What happened
Palantir Technologies (PLTR) sells data-analysis software to governments and companies and has ranked among the most widely held U.S. stocks by Korean retail investors for several years.
The 10-Q it filed on August 4 shows second-quarter revenue of $1,935m, up 93% from a year earlier, and pre-tax income of $1,081m. The income-tax provision was $15.4m — 1.4% of pre-tax income. At the 21% U.S. federal statutory rate the charge would have been $227m. For the first half the figures are $1,970m of pre-tax income and $27.6m of tax, again 1.4%.
The reason is in one paragraph of Note 10 and in the tax note of the 10-K. Why book profit and taxable profit differ so much, and when and how that difference comes back into net income, is the rest of this article.
What the numbers mean
Note 10 gives the reason. The company ran tax losses in the U.S. and the U.K. for years, and those losses are still on the books. The 10-K filed in February puts U.S. federal net operating losses at about $9.0bn at December 31, 2025 — up $3.5bn from $5.5bn a year earlier, in a year when GAAP pre-tax income was about $1.66bn. State NOLs were $4.8bn and foreign NOLs, mainly U.K., $1.8bn.
A company keeps two sets of books: the accounts shown to shareholders and the return filed with the tax authority. Palantir is strongly profitable in the first and still loss-making in the second. The largest reason is stock-based compensation. Shares and options granted to employees are expensed in the accounts at grant-date value ($265m in Q2) but deducted for tax at the market value on exercise or vesting. When the share price has risen sharply, the tax deduction far exceeds the accounting expense, and the tax loss grows. The 10-K also cites immediate expensing of domestic R&D under the 2025 U.S. tax act (OBBBA) as a contributor.
Those losses and credits (including $578m of federal R&D credits) are a right to pay less tax in the future, which accounting calls a deferred tax asset. Before any allowance it stood at $3,449m at year-end 2025. But the company holds a valuation allowance of $3,452m against it — the full amount — because its history of losses outweighs, in its judgment, the evidence that the asset can be used. On the balance sheet the right therefore appears as almost nothing (a net liability of $3.7m).
Why it matters
First, today's net income depends on the condition "almost no tax". Q2 net income of $1,066m is 98.6% of pre-tax income. At an effective rate in the typical software-company range of about 20%, the same pre-tax income would leave net income in the $800m range, and diluted EPS ($0.41) would scale accordingly.
Second, the company has signaled the direction. Note 10 of the 10-Q reads: "given the Company's recent earnings and anticipated future earnings, there is a reasonable possibility that it will have sufficient positive evidence in the future to release all or a portion of the valuation allowance." A release is a large accounting event. In the quarter it happens, the released amount — up to $3,452m on year-end figures — is booked as a tax benefit and net income jumps once. From the following quarter the deferred tax asset is used normally, the reported rate moves toward the statutory rate, and on unchanged pre-tax income net income is lower than now. Cash taxes remain low until the NOLs are exhausted.
Third, the business itself has grown regardless of the tax line. First-half operating cash flow was $2,115m, above net income of $1,942m; cash and marketable securities total $9,409m. Remaining performance obligations are $4.9bn, 43% of which is expected to become revenue within 12 months. Contract liabilities (deferred revenue and customer deposits) rose to $1.1bn from $0.8bn at December 31. Government customers account for 51% of revenue and the U.S. for 81%.
Company context
In the 10-K Palantir says that although it has achieved positive cumulative pre-tax income in the U.S. recently, the objective weight of its loss history keeps the allowance in place. The company reassesses each quarter, weighing recent and expected earnings, temporary and permanent differences — especially excess tax benefits from stock-based compensation — and tax planning strategies. It does not name a date.
Stock-based compensation creates the tax benefit and also adds shares. Diluted shares in Q2 were 2,569m, 7% above basic shares. Unrecognized compensation of $916m for RSUs and $497m for options and SARs remains to be expensed in coming quarters.
What to watch
Three items in the Q3 10-Q, expected in early November:
- Effective tax rate — 1.4% in Q2. A sudden large negative number (a tax benefit) means the allowance release has begun.
- The wording of Note 10 — whether "reasonable possibility" stays or turns into a release decision.
- The gap between pre-tax and net income — nearly zero today. When it widens toward 20%, the rate is normalizing.
These figures accumulate on the ticker page each quarter.