NOTE 10. Income Taxes

A reconciliation of (loss) income before income taxes for domestic and foreign locations is as follows:


	For the Year Ended December 31,
(In thousands)	2024		2023			2022
United States	$	81,050	$	(27,890	)	$	10,644
Foreign		—		—			—
Total (loss) income before income taxes	$	81,050	$	(27,890	)	$	10,644

A reconciliation of income tax (benefit) expense for the years ended December 31, 2024, 2023 and 2022 is as follows:


	For the Year Ended December 31,
	2024			2023		2022
Current:
Federal	$	(11	)	$	1,246	$	1,121
State		7			589		174
Foreign		—			—		—
Total current income tax (benefit) expense	$	(4	)	$	1,835	$	1,295

Deferred:
Federal	$	—		$	—	$	—
State		—			—		—
Foreign		—			—		—
Total deferred income tax expense		—			—		—
Total income tax (benefit) expense	$	(4	)	$	1,835	$	1,295

A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:


	For the Year Ended December 31,
	2024			2023			2022
Federal statutory income tax rate		21.0	%		21.0	%		21.0	%
State income taxes, net of federal benefit		1.9	%		1.9	%		7.2	%
Share-based compensation		(1.9	%)		(2.5	%)		16.1	%
Officers compensation		(3.4	%)		(7.4	%)		21.8	%
Research and development credits		24.0	%		20.0	%		(40.3	%)
Uncertain tax positions		(3.7	%)		(2.4	%)		9.0	%
Change in tax rate		(1.4	%)		0.2	%		(12.6	%)
Change in valuation allowance		(36.1	%)		(36.5	%)		(9.4	%)
Other		(0.2	%)		(0.3	%)		(1.0	%)
Permanent differences		(0.2	%)		(0.7	%)		0.4	%
Provision for income taxes		0.0	%		(6.7	)%		12.2	%

The significant components of deferred income taxes are as follows:


	December 31,
(in thousands)	2024			2023
Deferred tax assets:
Net operating loss	$	25,413		$	19,147
Tax credits		27,472			10,723
Accrued liabilities		2,966			943
Deferred revenue		5,515			7,014
Inventory		—			15,961
Basis difference in equity investments		2,127			2,202
Capitalized R&D		60,104			41,971
Right-of-use lease liability		6,601			7,233
Share-based compensation		14,872			11,618
Total gross deferred tax assets		145,070			116,812
Deferred tax liabilities:
Depreciation and amortization		(858	)		(1,184	)
Right-of-use asset		(6,168	)		(6,822	)
Total gross deferred tax liabilities		(7,026	)		(8,006	)
Valuation allowance		(138,044	)		(108,806	)
Net deferred tax asset	$	—		$	—

In assessing the realization of the deferred tax assets, the Company considers whether it is more likely than not that some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Due to lack of available sources of taxable income, the Company recorded a full valuation allowance against its net deferred tax assets as sufficient uncertainty exists regarding the future realization of these assets. As of December 31, 2024 and 2023, the Company recorded a valuation allowance of $138.0 million and $108.8 million, respectively. The valuation allowance changed by $29.2 million and $10.2 million for the years ended December 31, 2024 and 2023, respectively.

At December 31, 2024, the Company has federal and state net operating losses, or NOL, carryforwards of approximately $47.5 million and $223.5 million, respectively. The federal net operating loss carryforward includes losses generated in 2018 and after which can be carried forward indefinitely. The state net operating loss carryforward includes $0.4 million of losses that can be carried forward indefinitely. The remaining state net operating losses begin to expire in 2039.

At December 31, 2024, the Company has federal and state research and development credit carryforwards of approximately $19.8 million and $11.5 million, respectively. The federal credit carryforwards begin to expire in 2037, and the state credits carry forward indefinitely. $0.8 million of the state credit begin to expire in 2037 and the remainder carryforward indefinitely. Additionally, the Company has an Orphan Drug Credit of $4.7 million as of December 31, 2024 which will begin to expire in 2042 unless previously utilized.

Pursuant to Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Company’s federal and California net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has completed an IRC Section 382 analysis through December 31, 2024 regarding the limitation of net operating loss carryforwards and other tax attributes. The Company experienced ownership changes in 2018 and 2020; however, the Company estimates that all tax attributes can be utilized. There is a risk that additional ownership changes may occur in the future. If a change in ownership occurs, the NOL carryforwards and other tax attributes could be limited or restricted.

The company accounts for income taxes in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes. The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain tax position will not be recognized if it has less than 50% likelihood of being sustained.

A reconciliation of unrecognized tax benefits is as follows (in millions):


	December 31,
	2024		2023
Beginning balance of unrecognized tax benefits	$	3.6	$	2.9
Decrease for prior period tax positions		1.2		0.1
Increase for current period tax positions		2.0		0.6
Ending balance of unrecognized tax benefits	$	6.8	$	3.6

Amounts in the summary rollforward would not impact the effective tax rate as the Company maintains a full valuation on its net deferred tax assets. The Company is subject to taxation and files income tax returns in the United States, various U.S. states and foreign jurisdictions. The Company’s tax years from 2014 to date are subject to examination by the U.S., and state taxing authorities due to the carryforward of unutilized net operating losses and research and development credits. The Company’s policy is to recognize interest expense and penalties related to income tax matters as income tax expense. There was no tax related interest or penalties recognized for the years ended December 31, 2024, 2023 and 2022.

The Company does not anticipate any material changes to its unrecognized tax benefits within the next twelve months.

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.

Arcturus Therapeutics Holdings Inc. Income Taxes Disclosure

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