CareCloud, Inc. Income Taxes Disclosure

16. INCOME TAXES

 

For the years ended December 31, 2024 and 2023, the Company estimated its income tax provision based upon the annual pre-tax income or loss. Although the Company reported GAAP earnings in 2024, it incurred losses historically and there is uncertainty regarding future U.S. taxable income, which makes realization of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance has been recorded against all federal and state deferred tax assets as of December 31, 2024 and 2023.

 

The annual adjusted earnings and profits of our foreign affiliates pass through to the U.S. as federal and state taxable income under the Global Intangible Low-Taxed Income (“GILTI”) regime. For the tax years ended December 31, 2024 and 2023, the net GILTI from our foreign affiliates was absorbed against our current year U.S. consolidated loss. For state tax purposes, the Company’s foreign earnings may be taxable depending on each individual state’s legislative stance on the recent tax reform legislation. The activity in the deferred tax valuation allowance was as follows for the years ended December 31, 2024 and 2023:

 

SCHEDULE OF DEFERRED TAX VALUATION ALLOWANCE

		Year Ended December 31,
		2024				2023
		($ in thousands)
Beginning balance		$	87,597			$	92,091
Current year valuation allowance increase (decrease)			2,067				(4,494	)
Ending balance		$	89,664			$	87,597

 

The income (loss) before provision (benefit) for income taxes for financial reporting purposes during the years ended December 31, 2024 and 2023 consisted of the following:

 

SCHEDULE OF INCOME (LOSS) BEFORE INCOME TAX, DOMESTIC AND FOREIGN

		Year Ended December 31,
		2024				2023
		($ in thousands)
United States		$	7,191			$	(48,985	)
Foreign			820				(53	)
Total		$	8,011			$	(49,038	)

 

 

The provision (benefit) for income taxes for the years ended December 31, 2024 and 2023 consisted of the following:

SCHEDULE OF COMPONENTS OF INCOME TAX PROVISION (BENEFIT) 

		Year Ended December 31,
		2024				2023
		($ in thousands)
Current:
Federal		$	-			$	-
State			120				123
Foreign			40				38
			160				161
Deferred:
Federal			-				(252	)
State			-				(273	)
			-				(525	)
Total income tax provision (benefit)		$	160			$	(364	)

 

The components of the Company’s deferred income taxes as of December 31, 2024 and 2023 are as follows:

 SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES

		December 31,				December 31,
		2024				2023
		($ in thousands)
Deferred tax assets:
Allowance for expected credit losses		$	213			$	228
Deferred revenue			103				68
Property and intangible assets			3,015				1,933
State net operating loss (“NOL”) carryforwards			20,981				19,749
Federal net operating loss (“NOL”) carryforwards			55,569				57,562
Section 163(j) interest limitation			1,669				2,731
Stock based compensation			(173	)			-
ASC 842 - ROU asset			(559	)			(1,026	)
Prepaid commissions			(267	)			(303	)
Cumulative balance translation adjustment			1,015				988
Section 267 limitation			6				6
Credit carryovers			2,498				2,498
ASC 842 - Lease liability			558				1,031
Accrued compensation			86				80
Other			(46	)			(59	)
Section 174 costs			4,996				3,799
Valuation allowance			(89,664	)			(87,597	)
Total deferred tax assets			-				1,688
Deferred tax liabilities:
Goodwill amortization			-				(1,688	)
Net deferred tax liability		$	-			$	-

 

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss carryforwards. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years.

 

The Company has recorded goodwill as a result of its acquisitions. Goodwill is generally not amortized for financial reporting purposes. However, in 2023 the Company recorded a $42 million goodwill impairment charge, which partially reduced the basis of the tax-deductible goodwill. For tax purposes, goodwill from asset acquisitions is tax deductible and amortized over 15 years. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of this indefinitely lived asset (also known as a naked credit). Typically, the resulting deferred tax liability, which is expected to continue to increase over the amortization period, will have an indefinite life. As a result of the Company having indefinite life net operating losses under the recent tax reform legislation, the federal deferred tax liability resulting from the amortization of goodwill was offset against these indefinite federal operating net losses deferred tax assets to the extent allowable prior to 2023. As a result of the goodwill impairment charge in 2023, the entire deferred tax liability was reversed at that time and no additional deferred tax liability was recorded for 2024.

 

 

A reconciliation of the federal statutory income tax rate (21%) to the Company’s effective income tax rate (determined in dollars) for the years ended December 31, 2024 and 2023 is as follows:

 

SCHEDULE OF EFFECTIVE INCOME TAX RATE RECONCILIATION

		Year Ended December 31,
		2024				2023
		($ in thousands)
Federal provision (benefit) at statutory rate		$	1,682			$	(10,298	)
Increase (decrease) in income taxes resulting from:
State tax expense, net of federal benefit			94				7,383
Non-deductible items			30				26
Impact of foreign operations			(132	)			50
Subpart F GILTI inclusion			1,066				804
Stock based compensation			(177	)			18
Goodwill impairment charges			-				5,692
Deferred true-up			(2,708	)			455
Valuation allowance			305				(4,494	)
Total income tax provision (benefit)		$	160			$	(364	)

 

At December 31, 2024 and 2023, the Company did not record any uncertain tax positions based on the technical merits. Therefore, a tabular roll forward was excluded and there has been no accrued interest and penalties. The Company is subject to taxation in the United States, various states, Pakistan and Sri Lanka. As of December 31, 2024, all tax years since 2014 remain open to examination due to the carryover of unused net operating losses and tax credits in the United States by major taxing jurisdictions in which the Company is subject to tax. IT companies in Pakistan are subject to a 0.25% tax deducted at the source on receipts received from foreign sources with no further tax being due. It is the Company’s policy that any assessed penalties and interest on uncertain tax positions would be charged to income tax expense.

 

The Pakistan foreign receipts tax does not have a significant impact on the Company’s effective tax rate as all of its earnings in Pakistan have been fully included in the U.S. federal tax rate reconciliation at 21% for 2024 and 2023. The Pakistan statutory corporate tax rate is 29% before consideration of the aforementioned tax credit and the foreign receipts tax.

 

As of December 31, 2024, the Company has a total federal NOL carry forward of approximately $265 million of which approximately $187 million will expire between 2031 and 2038, and the balance of approximately $78 million has an indefinite life. Out of the total federal NOL carry forward, approximately $237 million is from the CareCloud and Meridian acquisitions and is subject to the federal Section 382 NOL annual usage limitations. The Company has state NOL carry forwards of approximately $211 million, of which $84 million relates to the State of New Jersey. These NOLs expire starting in 2025.

 

The Company has a full valuation allowance on its deferred tax assets in the U.S. which results in there being no U.S. deferred tax assets or liabilities recorded in the consolidated balance sheets at December 31, 2024 and 2023, respectively.