Arq, Inc.ARQ

Arq, Inc. Income Taxes Disclosure

10-KFiled Mar 10, 20266 min read
Income Taxes
The sources of pretax loss are as follows:
Years ended December 31,
(in thousands)20252024
Domestic$(44,771)$(3,435)
Foreign(7,827)(1,838)
$(52,598)$(5,273)
The provision for income taxes consists of the following:
 Years Ended December 31,
(in thousands)20252024
Current portion of income tax expense (benefit):
Federal$— $— 
State and other12 (164)
12 (164)
Deferred portion of income tax expense (benefit):
Federal— — 
State and other— — 
— — 
Total income tax expense (benefit)$12 $(164)
Effective tax rate— %3 %
As discussed in Note 1 above, the Company adopted ASU 2023-09 effective for the year ended December 31, 2025 on a retrospective basis. The reconciliation of income taxes computed at the U.S. federal statutory rate of 21% to the effective rate for the years ended December 31, 2025 and 2024 is as follows:
 Years ended December 31,
(in thousands, except for rate)20252024
 Amount% of Pretax lossAmount% of Pretax loss
U.S. federal statutory tax rate$(11,045)21 %$(1,107)21 %
State income taxes, net of federal benefit (1)
10 — %(130)3 %
Foreign tax effects - United Kingdom
Statutory tax rate difference between United Kingdom and U.S.(313)1 %(73)1 %
Valuation allowance304 (1)%459 (9)%
Other— — %1 — %
Nontaxable or nondeductible items
Stock-based compensation50 — %(363)7 %
Nondeductible compensation— — %53 (1)%
Other43 — %54 (1)%
Valuation allowances10,969 (21)%1,035 (20)%
Other adjustments(6)— %(93)2 %
Effective tax rate$12 — %$(164)3 %
(1) State taxes in Texas comprise the majority (greater than 50%) of the tax effect in the category.
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and their reported amounts in the accompanying Consolidated Balance Sheets. These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities are summarized as follows: 
 As of December 31,
(in thousands)20252024
Deferred tax assets
Tax credits$86,125 $86,125 
Net operating loss carryforwards22,264 18,985 
Intangible assets2,345 1,010 
Employee related liabilities1,386 1,553 
Operating lease obligations2,127 2,345 
ARO, net of reimbursements1,060 976 
Research and development capitalization1,092 1,591 
Other investments531 547 
Inventory508 680 
Interest limitations604 527 
Other359 622 
Total deferred tax assets118,401 114,961 
Less valuation allowance(114,033)(101,598)
Deferred tax assets4,368 13,363 
Less: Deferred tax liabilities
Property and equipment and other(1,404)(9,730)
Right of use operating lease assets(1,617)(2,289)
Upfront customer consideration(1,347)(1,344)
Total deferred tax liabilities(4,368)(13,363)
Net deferred tax assets$— $— 
Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against a deferred tax asset based on an assessment of the amount of the deferred tax asset that is "more likely than not" to be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. 
The Company assesses a valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize a deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, the Company assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance.
As of December 31, 2025, the Company concluded it is more likely than not the Company will not generate sufficient taxable income within the applicable net operating loss and tax credit carry-forward periods to realize any of its net deferred tax assets. For the year ended December 31, 2025, the Company increased a valuation allowance from December 31, 2024 by $12.4 million and as of December 31, 2025, has a valuation allowance equal to 100% of its net deferred tax assets. In reaching this conclusion, the Company primarily considered its pretax losses incurred over a cumulative three-year lookback period.
Net cash paid (refunded) for income tax consisted of the following:
As of December 31,
(in thousands)20252024
Federal$— $— 
State
   Texas(27)20 
   Illinois— (150)
   Pennsylvania— 44 
   Other— (14)
$(27)$(100)
The following table presents the approximate amount of federal and state net operating loss carryforwards and federal tax credit carryforwards available to reduce future taxable income, along with the respective range of years that the net operating loss and tax credit carryforwards would expire if not utilized:
As of December 31,
(in thousands)2025Beginning expiration yearEnding expiration year
Federal net operating loss carryforwards $13,329 2035Indefinite
Foreign net operating loss carryforwards$4,200 IndefiniteIndefinite
State and other net operating loss carryforwards$4,735 2026Indefinite
Federal tax credit carryforwards$86,125 20322041
The following table sets forth a reconciliation of the beginning and ending unrecognized tax positions on a gross basis for the years ended December 31, 2025 and 2024:
 Years Ended December 31,
(in thousands)20252024
Balance as of January 1$— $54 
Lapse of applicable statute of limitations— (54)
Balance as of December 31$— $— 
Interest and penalties related to uncertain tax positions are accrued and included in the "Interest expense" line item in the Consolidated Statements of Operations. Additional information related to the components of "Interest expense" is included in Note 9. For the year ended December 31, 2024, the Company did not record any adjustments or recognize interest expense for uncertain tax positions.
The Company files income tax returns in the U.S., various states and the United Kingdom. The Company is no longer subject to U.S. federal examinations by tax authorities for years before 2022. The Company is generally no longer subject to state examinations by tax authorities for years before 2018.
U.S. federal income tax rules, and Sections 382 of the Internal Revenue Code in particular, could substantially limit the use of Section 45 tax credits and other tax assets if the Company experiences an "ownership change" (as defined in the Internal Revenue Code). In general, an ownership change occurs if the aggregate stock ownership of certain stockholders (generally 5% stockholders, applying certain look-through rules) increases by more than 50 percentage points over such stockholders' lowest percentage ownership during the testing period (generally three years).
An entity that experiences an ownership change generally will be subject to an annual limitation on its pre-ownership change tax loss and credit carryforwards equal to the equity value of the entity immediately before the ownership change, multiplied by the long-term, tax-exempt rate posted monthly by the Internal Revenue Service (subject to certain adjustments). The annual limitation would be increased each year to the extent that there is an unused limitation in a prior year. As of December 31, 2025, the Company performed an IRC Section 382 analysis and determined that it had not experienced an ownership change as of that date.
In February 2023, the Company completed a business combination (the "Acquisition") in which it acquired certain tax assets (the "Acquisition Tax Assets") totaling approximately $12.5 million. The Acquisition Tax Assets are comprised of net operating loss carryforwards, of which $8.8 million were in the U.S. Prior to the Acquisition, the acquiree completed numerous equity offerings that resulted in ownership changes. The Company has not completed a formal IRC Section 382 analysis of the acquiree's equity changes from acquiree's inception through the date of the Acquisition. The Company believes that one or more "ownership changes" occurred prior to the date of the Acquisition as defined under Sections 382 and 383 and that a portion or all the Acquisition Tax Assets may subject to an annual limitation.

Historical Timeline

Fiscal YearFiled
2025Mar 10, 2026Showing above
2024Mar 5, 2025
2023Mar 12, 2024
2022Mar 8, 2023
2021Mar 8, 2022
2020Mar 10, 2021
2019Mar 16, 2020
2018Mar 18, 2019
2017Mar 12, 2018
2016Mar 13, 2017
2015Apr 19, 2016
2014Feb 29, 2016

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.

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