Arcellx, Inc. Income Taxes Disclosure
16. Income Taxes
The Company’s provision for income taxes consists of the following (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2025 |
|
|
2024 |
|
|
2023 |
|
|||
Current income tax provision (expense) benefit: |
|
|
|
|
|
|
|
|
|
|||
U.S. federal |
|
$ |
(45 |
) |
|
$ |
(1,910 |
) |
|
$ |
(427 |
) |
State |
|
|
(24 |
) |
|
|
(153 |
) |
|
|
(273 |
) |
Total |
|
$ |
(69 |
) |
|
$ |
(2,063 |
) |
|
$ |
(700 |
) |
A reconciliation of the statutory U.S. federal rate and effective rate for the year ended December 31, 2025, after the adoption of ASU 2023-09, is as follows (in thousands, except percent):
|
|
Year Ended December 31, |
|
|||||
|
|
2025 |
|
|||||
|
|
Amount |
|
|
Percent |
|
||
U.S. federal statutory tax rate |
|
|
48,053 |
|
|
|
-21.0 |
% |
State and local income taxes, net of federal income tax effect(1) |
|
|
(19 |
) |
|
|
— |
|
Tax Credits |
|
|
|
|
|
|
||
Research and development tax credits(2) |
|
|
3,744 |
|
|
|
(1.6 |
) |
Orphan Drug Credit(2) |
|
|
6,586 |
|
|
|
(2.9 |
) |
Change in valuation allowance |
|
|
(52,708 |
) |
|
|
23.0 |
|
Non-deductible items |
|
|
|
|
|
|
||
Stock based compensation(3) |
|
|
21,342 |
|
|
|
(9.4 |
) |
Section 162(m)(3) |
|
|
(27,156 |
) |
|
|
11.9 |
|
Other |
|
|
89 |
|
|
|
— |
|
Tax benefit (expense)/ Effective tax rate |
|
|
(69 |
) |
|
|
0.0 |
% |
(1) State taxes in Texas made up the majority of the tax effect in this category.
(2) Tax credits are net of unrecognized tax benefits.
(3) The non-deductible stock based compensation and section 162(m) items include impairment of certain related deferred tax assets which have a permanent effect on the effective tax rate.
A reconciliation of the statutory U.S. federal rate and effective rate for the year ended December 31, 2024 and 2023, prior to the adoption of ASU 2023-09, is as follows:
|
|
Year Ended December 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
U.S. federal tax |
|
|
21.0 |
% |
|
|
21.0 |
% |
State tax, net of federal benefit |
|
|
0.3 |
|
|
|
0.6 |
|
Change in valuation allowance |
|
|
(42.9 |
) |
|
|
(2.8 |
) |
Nondeductible compensation |
|
|
(17.0 |
) |
|
|
(15.2 |
) |
Research and development tax credits |
|
|
26.3 |
|
|
|
16.3 |
|
Stock based compensation |
|
|
16.5 |
|
|
|
10.2 |
|
Change in state deferred income tax rate |
|
|
(0.5 |
) |
|
|
(27.2 |
) |
Changes in unrecognized tax benefits |
|
|
(5.7 |
) |
|
|
(4.8 |
) |
Change in tax rates and other |
|
|
0.1 |
|
|
|
0.9 |
|
Effective income tax rate |
|
|
(1.9 |
)% |
|
|
(1.0 |
)% |
The significant components of the Company’s deferred income tax assets (liabilities) were as follows (in thousands):
|
|
December 31, |
|
|||||
|
|
2025 |
|
|
2024 |
|
||
Deferred income tax assets: |
|
|
|
|
|
|
||
U.S. federal net operating loss carryforward |
|
$ |
29,176 |
|
|
$ |
10,692 |
|
State net operating loss carryforward |
|
|
1,250 |
|
|
|
287 |
|
Research and development expenditures |
|
|
74,971 |
|
|
|
65,346 |
|
Research and development credits |
|
|
38,363 |
|
|
|
26,838 |
|
Lease liabilities - operating |
|
|
11,325 |
|
|
|
11,641 |
|
Stock based compensation |
|
|
11,184 |
|
|
|
8,117 |
|
Accruals and others |
|
|
4,364 |
|
|
|
2,371 |
|
Deferred Revenue |
|
|
34,670 |
|
|
|
24,423 |
|
Gross deferred income tax assets |
|
|
205,303 |
|
|
|
149,715 |
|
Less: Valuation allowance |
|
|
(193,880 |
) |
|
|
(137,302 |
) |
Total deferred income tax assets |
|
|
11,423 |
|
|
|
12,413 |
|
Deferred income tax liabilities: |
|
|
|
|
|
|
||
Depreciation |
|
|
(5,934 |
) |
|
|
(6,692 |
) |
Right-of-use asset - operating |
|
|
(5,197 |
) |
|
|
(5,143 |
) |
Section 481(a) adjustment |
|
|
(292 |
) |
|
|
(578 |
) |
Total deferred income tax liabilities |
|
|
(11,423 |
) |
|
|
(12,413 |
) |
Net deferred income tax assets (liabilities) |
|
$ |
— |
|
|
$ |
— |
|
On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was enacted in the United States. The OBBBA includes several significant tax provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act, modifications to the international tax framework and the restoration of certain business provisions. The legislation has multiple effective dates, with certain provisions effective in 2025 and others implemented through 2027. The Company evaluated the impact of the OBBBA and determined that it did not have a material impact on the Company’s consolidated financial statements for the year ended December 31, 2025.
