APPLIED OPTOELECTRONICS, INC. Income Taxes Disclosure

NOTE O—INCOME TAXES

  

The sources of the Company’s loss from operations before income taxes were as follows for the periods indicated (in thousands):

  

		Years ended December 31,
		2025				2024				2023
Domestic		$	(81,667	)		$	(181,701	)		$	(52,886	)
Foreign			34,963				(5,030	)			(3,153	)
Total loss before income taxes		$	(46,704	)		$	(186,731	)		$	(56,039	)

 

The provision for income tax expense (benefit) for the years ended December 31, was as follows (in thousands):

  

Current:		2025				2024				2023
Federal		$	—			$	—			$	—
State			2				2				1
Foreign			—				—				8
Total		$	2			$	2			$	9
Deferred:
Federal		$	—			$	—			$	—
State			—				—				—
Foreign			(8,478	)			—				—
Total		$	(8,478	)		$	—			$	—
Income tax (benefit) expense		$	(8,476	)		$	2			$	9

 

Deferred income tax assets and liabilities result principally from net operating losses, different methods of recognizing depreciation, reserves for doubtful accounts and inventory, research and development credits and foreign tax credits. At December 31, the net deferred tax assets and liabilities are comprised of the following approximate amounts (in thousands):

 

		2025				2024
NOL carryforward		$	79,264			$	59,788
Inventory reserves			3,261				3,700
Unrealized gains and losses			237				221
Share-based compensation			1,724				1,332
Foreign tax credit			4,599				4,599
Research and development credits			14,874				12,508
Capitalized research and development			—				14,449
Interest			5,587				4,465
ASC 842 Assets			931				1,515
Other			1,391				995
Deferred tax assets			111,868				103,572
Less valuation allowance			(95,753	)			(94,996	)
Deferred tax assets, net			16,115				8,576
Depreciation and amortization			(7,812	)			(7,216	)
ASC 842 Liabilities			(687	)			(1,360	)
Deferred tax liabilities			(8,499	)			(8,576	)
Deferred tax assets, net		$	7,616			$	—

  

The Company has a U.S. net operating loss carry forward of approximately $250.6 million, $33.6 million of which, if unused, expires between 2026 and 2032 and $217.0 million of which, can be carried forward indefinitely. The Company has U.S. and state research and development tax credits of $14.9 million, which, if unused, expire between 2028 and 2044. In addition, the Company has foreign tax credits of $4.6 million, which, if unused, will expire in 2028. Utilization of U.S. net operating losses and tax credit carry forwards are subject to an annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382. As of December 31, 2025, the Company had Taiwan net operating loss carry forwards of approximately $86.2 million and China net operating loss carry forwards of approximately $40.4 million.  The carryforward period for the Taiwan net operating loss carry forwards is ten years, and the expiration period begins 2028.  The carryforward period for China net operating loss carry forwards is ten years, and the expiration period begins 2029.

 

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2025. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

 

On the basis of this evaluation, as of December 31, 2025 and December 31, 2024, a valuation allowance of $95.8 million and $95.0 million, respectively, has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

 

The following table shows the change in the deferred tax valuation allowance as follows:

 

		2025				2024				2023
Beginning Balance, January 1		$	94,996			$	78,124			$	69,680
Change charged to expense/(income)			763				15,727				8,755
Change charged to currency translation adjustment			(162	)			1,145				(311	)
Other adjustment			156				—				—
Ending Balance, December 31		$	95,753			$	94,996			$	78,124

 

The expense (benefit) for income taxes differs from the amount that would result by applying the applicable federal income tax rate to income before income taxes, as follows (in thousands):

 

		Amount				Percentage
U.S. federal statutory tax rate		$	(9,808	)			21.0	%
State and local income tax, net of federal income tax effect			2*				0.0	%
Foreign tax effects
China
Statutory tax rate difference			(2,440	)			5.2	%
Changes in valuation allowances			(11,990	)			25.7	%
R&D super deduction			(2,537	)			5.5	%
Other			(50	)			0.1	%
Taiwan
Changes in valuation allowances			1,559				(3.3%	)
Prior Period Adjustments			(596	)			1.3	%
Other			236				(0.5%	)
Effect of cross-border tax laws
GILTI			9,139				(19.6%	)
Tax credits
Research and development credit			(2,366	)			5.1	%
Changes in valuation allowances			11,194				(25.2%	)
Nontaxable or nondeductible items
Share-based compensation			(1,225	)			3.8	%
Other			146				(0.3%	)
Other adjustments			260				(0.6%	)
Effective tax rate		$	(8,476	)			18.2	%

  

*State and Local taxes includes the effects of changes in valuation allowance.  No individual state made up the majority of the tax effect in this category.

