Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company’s net loss before provision for income taxes for the years ended December 31, 2021, 2020, and 2019 was as follows (in thousands):

	Year Ended December 31,
	2021		2020		2019
Domestic	$	(211,844)	$	(69,102)	$	(40,616)
Foreign	30,365		15,823		13,126
Total	$	(181,479)	$	(53,279)	$	(27,490)

The components of the provision for income taxes for the years ended December 31, 2021, 2020, and 2019 were as follows (in thousands):

	Year Ended December 31,
	2021		2020		2019
Current:
Domestic	$	2,876	$	(12)	$	11
Foreign	9,547		6,387		4,563
Deferred:
Domestic	—		—		(194)
Foreign	(1,907)		(2,360)		(745)
Total provision for income taxes	$	10,516	$	4,015	$	3,635

The following is a reconciliation of the federal statutory income tax rate to the Company’s effective tax rate for the years ended December 31, 2021, 2020, and 2019:

	Year Ended December 31,
	2021		2020		2019
Federal income tax	21.0	%	21.0	%	21.0	%
State taxes, net of federal benefit	—		—		3.2
Stock-based compensation	2.1		(17.1)		(0.2)
Change in valuation allowance	(25.4)		(11.8)		(32.8)
Earnings from foreign subsidiaries	(0.5)		(1.3)		(3.9)
Other items	(3.0)		1.6		(0.5)
Total provision for income taxes	(5.8)	%	(7.6)	%	(13.2)	%

The components of the Company’s net deferred tax assets as of December 31, 2021 and 2020, were as follows (in thousands):

	December 31,
	2021		2020
Deferred tax assets:
Net operating loss carryforwards	$	78,077	$	36,702
Foreign tax credit carryforwards	4,955		4,955
Stock-based compensation	9,643		—
Accruals and Reserves	6,584		5,433
Depreciation and amortization	1,633		354
Allowance for uncollectible accounts	66		1,383
Total deferred tax assets	100,958		48,827
Less: valuation allowance	(89,903)		(41,111)
Deferred tax assets, net of valuation allowance	11,055		7,716
Deferred tax liabilities:
Commissions	(4,771)		(3,323)
Net deferred tax assets	$	6,284	$	4,393

The Company regularly reviews its deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing taxable temporary differences and tax planning strategies. The Company’s judgment regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute the business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the Company’s income tax provision would increase or decrease in the period in which the assessment is changed. The Company’s valuation allowance increased by $48.8 million and $9.0 million during the years ended December 31, 2021 and 2020, respectively.

The Company has not provided U.S. income taxes and foreign withholding taxes on undistributed earnings of foreign subsidiaries because the Company intends to permanently reinvest such earnings outside the U.S.

Net Operating Loss and Credit Carryforwards

As of December 31, 2021, the Company has U.S. federal net operating loss carryforwards of approximately $345.7 million, of which $10.7 million are subject to limitation under Internal Revenue Code Section 382 (IRC Section 382). The net operating loss carryforwards for all the states in the United States is $94.0 million as of December 31, 2021. The federal net operating loss carryforwards that were generated prior to the 2018 tax year will begin to expire in 2030 if not utilized. For net operating loss carryforwards arising in tax years beginning after December 31, 2017, the Tax Act limits the Company’s ability to utilize carryforwards to 80% of taxable income, however, these operating losses may be carried forward indefinitely. The state net operating loss carryforwards will begin to expire in 2032 if not utilized. The Company has foreign tax credits of $5.0 million that will expire in 2027 if not utilized.

Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change provisions of IRC Section 382 and similar state provisions. The annual limitation may result in the inability to fully

offset future annual taxable income and could result in the expiration of net operating loss carryforwards before utilization. The Company continually reviews the impact to net operating losses of any ownership changes.

Unrecognized Tax Benefits

The Company has adopted authoritative guidance which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in the Company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company recognizes financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has no likelihood of being realized upon ultimate settlement with the relevant tax authority. As of December 31, 2021, the Company had gross unrecognized tax benefits of $2.2 million, all of which would affect income tax expense, if recognized, after consideration of valuation allowance. The Company did not have any unrecognized tax benefits with a significant impact on its financial statements as of December 31, 2020 and 2019.

The following table presents a reconciliation of the beginning and ending amount of the unrecognized tax benefits (in thousands):

	Year Ended December 31,
	2021
Unrecognized gross tax benefits at the beginning of the period	$	—
Increases related to prior year tax positions	1,269
Decreases related to prior year tax positions	—
Reversal of prior year unrecognized tax benefits	—
Increases in current year unrecognized benefits	958
Unrecognized gross tax benefits at the end of the period	$	2,227

The Company recognizes interest and penalties related to income tax matters as a component of income tax expense. Accrued interest of $0.5 million has been recorded as of December 31, 2021.

The Company's major tax jurisdictions are India and the U.S. and also files income tax returns in other various U.S. states and international jurisdictions. Carryover attributes beginning December 31, 2008, remain open to adjustment by the United States and state authorities. The U.S. federal, state, and foreign jurisdictions have statutes of limitations that generally range from three to five years. Due to the Company’s net losses, substantially all of its federal and state income tax returns are subject to examination for federal and state purposes since inception. As of December 31, 2021, Freshworks Inc., Freshworks India and Freshworks, GmbH are currently under examinations in India and Germany. The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years. As the outcome of the Company's tax audits are resolved in a manner inconsistent with management's expectations, the Company could adjust its provision for income taxes in the future.