022, this change included the loss of foreign attributes upon liquidation of a foreign subsidiary.

Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. In 2024, 2023 and 2022 we recorded interest expense of $3.3 million, $0.5 million and $0.2 million, respectively. In 2024, 2023 and 2022 we had no penalty expenses in our income tax provision. As of September 30, 2024 and 2023, we had accrued $3.1 million and $1.4 million of net estimated interest expense, respectively. We had no accrued tax penalties as of September 30, 2024, 2023 or 2022.

	Year ended September 30,
Unrecognized tax benefits (in thousands)	2024			2023			2022
Unrecognized tax benefit, beginning of year	$	50,742		$	23,923		$	21,166
Tax positions related to current year:
Additions		7,570			7,075			3,144
Tax positions related to prior years:
Additions		10,705			20,855			785
Reductions		(452	)		—			(1,172	)
Settlements		(3,530	)		—			—
Statute expirations		—			(1,111	)		—
Unrecognized tax benefit, end of year	$	65,035		$	50,742		$	23,923

If all of our unrecognized tax benefits as of September 30, 2024 were to become recognizable in the future, we would record a benefit to the income tax provision of $65.0 million (which would be partially offset by an increase in the U.S. valuation allowance of $6.2 million). Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $27.0 million as audits close and statutes of limitations expire.

In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the IRS in the United States. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions, including Germany, Ireland, and Italy. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, transfer pricing, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates. As of September 30, 2024, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:

Major Tax Jurisdiction	Open Years
United States	2021 through 2024
Germany	2015 through 2024
France	2023 through 2024
Japan	2019 through 2024
Ireland	2019 through 2024

Additionally, net operating loss and tax credit carryforwards from certain earlier periods in these jurisdictions may be subject to examination to the extent they are used in later periods.

We incurred expenses related to stock-based compensation in 2024, 2023 and 2022 of $223.5 million, $206.5 million and $174.9 million, respectively. Accounting for the tax effects of stock-based awards requires that we establish a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. The tax benefit recognized in the Consolidated Statements of Operations related to stock-based compensation totaled $27.5 million, $33.4 million and $27.1 million in 2024, 2023 and 2022, respectively. Upon vesting of the stock-based awards, the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit and is recorded to the tax provision. In 2024, 2023 and 2022, net windfall tax benefits of $10.2 million, $7.8 million and $5.2 million were recorded to the tax provision.

Prior to the passage of the U.S. Tax Cuts and Jobs Act in December of 2017 (the Tax Act), we asserted that substantially all of the undistributed earnings of our foreign subsidiaries were considered indefinitely reinvested and accordingly, no deferred taxes were provided. Pursuant to the provisions of the U.S. Tax Act, these earnings were subjected to U.S. federal taxation via a one-time transition tax, and there is therefore no longer a material cumulative basis difference associated with the undistributed earnings. We maintain our assertion of our intention to permanently reinvest these earnings outside the United States unless repatriation can be done substantially tax-free, with the exception of our Taiwan subsidiary. If we decide to repatriate any additional non-U.S. earnings in the future, we may be required to establish a deferred tax liability on such earnings. The amount of unrecognized deferred tax liability on the undistributed earnings would not be material.