Adicet Bio, Inc. Income Taxes Disclosure

14. Income Taxes

There was no income tax expense nor benefit for the years ended December 31, 2025 and 2024.

ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Because of the Company’s recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a valuation allowance.

The valuation allowance increased by $21.2 million and by $20.2 million during the years ended December 31, 2025 and 2024, respectively.

As of December 31, 2025, the Company had net operating loss carryforwards of $472.7 million, $16.7 million, and $ 15.2 million to reduce future taxable income, if any, for federal, state and foreign income tax purposes, respectively. Of the federal net operating loss carryforwards, $7.5 million will begin to expire in 2036 if not utilized, and $465.2 million can be carried forward indefinitely. The state carryforwards will begin to expire in 2035.

The Company also had approximately $19.7 million of federal and $11.6 million of California research and development tax credit carryforwards available to offset future taxable income as of December 31, 2025. The federal credits begin to expire in 2041 and the California research credits can be carried forward indefinitely.

Utilization of the net operating loss carryforwards and research and development tax credit carryforwards may be subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. If the Company has experienced an ownership change, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation. As of December 31, 2025, the ownership change analysis has not been completed. Any previous ownership changes may result in a limitation that will reduce the total amount of net operating loss and tax credit carryforwards disclosed that can be utilized. Subsequent ownership changes may affect the limitation in future years.

The Company files income tax returns in the United States federal jurisdiction, California, Massachusetts and Israel. The tax years 2016 to 2024 remains open to United States federal and state examination to the extent of the utilization of net operating loss and credit carryovers. Additionally, the Company is currently undergoing an audit with California’s Franchise Tax Board (FTB) regarding the apportionment of revenue for the tax year 2017 and may be obligated to make future payments to the state related to this tax year, depending on the outcome of the examination. The Company is evaluating the FTB's proposal and assessing its course of action.

As of December 31, 2025, the Company had unrecognized tax benefits of $0.8 million related to the transfer of certain intellectual property from its Israeli subsidiary. In addition, as of December 31, 2025, the Company had unrecognized tax benefits of $31.3 million related to the federal and state research and development credits as a result of no formal research credit study performed.

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense (benefit). Management determined that no accrual for interest and penalties was required as of December 31, 2025.