SOUTHWEST AIRLINES CO
For the period ended Dec 31, 2025. Filed Feb 5, 2026.
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FY2025 · Filed Feb 5, 2026
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14. Income Taxes
- INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax assets and liabilities as of December 31, 2025 and 2024, are as follows:
| (in millions) | 2025 | 2024 |
|---|---|---|
| DEFERRED TAX LIABILITIES: | ||
| Accelerated depreciation | $3,655 | $3,351 |
| Prepaid insurance | 329 | 282 |
| Operating lease right-of-use assets | 249 | 314 |
| Other | 99 | 99 |
| Total deferred tax liabilities | 4,332 | 4,046 |
| DEFERRED TAX ASSETS: | ||
| Accrued employee benefits | 356 | 337 |
| Loyalty program and flight credit liability | 540 | 604 |
| Operating lease liabilities | 252 | 319 |
| Net operating losses and tax credits (a) | 644 | 352 |
| Other | 260 | 267 |
| Valuation allowance | (9) | — |
| Total deferred tax assets | 2,043 | 1,879 |
| Net deferred tax liability | $2,289 | $2,167 |
(a) As of December 31, 2025 and 2024, the Company had approximately $66 million and $56 million, respectively, of state net operating loss carryforwards (tax effected) to reduce future state taxable income. These state net operating loss carryforwards will expire in years 2026 through 2046 if unused. As of December 31, 2025 and 2024, the Company had $504 million and $253 million, respectively, of federal net operating loss carryforwards (tax effected) that may be carried forward indefinitely. As of December 31, 2025 and 2024, the Company had $75 million and $53 million, respectively, of federal research and development tax credit carryforwards subject to expiration beginning in 2043 if unused.
A valuation allowance is recorded when it is more likely than not that some portion of deferred tax assets will not be realized. During 2025, the Company established deferred tax assets related to Texas research and development tax credits. The gross deferred tax asset totaled $13 million, of which approximately $12 million is not expected to be realized based on current projections of taxable income and applicable utilization limitations. Accordingly, as of December 31, 2025, the Company recorded a valuation allowance of approximately $12 million against these assets. The change in the valuation allowance during the year reflects the initial recognition of the deferred tax assets and updated assessments of future utilization.
Foreign pretax income, income tax expense, and income taxes paid were immaterial for all periods presented. As a result, foreign amounts have not been separately disaggregated.
The provision (benefit) for income taxes is composed of the following:
| (in millions) | 2025 | 2024 | 2023 |
|---|---|---|---|
| CURRENT: | |||
| Federal | $(2) | $— | $(10) |
| State | 2 | 1 | 19 |
| Total current | — | 1 | 9 |
| DEFERRED: | |||
| Federal | 107 | 108 | 140 |
| State | 15 | 24 | 19 |
| Total deferred | 122 | 132 | 159 |
| Income tax provision | $122 | $133 | $168 |
The following table presents the differences between the Company's income tax provision and the amounts computed at the federal statutory income tax rate, on both a dollar and percentage basis:
| (dollars in millions) · 2025 · 2024 · 2023 | ||||||
|---|---|---|---|---|---|---|
| U.S. federal statutory tax | $118 | 21.0% | $126 | 21.0% | $133 | 21.0% |
| State and local income taxes, net of federal income tax effect (1) | 13 | 2.3% | 20 | 3.3% | 30 | 4.7% |
| Foreign tax effects | — | —% | — | —% | — | —% |
| Effect of changes in tax laws or rates enacted in the current period | — | —% | — | —% | — | —% |
| Effect of cross-border tax laws | — | —% | — | —% | — | —% |
| Tax credits | ||||||
| Research and development tax credits | (23) | (4.1)% | (30) | (5.0)% | (14) | (2.2)% |
| Other credits | (2) | (0.4)% | (3) | (0.4)% | (5) | (0.8)% |
| Changes in valuation allowances | — | —% | — | —% | — | —% |
| Nontaxable or nondeductible items | ||||||
| Per diem | 10 | 1.8% | 9 | 1.5% | 8 | 1.3% |
| Compensation | 8 | 1.4% | 13 | 2.2% | 6 | 0.9% |
| DOT settlement | (7) | (1.2)% | (3) | (0.6)% | 22 | 3.6% |
| Other | 6 | 1.1% | 5 | 0.9% | 2 | 0.2% |
| Changes in unrecognized tax benefits | — | —% | — | —% | — | —% |
| Other adjustments | (1) | (0.2)% | (4) | (0.7)% | (14) | (2.2)% |
| Total income tax provision | $122 | 21.7% | $133 | 22.2% | $168 | 26.5% |
(1) State taxes in California, New York City, and Hawaii for 2023; California, Texas, and Hawaii for 2024; and Florida, Maryland, California, Colorado, and Arizona for 2025 represented the majority (greater than 50%) of the tax effect within this category.
The total cash paid for income taxes (net of refunds) is composed of the following:
| (in millions) | 2025 | 2024 | 2023 |
|---|---|---|---|
| U.S. federal | $(2) | $(19) | $(96) |
| State* | 1 | (2) | 9 |
| Total cash paid for income taxes (net of refunds) | $(1) | $(21) | $(87) |
- Some jurisdictions met the 5% disaggregation threshold; however, the related amounts were immaterial.
The amount of, and changes to, the Company's uncertain tax positions were not material in any of the periods presented. Additionally, the Company does not expect significant changes to the total amount of unrecognized tax benefits within the next 12 months.
The only periods subject to examination for the Company’s federal tax return are tax years 2020, 2024, and 2025. The Company is also subject to various examinations from state and local income tax jurisdictions in the ordinary course of business. These examinations are not expected to have a material effect on the financial results of the Company.
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