AIRO Group Holdings, Inc. Income Taxes Disclosure

 

17.	Income Taxes

 

For the year ended December 31, 2025, the Company’s income tax expense was $7.0 million, and the effective tax rate was 239.6%. For the year ended December 31, 2024, the Company’s income tax expense was $9.2 million, and the effective tax rate was 31.2%.

 

The sources of income (loss) before income tax expense are as follows for the years ended December 31:

Schedule of Loss Before Income Tax Expense  

(In Thousands)		2025				2024
United States (“U.S.”)		$	(23,874	)		$	(65,863	)
International			26,813				36,378
Income (loss) before income tax expense		$	2,939			$	(29,485	)

 

 

Income tax expense is comprised of the following for the years ended December 31:

Schedule of Income Tax Expense  

(In Thousands)		2025				2024
Current:
Federal		$	380			$	(1	)
State			6				1
International			6,397				9,881
Total current			6,783				9,881
Deferred:
Federal			476				139
State			61				18
International			(277	)			(829	)
Total deferred			260				(672	)
Total income tax expense		$	7,043			$	9,209

 

A reconciliation of the federal statutory income tax rate to the effective income tax rate subsequent to the adoption of ASU 2023-09 is as follows for the year ended December 31:

 

Schedule of Effective Income Tax Rate Reconciliation

		2025				Percent
Federal tax at statutory rate		$	617				21.0	%
State and local income taxes, net of U.S. federal income tax effect			66				2.2	%
Foreign tax effects
Denmark:
Statutory tax rate difference between Denmark and U.S.			285				9.7	%
Denmark permanent differences			151				5.1	%
Return to provision			(155	)			(5.3	)%
Other			1				0.0	%
Canada:
Statutory tax rate difference between Denmark and U.S.			58				2.0	%
Change in valuation allowance			147				5.0	%
Other			(2	)			(0.1	)%
Effect of cross-border tax laws
Global intangible low-taxed income			5,793				197.1	%
Changes in valuation allowance			(5,632	)			(191.6	)%
Nontaxable or nondeductible items
Stock compensation			932				31.7	%
Fair value change in contingent liability			4,660				158.6	%
Section 162(m) limitation			64				2.2	%
Other nondeductible item			2				0.1	%
Other adjustments			56				1.9	%
Income tax expense and effective tax rate		$	7,043				239.6	%

 

Supplemental cash flow information related to cash paid for income taxes is as follows for the year ended December 31:

 

Schedule of Supplemental Cash Flow Related to Cash Paid For Income Taxes

(In Thousands)		2025
Federal:
Federal		$	-
State and local			-
International:
Denmark			17,720
Canada			-
International			-
Total cash paid for income taxes, net of refund		$	17,720

 

A reconciliation of the federal statutory income tax rate to the effective income tax rate prepared under the disclosure requirements prior to the adoption of ASU 2023-09 is as follows for the year ended December 31:

 

		2024
Federal tax at statutory rate		$	(6,192	)
State income taxes			19
Stock compensation			150
Foreign rate differential			372
Fair value change in contingent liability			(504	)
Global intangible low-taxed income inclusion			-
Transaction costs			301
Goodwill impairment			7,979
Other permanent differences			48
Return to provision			211
Valuation allowance			6,786
Other			39
Income tax expense		$	9,209

 

 

The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company primarily considered the nature of its deferred tax assets and the timing, likelihood, and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

 

 

Deferred tax assets and liabilities are as follows as of December 31:

 Schedule of Deferred Tax Assets and Liabilities 

		2025				2024
Deferred tax assets:
Net operating loss carryforwards		$	6,499			$	12,342
Accruals and reserves			2,096				3,221
Excess interest expense 163(j)			4,897				4,033
Capitalized research and experimental expenses			333				865
Other			1,573				1,019
Gross deferred tax assets			15,398				21,480
Valuation allowance			(4,800	)			(9,836	)
Net deferred tax assets			10,598				11,644
Deferred tax liabilities:
Intangible assets			(9,565	)			(10,908	)
Property and equipment			(1,524	)			(1,305	)
ROU assets			(555	)			(198	)
Total deferred tax liabilities			(11,644	)			(12,411	)
Net deferred tax liabilities		$	(1,046	)		$	(767	)

