CareCloud, Inc. Income Taxes Disclosure

17. INCOME TAXES

 

For the years ended December 31, 2025 and 2024, the Company estimated its income tax provision based upon the annual pre-tax income. Although the Company reported GAAP earnings in 2025 and 2024, it incurred tax losses historically and there is uncertainty regarding future U.S. taxable income, to which the Company believes 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, 2025 and 2024.

 

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 now referred to as Net Controlled Foreign Corporation Tested Income (“NCTI”). For the tax years ended December 31, 2025 and 2024, the net NCTI 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, 2025 and 2024:

 

SCHEDULE OF DEFERRED TAX VALUATION ALLOWANCE

		Year Ended December 31,
		2025				2024
		($ in thousands)
Beginning balance		$	89,664			$	87,597
Current year valuation allowance increase			5,983				2,067
Ending balance		$	95,647			$	89,664

 

The income before provision for income taxes for financial reporting purposes during the years ended December 31, 2025 and 2024 consisted of the following:

 

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

		Year Ended December 31,
		2025				2024
		($ in thousands)
United States		$	10,094			$	7,191
International			903				820
Total		$	10,997			$	8,011

 

The provision for income taxes for the years ended December 31, 2025 and 2024 consisted of the following:

 

SCHEDULE OF COMPONENTS OF INCOME TAX PROVISION

		Year Ended December 31,
		2025				2024
		($ in thousands)
Current:
Federal		$	-			$	-
State			150				120
International			49				40
			199				160
Deferred:
Federal			-				-
State			-				-
International			-				-
			-				-
Total income tax provision		$	199			$	160

 

 

The components of the Company’s deferred income taxes as of December 31, 2025 and 2024 are as follows:

 

SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES

		December 31,				December 31,
		2025				2024 (a)
		($ in thousands)
Deferred tax assets:
Allowance for expected credit losses		$	219			$	213
Deferred revenue			141				103
Property and intangible assets			4,098				3,015
State net operating loss (“NOL”) carryforwards			30,594				20,981
Federal net operating loss (“NOL”) carryforwards			56,836				55,569
Section 163(j) interest limitation			-				1,669
Stock based compensation			-				(173	)
Cumulative balance translation adjustment			1,019				1,015
Section 267 limitation			6				6
Credit carryovers			2,498				2,498
ASC 842 - Lease liability			727				558
Accrued compensation			475				86
Section 174 costs			-				4,996
Valuation allowance			(95,647	)			(89,664	)
Total deferred tax assets			966				872
Deferred tax liabilities:
Prepaid commissions			(221	)			(267	)
Right-of-use assets			(731	)			(559	)
Other			(14	)			(46	)
Total deferred tax liabilities		$	(966	)		$	(872	)

 

(a)	Certain prior period balances have been reclassified to conform to the current period presentation.

 

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. Deferred income tax liabilities represent amounts that will increase income taxes payable 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 at December 31, 2025 and 2024.

 

The income tax paid, net of refunds received, for the years ended December 31, 2025 and 2024 consisted of the following:

 

SCHEDULE OF INCOME TAX PAID NET 

		2025				2024
		Year Ended December 31,
		2025				2024
		($ in thousands)
Federal		$	-			$	-
State			152				118
Local			36				8
International			58				31
Total		$	246			$	157

 

 

A reconciliation of the provision for income taxes to the amount computed by applying the 21% statutory U.S. federal income tax rate to income before income taxes for the year after the adoption of ASU 2023-09 is as follows:

 

Schedule of Effective Income Tax Rate Reconciliation 

		Year Ended December 31, 2025
		Amount				Percent
		($ in thousands)
Provision at U.S. federal statutory rate		$	2,309				21.0	%
State and local income tax, net of federal income tax effect (a)			119				1.1	%
Foreign tax effects:
Pakistan			-				-
Impact of foreign operations			(140	)			(1.3	)%
Effect of cross-border tax laws:
Subpart F GILTI inclusion			827				7.5	%
Nontaxable or nondeductible items			(6	)			(0.1	)%
Changes in valuation allowance			(2,934	)			(26.6	)%
Deferred tax adjustment			24				0.2	%
Provision for income taxes		$	199				1.8	%

 

(a) The states and local jurisdictions that contribute to the majority (greater than 50%) of the effect in this category include New Jersey, California, Texas and Ohio.

 

A reconciliation of the provision for income taxes to the amount computed by applying the 21% statutory U.S. federal income tax rate to income before income taxes for the year prior to the adoption of ASU 2023-09 is as follows:

 

		Year Ended December 31, 2024
		($ in thousands)
Provision at U.S. federal statutory rate		$	1,682
Increase (decrease) in income taxes resulting from:
State tax expense, net of federal benefit			94
Non-deductible items			30
Impact of foreign operations			(132	)
Subpart F GILTI inclusion			1,066
Stock based compensation			(177	)
Deferred tax adjustment			(2,708	)
Changes in valuation allowance			305
Provision for income taxes		$	160

 

At December 31, 2025 and 2024, 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 for the years ended December 31, 2025 and 2024. The Company is subject to taxation in the United States, various states, Pakistan and Sri Lanka. As of December 31, 2025, 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. As of December 31, 2025 and 2024, the Company had no unrecognized tax benefits and did not recognize any interest or penalties.

 

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 2025 and 2024. The Pakistan statutory corporate tax rate is 29% before consideration of the aforementioned tax credit and the foreign receipts tax.

 

As of December 31, 2025, the Company has a total federal NOL carry forward of approximately $271 million of which approximately $186 million will expire between 2030 and 2037, and the balance of approximately $85 million has an indefinite life. At December 31, 2025, the Company had federal research and development credit carryforwards of approximately $3.4 million. 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 $214 million, of which $87 million relates to the State of New Jersey. These NOLs expire starting in 2026.

 

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, 2025 and 2024, respectively.

 

On July 4, 2025, the One Big Beautiful Act (“OBBBA”) was enacted into law. The OBBBA contained several tax changes to certain U.S. corporate tax provisions, including foreign-related tax reporting items. The Company carefully assessed all aspects of the OBBBA and has determined that its impacts are immaterial to its income tax position.