ADIAL PHARMACEUTICALS, INC. Income Taxes Disclosure

10 — INCOME TAXES

 

A reconciliation of the statutory Federal income tax rate and effective rate of the provision for income taxes is as follows:

 

		Year ended
		December 31, 2024				December 31, 2023
Federal statutory rate			21.00	%			21.00	%
Stock options			(0.93	)%			(3.69	)%
Change in fair value of investment			(0.00	)%			(0.58	)%
Transaction expenses			(0.56	)%			(1.67	)%
Other permanent items			0.03	%			1.25	%
State taxes			2.94	%			7.08	%
Increase in VA			(15.37	)%			(23.19	)%
Warrant inducement			(7.10	)%			0.00	%
Other			0.00	%			(0.20	)%
Effective tax rate			0.00	%			0.00	%

 

Tax expense (benefit) for the year ended December 31, 2024 is shown on the table below:

 

Current

Deferred

Total

Federal

—

—

—

State and Local

—

—

—

Total

—

—

—

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting, and the amounts recognized for income tax purposes. The significant components of deferred tax assets and liabilities as of December 31, 2023 and 2022, respectively, are as follows:

 

Deferred Tax Assets & Liabilities (rounded)

 

		Deferred Tax Asset
		2024				2023
Net operating loss carry-forward			13,963,767				12,297,198
Accrued Expenses			107,221				101,758
Restricted stock			16,184				15,854
Section 174 R&D			1,510,506				1,116,665
Less: valuation allowance			(15,559,357	)			(13,531,039	)
Total tax assets		$	38,321			$	437
Fixed Asset			—				—
Intangible assets			(495	)			(437	)
Joint Venture			(37,826	)			—
Total deferred tax labilities		$	(38,321	)		$	(437	)
Net deferred tax asset (liability)		$	—			$	—

 

The Company has a net operating loss carry-forward of $53.9 million for Federal and of $56.4 million state tax purposes at December 31, 2024, that is potentially available to offset future taxable income. NOLS generated prior to 2018, $340 thousand of Federal NOLS and $655 thousand of state NOLs, will begin to expire in 2037. For Federal and most states, the NOL carryover limitation was eliminated for losses generated after January 1, 2018, giving the taxpayer the ability to carry forward losses indefinitely. However, NOL carry forward arising after January 1, 2018, will now be limited to 80 percent of Taxable income.

 

In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, net operating loss carryback potential and tax planning strategies in making these assessments.

 

Based upon the above criteria, the Company believes that it is more likely than not that the remaining net deferred tax assets will not be realized. Accordingly, the Company has recorded a valuation allowance of $15.6 million against the net deferred tax asset that is not realizable as of December 31, 2024.

 

Section 382 of the Internal Revenue Code (“Section 382”) imposes limitations on a corporation’s ability to utilize net operating losses if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. Any unused annual limitation may be carried over to later years, and the amount of the limitation may under certain circumstances be increased by the built-in gains in assets held by us at the time of the change that are recognized in the five-year period after the change.

 

The company has not performed a study to assess whether an ownership change for purposes of Section 382 has occurred, or whether there have been multiple ownership change since the Company’s inception, due to the significant costs and complexities associated with such study. If the company has experienced a change in control, as defined by Section 382, at any time since its public offering, utilization of net operating loss carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion of the net operating losses before utilization.

 

The Company files tax returns as prescribed by the tax laws of the jurisdiction in which they operate. In the normal course of business, the Company is subject to examination of Federal and state jurisdiction where applicable based on the statute of limitations that apply in each jurisdiction. As of December 31, 2024, open years related to the federal and state Jurisdictions are 2023, 2022, and 2021. Since the Company was not a taxable entity prior to reincorporation, examination of returns for years prior to 2017 will not result in changes to tax liability or benefit. The company has no open tax audits with any taxing authority as of December 31, 2024.

 

The Company had no uncertain tax positions at December 31, 2024.