Canton Strategic Holdings, Inc. Income Taxes Disclosure

Note 5 – Income Taxes

 

The Company does not have any significant current income taxes due because of the losses generated in each year.

 

Deferred income taxes represent the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. The Company’s deferred tax assets relate primarily to its net operating loss carryforwards and other balance sheet basis differences. In accordance with FASB ASC 740, the Company recorded a valuation allowance to fully offset the gross deferred tax asset because it is not more likely than not that the Company will realize future benefits associated with these deferred tax assets at December 31, 2024 and 2023. The valuation allowance increased by approximately $3.5 million and $2.8 million for the years ended December 31, 2024 and 2023, respectively.

 

The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2023 and 2022 were as follows:

 Schedule of Significant Components of Company’s Deferred Tax Assets

Deferred tax asset (liabilities) related to:		2024				2023
		December 31,
Deferred tax asset (liabilities) related to:		2024				2023
Federal net operating loss carryforward		$	4,264,000			$	3,017,000
State net operating loss carryforward			1,444,000				1,021,000
Capitalized costs			1,957,000				1,261,000
Acquired in-process research and development			1,027,000				319,000
Research and development credit			382,000				243,000
Stock compensation			904,000				733,000
Accrued expenses and other			211,000				84,000
Total deferred tax assets			10,189,000				6,678,000
Valuation allowance			(10,189,000	)			(6,678,000	)
Deferred tax asset, net of valuation allowance		$	-			$	-

 

The income tax benefit for the years ended December 31, 2024 and 2023 differ from the amounts computed by applying the U.S. federal income tax rate of 21% to loss before income tax benefit as a result of non-deductible expenses, tax credits generated, and increases in the Company’s valuation allowance.

 Schedule of Effective Income Tax Expense

		2024				2023
		For the years ended December 31,
		2024				2023
Income tax benefit at the federal statutory rate		$	(2,550,000	)		$	(1,957,000	)
Permanent differences and other			30,000				34,000
State income taxes			(853,000	)			(661,000	)
Research and development credit			(216,000	)			(238,000	)
Other			78,000				45,000
Change in valuation allowance			3,511,000				2,777,000
Effective income tax expense		$	-			$	-

 

A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of the available evidence, both positive and negative, the Company determined that valuation allowances of approximately $10.2 million and $6.7 million at December 31, 2024 and 2023, respectively, were necessary to reduce the deferred tax assets to the amount that will more likely than not be realized.

 

At December 31, 2024 and 2023, the Company had available net operating loss carryforwards of approximately $20.3 million and $14.4 million, respectively, for federal income tax purposes, all of which were generated after 2017 and can be carried forward indefinitely under the Tax Cuts and Jobs Act. At December 31, 2024 and 2023, the Company had approximately $382,000 and $243,000 of federal research and development (“R&D”) tax credit carryforwards. If not utilized, the federal R&D credits will begin to expire in 2038. The Company also had $20.3 million and $14.9 million of state net operating losses that will begin to expire in 2037.

 

 

Sections 382 and 383 of the Internal Revenue Code, and similar state regulations, contain provisions that may limit the NOL carryforwards available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% over a three-year period, the amount of the NOL carryforwards that the Company may utilize in any one year may be limited. Although the Company has not undertaken a formal analysis, it is likely that such an ownership change occurred during 2021.

 

The Tax Cuts and Jobs Act of 2017 (“TCJA”) has modified the IRC 174 expenses related to research and development for the tax years beginning after December 31, 2021. Under the TCJA, the Company must now capitalize the expenditures related to research and development activities and amortize over five years for U.S. activities and 15 years for non-U.S. activities using a mid-year convention. Therefore, the capitalization of research and development costs in accordance with IRC 174 results in a gross deferred tax asset of $6,961,000.