 

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

		2024				2023
Expected taxes at statutory rate		$	(39,214	)		$	(11,768	)
Interest Carryforward			1,843				—
Non-deductible/non-taxable items			470				57
Global intangible low-taxed income			1,809				2,568
Foreign rate differences			(314	)			242
Foreign permanent differences			(1,245	)			(1,212	)
Changes in valuation allowance			15,727				8,755
Share-based compensation			222				729
Research and development credits			(1,510	)			(492	)
Extinguishment of debt			22,602				1,580
Foreign other			—				—
Other, net			(388	)			(450	)
Tax (benefit) expense		$	2			$	9

 

  

		2025				2024				2023
Unrecognized tax benefits — January 1		$	181			$	181			$	181
Gross increases — tax positions in prior period			—				—				—
Gross decreases — tax positions in prior period			—				—				—
Unrecognized tax benefits — December 31		$	181			$	181			$	181

 

The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the unrecognized tax benefits noted above, it has not accrued penalties or interest during 2025 as a result of net operating losses. During 2024 or 2023, the Company also accrued no penalties or interest.

 

The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company’s open tax years subject to examination in the U.S. federal and state jurisdictions are 2022 through 2024. To the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or tax credit carryforward. The Company is subject to examination for tax years 2020 forward for various foreign jurisdictions.

 

On August 9, 2022, the Creating Helpful Incentives to Produce Semiconductors and Science Act, (the "CHIPS Act") was signed into law. Among other things, the CHIPS Act provides for refundable tax credits and certain other financial incentives to further investments in domestic manufacturing. At least a portion of our current and future capital expenditures and research and development costs will qualify for this credit, which benefits us by allowing us to net the credit received against our costs. This credit is accounted for outside of ASC 740 as a reduction to the depreciable basis of the assets used in operations and will not have an impact on our effective tax rate.  

 

On July 4, 2025, legislation commonly referred to as the One Big Beautiful Bill Act (the “OBBBA”) was signed into law. Among other things, the OBBBA suspends the requirement to capitalize and amortize domestic research and development (R&D) expenditures for amounts paid or incurred in taxable years beginning after December 31, 2024 and before January 1, 2030. The OBBBA also permits taxpayers to elect to accelerate deductions for the remaining unamortized domestic R&D expenditures paid or incurred between January 1, 2022 and December 31, 2024 over a one- or two-year period. The Company elected to accelerated deductions with respect to unamortized domestic R&D expenditures capitalized in 2022, 2023, and 2024 as a deduction in 2025.

 

In addition, the OBBBA preserves a significant portion of the Inflation Reduction Act (IRA) clean energy tax credit framework but introduces certain limitations and additional diligence obligations for developers, investors, lenders, and credit purchasers, including a phaseout of the Clean Electricity Tax Credits and placed-in-service deadlines for certain wind and solar projects (Internal Revenue Code Sections 45Y and 48E). Based on the Company’s business profile and the limited applicability of these provisions to the Company, we do not currently expect these changes to have a material impact on our income tax provision or ETR. The OBBBA permanently extends 100% bonus depreciation for qualifying property placed in service after January 19, 2025. The Company does not intend to elect bonus depreciation and, as a result, does not expect this provision to have a material impact on the Company’s income tax provision or effective tax rate. For tax years beginning after December 31, 2024, the OBBBA permanently restores the EBITDA-based calculation of adjusted taxable income (ATI) for purposes of the Section 163(j) business interest expense limitation (i.e., allowing addbacks for depreciation, amortization, and depletion in computing ATI). This change generally increases the amount of business interest expense that can be deducted and may reduce the amount of interest subject to carryforward.

 

The Company expects any earnings of foreign subsidiaries to be indefinitely invested outside the United States. As of December 31, 2025, however, the Company does not have any accumulated undistributed earnings generated by foreign subsidiaries and has estimated that its tax basis in foreign subsidiaries exceeds its book basis. The Company has concluded that no deferred tax asset (DTA) should be recorded because at the present time it does not expect that the temporary book-tax basis difference that would create this DTA will reverse in the foreseeable future.