The Company records valuation allowances to reduce deferred tax assets to the amount that is not more likely than not to be realized. In assessing the likelihood of realization, management considers (i) future reversals of existing taxable temporary differences; (ii) future taxable income exclusive of reversing temporary difference and carryforwards; (iii) taxable income in prior carryback years if carryback is permitted under applicable tax law; and (iv) tax planning strategies. The Company’s net deferred income tax assets are not more likely than not to be utilized due to the lack of sufficient sources of future taxable income and cumulative book losses which have resulted over the years. The valuation allowance increased by approximately $56.6 million and $45.5 million for the year ended December 31, 2025 and 2024, respectively. The increases were primarily attributable to additional net operating loss carryforwards, capitalized research and development expenditures, research and development credits, and deferred revenue, partially offset in 2024 by the utilization of net operating loss carryforwards.
The Company had federal and State net operating loss (NOL) carryforwards of approximately $140.2 million and $233.9 million, respectively, as of December 31, 2025. The Company also had federal and State research and development tax credit carryforwards of approximately $18.9 million and $5.3 million, respectively, and federal orphan drug credit carryforwards of $27.5 million, available to potentially offset future income taxes, as of December 31, 2025. The federal NOL will be carried forward indefinitely, if not utilized, but is limited to eighty percent of taxable income. The State NOL will begin expiring in 2038, if not utilized, while a portion is carried forward indefinitely. The federal research and development tax credit carryforwards and orphan drug credit carryforwards, if not utilized, will begin to expire in 2042. The California research and development tax credit carryforwards do not expire while other State research and development tax credit carryforward will begin to expire in 2031.
Under Section 382/383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which generally occurs if the percentage of the corporation’s stock owned by 5% stockholders increases by more than 50% over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. The annual limitation may result in the expiration of net operating losses and credits before utilization. The Company performed a Section 382/383 analysis through December 31, 2024. The Company has experienced ownership changes. Some of the Company’s federal research and development tax credit carryforwards will be permanently limited as a result of the ownership change, which have been excluded from the Company’s
deferred income tax assets. The Company has not completed a Section 382/383 analysis for the period subsequent to December 31, 2024. Subsequent ownership changes may further affect the limitation in future years.
Related to unrecognized tax benefits noted below, interest and penalties related to unrecognized tax benefits are recognized in the provision of income taxes. No penalties or interest were recorded during the years ended December 31, 2025, 2024 and 2023. The Company had $12.6 million, $9.6 million and $3.5 million unrecognized tax benefits as of December 31, 2025, 2024 and 2023, respectively. Of the unrecognized tax benefits as of December 31, 2025, 2024 and 2023, none would affect the Company’s effective tax rate if recognized due to the Company's full valuation allowance position. The following table reconciles the beginning and ending amounts of unrecognized tax benefits:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2025 |
|
|
2024 |
|
|
2023 |
|
|||
Balance at beginning of year |
|
$ |
9,578 |
|
|
$ |
3,450 |
|
|
$ |
— |
|
Additions related to current year tax positions |
|
|
2,987 |
|
|
|
3,177 |
|
|
|
809 |
|
Additions related to prior year tax positions |
|
|
6 |
|
|
|
2,951 |
|
|
|
2,641 |
|
Balance at end of year |
|
$ |
12,571 |
|
|
$ |
9,578 |
|
|
$ |
3,450 |
|
The Company’s federal income tax returns for the tax years 2018 through 2024 and state income tax return for tax years 2015 through 2024 remain subject to examination by taxing authorities due to the tax attribute carryforwards. The Company's 2023 federal income tax return is currently under examination by the Internal Revenue Service.
Cash paid for income taxes, net of refunds received, by jurisdiction for the year ended December 31, 2025 is as follows (in thousands):
|
|
Year Ended December 31, |
|
|
|
|
2025 |
|
|
U.S. federal |
|
$ |
1,025 |
|
Texas |
|
|
285 |
|
Other |
|
|
9 |
|
Total |
|
$ |
1,319 |
|
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 26, 2026 | Showing above |
| 2024 | Feb 27, 2025 | |
| 2023 | Feb 28, 2024 | |
| 2022 | Mar 29, 2023 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.