AeroVironment Inc Income Taxes Disclosure

15.          Income Taxes

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The components of income (loss) before income taxes are as follows (in thousands):

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The Company expects any foreign earnings to be reinvested in such foreign jurisdictions and, therefore, no deferred tax liabilities for U.S. income taxes on undistributed earnings are recorded. The foreign subsidiaries do not have any undistributed earnings.
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A reconciliation of income tax expense (benefit) computed using the U.S. federal statutory rates to actual income tax expense is as follows:

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The components of the provision for (benefit from) income taxes are as follows (in thousands):

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Significant components of the Company’s deferred income tax assets and liabilities are as follows (in thousands):

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For tax years beginning in 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminated the option to currently deduct research and experimental (“R&E”) expenditures in the period incurred and requires taxpayers to capitalize and amortize such expenditures over a period of five years (for U.S.-based research) or fifteen years (for non-U.S. based research), as applicable, pursuant to Section 174 of the Internal Revenue Code. As of April 30, 2025 and 2024, the Company recorded a tax adjustment to capitalize and amortize its R&D costs, which resulted in an increase to income taxes payable of approximately $57,266,000 and $42,788,000, respectively.

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At April 30, 2025 and 2024 the Company recorded a valuation allowance of $26,770,000 and $23,835,000, respectively, primarily against state R&D credits as the Company is currently generating more tax credits than it will utilize in future years and against its capital loss carryforward. The valuation allowance increased by $2,935,000 and $1,332,000 for April 30, 2025 and April 30, 2024, respectively primarily due to a full valuation allowance against foreign deferred tax assets.

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At April 30, 2025 the Company had California R&D credit carryforwards of $24,728,000. These credits carryforward indefinitely.

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At April 30, 2025, the Company had federal, state and foreign net operating loss carryforwards of approximately $1,757,000, $97,314,000 and $5,012,000, respectively. The federal net operating losses carry forward indefinitely. The state net operating losses will begin expiring in fiscal year 2035, and foreign net operating losses carry forward indefinitely. Utilization of federal and state net operating loss carryforwards may be subject to substantial annual limitation due to the ownership changes as provided by Section 382 of the Internal Revenue Code and similar state provisions.

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At April 30, 2025 and 2024, the Company had approximately $13,429,000 and $13,601,000, respectively, of unrecognized tax benefits, respective to the 2025 balance, $5,004,000 would impact the Company’s tax expense and $6,377,000 would result in an increase in California R&D credit valuation allowance. The Company estimates that

$1,478,000 of its unrecognized tax benefits will decrease in the next twelve months due to statute of limitation expiration.

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The following table summarizes the activity related to the Company’s gross unrecognized tax benefits for the years ended April 30, 2025 and 2024 (in thousands):

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The Company records interest and penalties on uncertain tax positions to income tax expense. As of April 30, 2025 and 2024, the Company had accrued approximately $454,000 and $283,000, respectively, of interest and penalties related to uncertain tax positions. The 2021 to 2024 tax years remain open to examination by the IRS for federal income taxes. The tax years 2019 to 2024 remain open for major state taxing jurisdictions.