 

As of December 31, 2025, the Company has federal, state, and foreign net operating loss carryforwards (“NOL”) totaling $21.5 million, $29.1 million, and $2.3 million, respectively. If not utilized, federal NOLs of $5.9 million will expire at various dates from 2028 through 2035, and $15.6 million of federal NOLs have indefinite lives. A portion of State NOLs will expire at various dates between 2026 through 2046 and the remainder will have indefinite lives. Canadian NOLs of $2.3 million begin to expire in 2043.

 

Management regularly assesses the ability to realize deferred tax assets recorded based upon the weight of all available evidence, including such factors as recent earnings history and expected future taxable income on a jurisdiction-by-jurisdiction basis. In the event that the Company changes its determination as to the amount of realizable deferred tax assets, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. The Company’s management believes that, based on a number of factors, it is more likely than not, that all or some portion of the deferred tax assets will not be realized; and accordingly, for the year ended December 31, 2025, the Company has provided a valuation allowance for certain deferred tax assets that are expected to be unrealized against the Company’s U.S. and Canada net deferred tax assets. The net change in the valuation allowance for the years ended December 31, 2025 and 2024 was a decrease of $5.0 million and an increase of $5.3 million, respectively. The decrease in the valuation allowance year-over-year was mainly driven by the utilization of net operating losses in the United States, which led to a corresponding decrease in the valuation allowance. The taxable income in the United States was mainly driven by Sky Watch’s tested income and its inability to claim high-tax exception for the 2025 tax year. 

 

Domestic NOLs are subject to an annual limitation as a result of multiple changes of ownership as defined under Internal Revenue Code (“IRC”) Section 382. Federal NOLs of $15.1 million and state NOLs of $20.5 million originating after the most recent change are not subject to limitation. IRC §163(j) interest expense carryforwards have indefinite lives and are generally limited to an annual utilization limitation of thirty percent of adjusted taxable income plus business interest income. California NOLs are limited to a member’s contribution to combined California taxable income. The Company has reduced its federal and New Mexico NOLs by the amount expected to be unavailable and expire unutilized as a result of any IRC §382 limitation.

 

The Company had no unrecognized tax benefits for the years ended December 31, 2025 and 2024. The Company recognizes interest and penalties related to unrecognized tax benefits in operating expenses. No such interest and penalties were recognized during the years ended December 31, 2025 and 2024.

 

The Company expects to file income tax returns in the United States, Canada, and Denmark. As of December 31, 2025, Holdings’ tax years 2022 through 2024 remain open to examination. Prior to the closing of the acquisitions, AIRO Drone, Agile Defense, and Jaunt were taxed as partnerships and, as a result, the Company is not responsible for pre-acquisition tax authority examinations. All of Aspen Avionics’ tax years remain open to examination. Coastal Defense’s tax years 2022 through 2024 remain open to examination. Denmark’s statute of limitations expires May 1st in the fourth calendar year following the end of the relevant accounting period, and therefore the 2022 through 2024 tax years remain open to examination.

 

H.R.1, enacted on July 4, 2025, introduced provisions that modified the IRC, including the immediate expensing of domestic research and development expenditures. As previously required under the Tax Cuts and Jobs Act, the Company capitalized and amortized research and experimental expenditures under IRC Section 174 for tax years beginning after December 31, 2021. With the enactment of H.R.1 in 2025, the Company began deducting domestic Section 174 costs in the year they were incurred. The Company will continue to capitalize and amortize research and experimental costs over 15 years for research and development performed outside of the United States. Other notable changes made with the passage of H.R. 1 include favorable changes to the interest expense limitation under IRC Section 163(j) and the reinstatement of 100 percent bonus depreciation for qualified property acquired and placed in service on or after January 20, 2025.