Capstone Holding Corp. Income Taxes Disclosure

Note 17 Income Taxes

 

Pre-Tax book income/(loss) has been recorded in the following jurisdictions:

 

		Tax Years Ended
		12/31/2025				12/31/2024
US		$	(13,877	)		$	(2,121	)
Foreign			(177	)			-
Income from continuing operations before taxes			(14,054	)			(2,121	)
Total pre-tax income/(loss)		$	(14,054	)		$	(2,121	)

 

The Company generated federal and state income tax expense for the period ended December 31, 2025 of $7,178, $46, and $48, respectively in ('000's'). The Company generated federal, state, and foreign income tax expense for the period ended December 31, 2024 of $419, $23, and $0, respectively in ('000's').             

 

		Tax Years Ended
		12/31/2025				12/31/2024
Current:
Federal		$	-			$	-
State			46				23
Foreign			(28	)			-
			18				23
Deferred:
Federal			7,178				419
State			-				-
Foreign			(19	)			-
			7,159				419
Income tax expense (benefit) for continuing operations			7,176				442
Total			7,176			$	442

 

Note 17 Income Taxes (cont.)

 

Effective January 1, 2025, the Company adopted ASU 2023‑09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, on a prospective basis in accordance with the standard’s transition guidance. As required under ASU 2023‑09, the rate reconciliation for the current year is presented using the new prescribed categories and enhanced disaggregation to provide greater transparency into the factors affecting the Company’s effective tax rate for continuing operations. The following table presents the Company’s income tax rate reconciliation on continuing operations for the year ended December 31, 2025, prepared in accordance with the disclosure requirements of ASU 2023‑09 in ('000's').

 

		Tax Year Ended
		12/31/2025
		Amount				Percent
U.S. Federal Statutory Tax Rate		$	(2,951	)			21.00	%
State and Local Income Taxes, Net of Federal Income Tax Effect			46				-0.33	%
Foreign Tax Effects			(11	)			0.07	%
Effect of Changes in Tax Laws or Rates Enacted in the Current Period			-				0.00	%
Effect of Cross-Border Tax Laws			-				0.00	%
Tax Credits			1,475				-10.49	%
Changes in Valuation Allowances			(3,177	)			22.60	%
Nontaxable or Nondeductible Items
Embedded Derivative			(174	)			1.24	%
Goodwill Impairment			1,302				-9.26	%
Other Nontaxable or Nondeductible Items			102				-0.73	%
Changes in Unrecognized Tax Benefits			-				0.00	%
Other Adjustments
Net Federal Operating Losses Expiration			9,944				-70.76	%
Other Unused Attributes			619				-4.40	%
Other			1				-0.01	%
Effective Tax Rate		$	7,176				-54.99	%

 

As a result of the Company’s prospective adoption of ASU 2023‑09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, the rate reconciliation table presented above for the year ended December 31, 2025 reflects the new prescribed categories and enhanced disaggregation required under the updated disclosure framework. In accordance with the transition guidance, the Company did not elect retrospective application; therefore, the comparative periods that follow are presented in the legacy ASC 740 format applicable to those historical periods. The Company continues to apply FASB ASC Topic 740, Income Taxes, in the computation and presentation of its income tax provision, and the enhanced ASU 2023‑09 disclosure requirements apply solely to the current year rate reconciliation. The following table presents the reconciliation of the income tax provision (benefit) for prior periods using the legacy ASC 740 disclosure format for continuing operations in ('000's').

 

		Tax Year Ended
		12/31/2024
Income tax provison (benefit) at statutory rate			(444	)
State taxes, net of federal benefit			23
Net change in NOL carryforward, federal credits and valuation allowance			863
Income tax provision recognized		$	442

 

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. Significant components of the Company's deferred tax assets and liabilities are as follows in ('000's'):

 

		Tax Years Ended
		12/31/2025				12/31/2024
Deferred tax assets:
Stock options		$	89			$	79
Basis difference in TotalStone			-				620
Basis difference in Diamond Products			247				217
Interest expense limitation			961				730
Property and equipment			403				-
Intangibles			24				-
Federal credits			2,111				3,110
Net operating loss carryforwards			20,896				29,604
Other deferred tax assets			724				460
Gross deferred tax assets			25,456				34,820
Valuation allowance			(25,437	)			(27,642	)
Net deferred tax assets		$	20			$	7,178
Deferred tax liabilities
Intangibles			(40	)			-
Gross deferred tax liabilities			(40	)			-
Net deferred tax liabilities			(40	)			-
Net deferred taxes		$	(20	)		$	7,178

 

Note 17 Income Taxes (cont.)

