CREATIVE REALITIES, INC. Income Taxes Disclosure

NOTE 13: INCOME TAXES

 

The composition of (loss) income before income tax expense for the years ended December 31, 2025 and 2024 was as follows:

 

		For the Years Ended December 31,
		2025				2024
Federal		$	(10,490	)		$	(2,757	)
Foreign			3,380				(645	)
(Loss) income before income taxes		$	(7,110	)		$	(3,402	)

 

Income tax expense consisted of the following:

 

		For the Years Ended December 31,
		2025				2024
Tax provision summary:
State income tax expense (benefit)		$	27			$	46
Deferred tax expense (benefit) – federal			(39	)			41
Deferred tax expense (benefit) – state			(12	)			19
Deferred tax expense (benefit) – foreign			1,190				-
Tax expense		$	1,166			$	106

 

The income tax expense includes federal and state income taxes currently payable and those deferred or prepaid because of temporary differences between financial statement and tax bases of assets and liabilities. The Company records income taxes under the liability method. Under this method, deferred income taxes are recognized for the estimated future tax effects of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws.

 

A reconciliation (reflective of the provisions of ASU 2023-09) of the statutory income tax rate to the effective income tax rates as a percentage of income before income taxes is as follows:

 

		For the Years Ended December 31,
		2025								2024
		Amount				Percent				Amount				Percent
US Federal Statutory Tax Rate		$	(1,493	)			21.0	%		$	(732	)			21.0	%
State and local income taxes, net of federal benefit*			12				-0.2	%			51				-1.5	%
Foreign Tax Effects
Canada:
Statutory tax rate difference			186				-2.6	%			(35	)			1.0	%
Changes in valuation allowance			299				-4.2	%			454				-13.0	%
Prior year return-to-provision adjustments			-				0.0	%			(285	)			8.2	%
Other			(5	)			0.1	%			-				0.0	%
Changes in valuation allowance			1,182				-16.6	%			(967	)			27.8	%
Effect of Cross-Border Tax Laws:
Global Intangible Low-Taxed Income			487				-6.9	%			-				0.0	%
Nontaxable or nondeductible items
Gain on contingent consideration			(1,003	)			14.1	%			-				0.0	%
Fair value of contingent consideration			-				0.0	%			338				-9.7	%
Original issue discount			-				0.0	%			45				-1.3	%
Other			11				-0.1	%			11				-0.3	%
Other:
Expiration of net operating loss carryforwards			1,470				-20.7	%			851				-24.4	%
Federal return-to-provision adjustments			20				-0.3	%			375				-10.8	%
Total		$	1,166				-16.4	%		$	106				-3.0	%

 

*State taxes in Texas in 2024 and 2025 made up the majority (greater than 50%) of the tax effect in this category.

 

Cash paid for income taxes, net of refunds received, consisted of the following:

 

		For the Years Ended December 31,
		2025				2024
US Federal Taxes		$	-			$	-
Foreign Taxes			-				-
State and Local Taxes:
Minnesota			-				4
New Jersey			4				-
New York			16				10
Texas			32				28
Other States			4				10
		$	56			$	52

 

The net deferred tax assets and liabilities recognized in the accompanying consolidated balance sheets, determined using the income tax rate applicable to each period, consisted of the following:

 

		December 31,
		2025				2024
Deferred tax assets:
Reserves		$	129			$	239
Property and equipment			18				41
Accrued expenses			150				325
Non-qualified stock options			2,088				1,645
Net foreign carryforwards			10,097				4,148
US net operating loss and contribution carryforwards			38,086				37,437
Foreign credits			328				-
Section 163(j) interest expense carryforward			1,052				651
Research and development credits			2,312				2,312
Right-of-use liability			6,285				212
Acquisition costs			461				-
Section 174			-				1,962
Total deferred tax assets			61,006				48,972
Valuation allowance			(48,851	)			(43,654	)
Total deferred tax assets, net			12,155				5,318
Deferred tax liabilities:
Right-of-use asset			(6,517	)			(207	)
Intangible assets			(9,179	)			(5,244	)
Total deferred tax liabilities			(15,696	)			(5,451	)
Deferred tax liabilities, net		$	(3,541	)		$	(133	)

 

The Company’s income tax provision for the year ended December 31, 2025 was significantly impacted by the acquisition of CDM on November 7, 2025. The acquisition resulted in the recognition of deferred tax assets and liabilities related to the fair value adjustments of acquired assets and assumed liabilities, including identifiable intangible assets.

 

The Company recorded net deferred tax liabilities of $2,215 related to the acquisition, primarily attributable to book-tax basis differences in acquired intangible assets, partially offset by deferred tax assets related to net operating loss carryforwards.

 

In connection with the acquisition, the Company recognized a $3,550 increase in valuation allowance against certain acquired deferred tax assets, primarily related to foreign net operating losses for which realization is not considered more likely than not.

 

As of December 31, 2025, the Company had no reserves recorded as a liability for unrecognized tax benefits for U.S. federal and state tax jurisdictions. There were no unrecognized tax benefits as of December 31, 2025 that, if recognized, would affect the tax rate. It is the Company’s policy to accrue interest and penalties related to liabilities for income tax contingencies in the provision for income taxes.

 

The acquisition of CDM did not result in the recognition of any uncertain tax positions and, as of December 31, 2025, the Company had no accrued interest or penalties related to uncertain tax positions.

 

The Company’s deferred tax assets are primarily related to net federal, state, and foreign operating loss carryforwards (“NOLs”). As of December 31, 2025, the Company has federal net operating loss carryforwards of $36,923, of which, $13,817 have an indefinite carryforward period but are subject to limitation on usage such that they cannot be utilized to offset more than 80% of taxable income in a given tax year. The Company has foreign net operating loss carryforwards of $10,097 which have a twenty-year carryforward period, federal contribution carryforwards of $13 which have a five-year carryforward period, and state net operating loss carryforwards of $1,150 expiring between 2026 and 2045. The federal statute of limitations remains open for tax years 2022 through 2024 and state tax jurisdictions generally have statutes of limitations open for tax years 2021 through 2024.

 

We have substantial NOLs that are limited in usage by IRC Section 382. IRC Section 382 generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership within a statutory testing period. As a result of the acquisition, the Company acquired foreign net operating loss carryforwards which are subject to limitation under the Canadian tax regime. A valuation allowance has been recorded against a portion of these acquired foreign losses due to uncertainty regarding realizability.

 

We have performed a preliminary analysis of the annual NOL carryforwards and limitations that are available to be used against taxable income. Based on the history of losses of the Company, there continues to be a partial valuation allowance against the net deferred tax assets of the Company.