CASTLE BIOSCIENCES INCCSTL
CASTLE BIOSCIENCES INC Income Taxes Disclosure
Income Taxes
The components of income tax (benefit) expense are as follows (in thousands):
| Years Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current tax expense | |||||||||||||||||
| U.S. federal | $ | (254) | $ | 663 | $ | — | |||||||||||
| State and local | 1,126 | 1,255 | 324 | ||||||||||||||
| Total current | 872 | 1,918 | 324 | ||||||||||||||
| Deferred tax benefit | |||||||||||||||||
| U.S. federal | (6,081) | 1,622 | 33 | ||||||||||||||
| State and local | (147) | (221) | (256) | ||||||||||||||
| Total deferred | (6,228) | 1,401 | (223) | ||||||||||||||
Total income tax (benefit) expense | $ | (5,356) | $ | 3,319 | $ | 101 | |||||||||||
The differences between income taxes expected at the U.S. federal statutory rate (21%) and the reported income tax benefit, following the adoption of ASU 2023-09, are summarized as follows (in thousands):
Year Ended December 31, 2025 | |||||||||||
$ | % | ||||||||||
Pre-tax loss | $ | (29,514) | |||||||||
| U.S. federal statutory income tax rate | (6,199) | 21.0 | % | ||||||||
| State and local income taxes, net of federal effect | 742 | (2.5) | % | ||||||||
| Tax credits: | |||||||||||
| R&D tax credit | (2,078) | 7.0 | % | ||||||||
Non-taxable and non-deductible items: | |||||||||||
| Non-deductible meals and entertainment | 2,032 | (6.9) | % | ||||||||
| Stock-based compensation | 2,374 | (8.0) | % | ||||||||
| Other | 119 | (0.4) | % | ||||||||
| Change in valuation allowance | (2,401) | 8.1 | % | ||||||||
| Other | 55 | (0.2) | % | ||||||||
Income tax benefit | $ | (5,356) | 18.1 | % | |||||||
The differences between income taxes expected at the U.S. federal statutory rate (21%) and the reported income tax expense, prior to the adoption of ASU 2023-09, are summarized as follows (in thousands):
| Years Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Pre-tax income (loss) | $ | 21,564 | $ | (57,365) | |||||||
| U.S. federal taxes at statutory rate | 4,528 | (12,046) | |||||||||
| State income taxes | 683 | 925 | |||||||||
| R&D tax credit | (3,381) | (2,186) | |||||||||
| Change in valuation allowance | (4,469) | 5,207 | |||||||||
| Stock-based compensation | 1,528 | 4,323 | |||||||||
| Non-deductible officers’ compensation | 2,651 | 2,377 | |||||||||
| Permanent differences | 1,712 | 1,474 | |||||||||
| Other | 67 | 27 | |||||||||
Income tax expense | $ | 3,319 | $ | 101 | |||||||
Income taxes paid (net of refunds) that exceed 5% of total income taxes paid (net of refunds) by jurisdictions following the adoption of ASU 2023-09, are as follows (in thousands):
Year Ended December 31, 2025 | |||||
| U.S. federal | $ | 1,172 | |||
State and local | |||||
| Michigan | 127 | ||||
Pennsylvania | 244 | ||||
| Virginia | (138) | ||||
| Other | 196 | ||||
| Total income taxes paid, net of refunds received | $ | 1,601 | |||
Significant components of deferred tax assets and liabilities are as follows (in thousands):
| As of December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| NOL carryforwards | $ | 33,831 | $ | 31,782 | |||||||
| Accrued liabilities | 10,048 | 7,301 | |||||||||
| Capitalized R&D costs | 8,925 | 15,485 | |||||||||
| Lease liabilities | 7,050 | 3,774 | |||||||||
| Stock-based compensation | 6,464 | 5,128 | |||||||||
| R&D tax credit | 13,002 | 9,747 | |||||||||
| Total deferred tax assets | 79,320 | 73,217 | |||||||||
| Less valuation allowance | (48,662) | (50,536) | |||||||||
| Deferred tax assets, net | $ | 30,658 | $ | 22,681 | |||||||
| Deferred tax liabilities: | |||||||||||
| Prepaid expenses | $ | (213) | $ | (185) | |||||||
| Property and equipment | (8,457) | (6,374) | |||||||||
| Intangible assets | (18,032) | (14,986) | |||||||||
| ROU assets | (5,654) | (2,558) | |||||||||
| Other | (637) | (185) | |||||||||
| Total deferred tax liabilities | (32,993) | (24,288) | |||||||||
| Net deferred tax liability | $ | (2,335) | $ | (1,607) | |||||||
On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted into law. The OBBBA includes a broad range of tax reform provisions affecting businesses, including reinstatement of permanent expensing of domestic research and development costs, higher EBITDA cap on the deduction for interest expense and 100% bonus depreciation. We will benefit from the reinstatement of permanent expensing of domestic research and development costs and 100% bonus depreciation.