 

In December 2023, the FASB issued ASU 2023‑09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances the transparency and decision usefulness of income tax information by expanding annual disclosure requirements related to income taxes paid. The amendments require entities to disaggregate income taxes paid by jurisdiction, providing separate disclosure for federal, state, and foreign income tax payments.  These requirements are intended to give users of the financial statements greater insight into the geographical distribution of an entity’s cash tax outflows and tax related cash flow risks.  The Company has adopted the disclosure requirements of this standard on its consolidated financial statements.

Cash paid for income taxes (net of refunds) are as follows for the year ended December 31, 2025 in ('000's'):

 

		Tax Year Ended
		12/31/2025
U.S. Federal		$	-
U.S. State
California			(79	)
New Jersey			(66	)
Foreign
Canada			21
Total income taxes paid, net		$	(124	)

 

The Company has accumulated approximately $141.0 million in federal and $17.0 million in state net operating loss carryforwards (“NOLs”) and approximately $3.9 million of research and development tax credit carryforwards. The federal NOLs generated before 2018 have 20-year carryforward periods with NOLs generated in 2018 and after having no expiration period. Federal NOLs generated in 2018 and after total $3.5 million. The availability of these NOL’s to offset future taxable income could be limited in the event of a change in ownership, as defined in Section 382 of the Internal Revenue Code.

 

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes deferred tax assets to the extent that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The valuation allowance changed by -$2.2 million,  during the year ended December 31, 2025. 

 

For the period ended December 31, 2025, Capstone Holding Corp. has a total carryover of Federal Net Operating Losses (NOLs) of $98.4 million, which represents NOLs that were generated before the rules of the Tax Cuts and Jobs Act (TCJA), which became effective on January 1, 2018 and NOLs that were generated after the TCJA. The Company expects to expire $22.7 million of NOLs for the period ended December 31, 2025. The Company’s NOLs that were generated after TCJA in the amount of $8.8 million do not expire but are subject to the 80% limitation. The Company has a State NOL carryover of $3.6 million. These NOLs are subject to various limitations and expiration dates. 

 

The Internal Revenue Code of 1986, as amended, imposes restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation. Accordingly, a company's ability to use net operating losses and tax credits may be limited as prescribed under Internal Revenue Code Section 382 and 383 ("IRC Section 382"). Events which may cause limitations in the amount of the net operating losses or tax credits that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Utilization of the federal and state net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 rules and similar state provisions. At December 31, 2025, based on preliminary internal analysis, the Company has not experienced an ownership change as defined under IRC Section 382. However, in light of the 2025 initial public offering, corporate restructuring, and conversions of convertible notes and preferred interests into common stock, the Company expects that an ownership change may occur in early 2026. Upon occurrence of an ownership change, the Company's ability to utilize its $98.4 million of pre-TCJA and $8.8 million of post-TCJA federal net operating loss carryforwards against future taxable income will become subject to an annual limitation under IRC Section 382. The Company intends to engage an outside advisor to complete a formal Section 382 study. Any such limitation is not expected to affect the Company's net income tax expense in the near term because of the full valuation allowance maintained against net deferred tax assets. 

 

The Company's major tax jurisdictions are the United States and Canada.  All of the Company's tax years will remain open for examination by the Federal and state tax authorities for three and four years, respectively, from the date of utilization of the net operating loss or research and development credit.  The Company does not have any tax audits pending in the United States.

 

"The Inflation Reduction Act of 2022 was signed into law August 16, 2022, and includes significant legislation addressing taxes, inflation, climate change and renewable energy incentives, and healthcare.  Key tax provisions include a 15% corporate minimum tax, clean energy incentives, and a 1% excise tax on stock buybacks. The Company does not expect the provisions of such legislation to have any impact on the effective tax rate of the Company but will continue to evaluate the tax effects should any provisions become applicable to the Company.

 

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted as Public Law 119‑21. The legislation implements several amendments to the Internal Revenue Code, including the permanent extension of 100 percent bonus depreciation for qualified property and research and development expenditures, as well as revisions to expensing rules applicable to certain structures.  The Act also includes modifications affecting corporate tax administration, such as adjustments to the Employee Retention Credit (ERC), changes to Opportunity Zone related provisions, and the scheduled expiration or modification of certain business related clean energy credits.

 

The Company has evaluated the corporate income tax effects of the OBBBA in the period of enactment. In connection with the Act’s modifications to bonus depreciation,  the Company has accelerated depreciation for its current period additions, consistent with the Act’s statutory framework governing the 100 percent allowance. The resulting adjustments have been reflected in the Company’s measurement of current and deferred income tax assets and liabilities. Based on its analysis, the Company determined that the enactment of the OBBBA did not have a material impact on its consolidated financial statements for the year ended December 31, 2025. The Company will continue to monitor regulatory and administrative guidance issued under the Act."