20. Income Taxes

The Company’s (loss) income before income taxes of $(51.3) million, $(98.0) million, and $(121.2) million during the years ended December 31, 2025, 2024 and 2023, respectively, consisted entirely of income earned in the United States.

Income tax expense for the years ended December 31, 2025, 2024 and 2023 consist of the following (in thousands):

The table below provides the updated requirements of ASU 2023-09 for 2025. See Note 2- Summary of Significant Accounting Policies—Recent accounting pronouncements for additional details on the adoption of ASU 2023-09.

The effective income tax rate for the year ended December 31, 2025 differs from the statutory federal income tax rate as follows (in thousands, except percentages):

As previously disclosed for the years ended December 31, 2024 and 2023, prior to the adoption of ASU 2023-09, the effective income tax rate differs from the statutory federal income tax rate as follows:

Deferred income taxes at December 31, 2025 and 2024 consisted of the following (in thousands):

The following table summarizes the Company’s change in valuation allowance for the year ending December 31, 2025 and 2024 (in thousands):

The Company’s sole material asset is Purple LLC, which is treated as a partnership for U.S. federal income tax purposes and for purposes of certain state and local income taxes. Purple LLC’s net taxable income and any related tax credits are passed through to its members and included in the members’ tax returns, even though such net taxable income or tax credits may not have actually been distributed. While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax on its allocable earnings of Purple LLC. The primary factors impacting expected tax are tax exempt income from the tax receivable agreement, remeasurement of the deferred taxes associated with the investment in Purple LLC, and the impact of recording a valuation allowance.

During 2022, the Company entered into a three-year cumulative loss position and determined that it would not be able to generate sufficient taxable income to utilize its deferred tax assets. Based on this and other negative evidence, the Company concluded it was more likely than not that its deferred tax assets would not be realized and that a full valuation allowance for its deferred tax assets was required. At both December 31, 2025 and 2024, the Company continued to maintain a full valuation allowance on its deferred tax assets based on its three-year cumulative loss position.

In connection with the Business Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment by the Company to InnoHold of 80% of the net cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in the assets of Purple LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets of Purple LLC resulting from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities or cash, as applicable, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under the agreement.

As noncontrolling interest holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B Units, a liability may be recorded based on 80% of the estimated future cash tax savings that the Company may realize as a result of increases in the basis of the assets of Purple LLC attributed to the Company as a result of such exchange or redemption. The amount of the increase in asset basis, the related estimated cash tax savings and the attendant liability to be recorded will depend on the price of the Company’s Common Stock at the time of the relevant redemption or exchange.

During 2022, the Company concluded that the tax receivable agreement liability was not probable and correspondingly reduced its tax receivable agreement liability to zero. There was no tax receivable agreement liability recorded during 2025 or 2024.

As of December 31, 2025, the Company estimates it will have approximately $79.9 million of tax-affected U.S. net operating loss carryforwards (“NOLs”), of which $79.4 million do not have an expiration date and $0.5 million expire in 2037. The Company also had approximately $21.1 million of tax-affected NOL carryforwards to reduce future state taxable income at December 31, 2025, which have various carryforward periods and begin to expire in 2026, if unused. Under Section 382 and related provisions of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change”, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. Generally, an ownership change is defined as a change in its equity ownership by certain stockholders over a three-year period of greater than 50 percentage points (by value). If finalized, Treasury Regulations currently proposed under Section 382 of the Code may further limit our ability to utilize our pre-change NOLs or other tax attributes if we undergo a future ownership change. Thus, our ability to utilize carryforwards of our net operating losses, including net operating losses acquired from the Intellibed acquisition, and other tax attributes to reduce future tax liabilities may be substantially restricted. As of December 31, 2025, we completed a study to assess whether an ownership change has occurred, as defined by IRC Section 382, or whether there have been ownership changes since the Company’s formation. The results of this study indicate that we experienced one ownership change on December 31, 2021. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we generate taxable income, our ability to use our pre-change NOL and tax credits carryforwards to reduce U.S. federal and state taxable income may be subject to further limitations, which could result in increased future tax liabilities to us. Moreover, our federal NOLs from years prior to 2018 can be carried forward for a maximum of 20 years from the year in which the NOL was incurred, and our state NOLs are subject to carryforward limitations that vary from state to state; as a result, all or a portion of those carryforwards could expire before being available to reduce future income tax liabilities. Refer to Note 15 – Stockholders’ Equity – NOL Rights Plan for information on plan adopted by the Board to preserve Current NOLs.

The Company estimates federal research and development (“R&D”) tax credit carryforwards will be approximately $2.9 million as of December 31, 2025, which begin to expire in 2042, if unused. The Company also had approximately $1.9 million of state tax credit carryforwards to reduce future state tax liability at December 31, 2025, which have various carryforward periods and begin to expire in 2030, if unused.

On July 4, 2025, the U.S. enacted tax legislation referred to as the One Big Beautiful Bill Act (“OBBBA”). The OBBBA includes significant changes to U.S. income tax laws, including tax cut extensions and modifications to the international tax framework with certain provisions effective in 2025 and others effective in 2026 and afterward. The OBBBA did not have a material impact on the Company’s effective tax rate.

The effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not” threshold. For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheets. There are no material interest and penalties relating to uncertain tax positions as of December 31, 2025. As of December 31, 2025, there are $0.2 million of unrecognized tax benefits that if recognized would affect the annual effective tax rate.

The following table summarizes the Company’s unrecognized tax benefits for the years ended December 31, 2025, 2024 and 2023 (in thousands):

As of December 31, 2025, there are $0.2 million of unrecognized tax benefits that if recognized would affect the annual effective tax rate The Company remains subject to income tax examinations for its U.S. federal income taxes for 2019 through 2025. The Company also remains subject to income tax examinations for U.S. state and local income taxes generally for 2019 through 2025.