As of December 31, 2025, we had federal NOL carryforwards of approximately $134.8 million of which $52.9 million will begin to expire in 2032 if not utilized to offset taxable income, and $81.9 million may be carried forward indefinitely. Future changes in ownership, as defined by Section 382 of the IRC, could limit the amount of NOL carryforwards used in any one year. As of December 31, 2025, we had state NOL carryforwards of approximately $113.0 million, which begin to expire in 2030 if not utilized to offset state taxable income. As of December 31, 2025, we had $13.0 million of R&D tax credit carryforwards, including $1.4 million of state credits. These credits begin to expire in 2037 if not utilized to offset federal income tax liabilities.
In general, under Section 382 and 383 of the IRC, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs and certain tax credits, to offset future taxable income and tax. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders changes by more than 50 percentage points over such stockholders’ lowest percentage of ownership during the testing period (generally three years). We performed a Section 382 analysis from inception through the year ended December 31, 2025 and concluded we had experienced an ownership change in 2011, 2014 and 2020. These changes in ownership did not result in the expiration of any NOLs or R&D credits. However, future changes in ownership may further limit our ability to utilize our NOL carryforwards and R&D tax credit carryforwards. We have also performed Section 382 analyses with respect to the NOLs we obtained in our acquisitions of Cernostics, AltheaDx and Previse. Based on changes in ownership that have occurred, $36.3 million of NOLs relating to Cernostics and AltheaDx and zero relating to Previse are expected to expire unused as a result of Section 382 limitations. With respect to Previse, we acquired $2.3 million of NOLs that can be carried forward indefinitely to offset future taxable income.
As of December 31, 2025 and 2024, we placed a valuation allowance of $48.7 million and $50.5 million, respectively, against our net deferred tax asset balance, as we have determined that it is more likely than not that they will not be realized. The valuation allowance as of December 31, 2025 and 2024 was primarily related to NOL and R&D tax credit carryforwards that more likely than not, will expire unused.
The net change in total valuation allowance for each of the years ended December 31, 2025, 2024 and 2023 was a decrease of $1.9 million, a decrease of $4.5 million, and an increase of $5.1 million, respectively.
We assessed whether we had any significant uncertain tax positions related to open tax years and concluded there were none. Accordingly, no reserve for uncertain tax positions has been recorded as of December 31, 2025 and 2024. We are generally no longer subject to tax examinations for U.S. federal income tax purposes for fiscal years prior to 2022 and fiscal years prior to 2021 for multiple state jurisdictions. However, since we have been in an NOL position since 2008 until recently, our 2008 to 2021 federal tax returns and our 2008 to 2020 state tax returns are potentially subject to examination adjustments to the extent of those NOL carryforwards.
We are currently under IRS audit for fiscal year 2023. We believe our provisions for income taxes is adequate; however, any assessment may affect our results of operations and cash flows.
No material amounts of tax-related interest or penalties were recorded during the years ended December 31, 2025, 2024 and 2023.
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.