Citi Trends Inc Income Taxes Disclosure

5. Income Taxes

Income tax (expense) benefit consists of the following (in thousands):

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Income tax (expense) benefit computed using the federal statutory rate is reconciled to the reported income tax (expense) benefit as follows (in thousands):

* The only state that contributes to the majority (greater than 50%) of the tax effect in this category is Louisiana.

Deferred tax assets and deferred tax liabilities consist of the following (in thousands):

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The following table summarizes (receipts) payments of income taxes in fiscal 2025 (in thousands):

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The Company files income tax returns in U.S. federal and state jurisdictions where it does business and is subject to examinations by the Internal Revenue Service (“IRS”) and other taxing authorities. With a few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to fiscal 2021. The Company reviews and assesses uncertain tax positions, if any, with recognition and measurement of tax benefit based on a “more-likely-than-not” standard with respect to the ultimate outcome, regardless of whether this assessment is favorable or unfavorable. As of January 31, 2026, there were no material benefits taken on the Company’s income tax returns that do not qualify for financial statement recognition. If a tax position does not meet the minimum statutory threshold to avoid payment of penalties and interest, a company is required to recognize an expense for the amount of the interest and penalty in the period in which the company claims or expects to claim the position on its tax return. For financial statement purposes, companies are allowed to elect whether to classify such charges as either income tax expense or another expense classification. Should such expense be incurred in the future, the Company will classify such interest as a component of interest expense and penalties as a component of income tax expense.

At January 31, 2026, the Company had income tax net operating loss (“NOL”) carryforwards for federal purposes of $58.5 million (gross) and for state purposes of $2.5 million (tax effected), which are available to offset future state taxable income. The federal tax NOL carryforwards have an indefinite carryforward, but are limited to offsetting 80% of taxable income in future years. State NOL rules vary by jurisdiction with respect to carryforward periods, utilization limits, and eligibility requirements. Depending on the state, carryforward periods generally range from 5 to 20 years, while certain states conform to federal rules and allow indefinite carryforwards for post-2017 NOLs. Utilization of these NOLs may be subject to annual limitations under Section 382 of the Internal Revenue Code (“IRC”) if the Company experiences an “ownership change,” as defined in the IRC. An ownership change generally occurs when the aggregate stock ownership of certain significant shareholders increases by more than 50 percentage points over a rolling three‑year period. The Company has performed an analysis under Section 382 and determined that prior ownership changes have resulted in certain annual limitations on the future use of its NOLs. These limitations may restrict the Company’s ability to offset future taxable income with pre‑change NOLs, potentially resulting in increased cash tax liabilities in future periods. Management will continue to monitor equity transactions and other events that could trigger additional ownership changes and further limit the Company’s ability to utilize its NOLs.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible and income tax credits may be utilized, management believes sufficient negative evidence exists to require a valuation allowance. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal, resulting in no deferred tax asset balance being recognized. In accordance with ASC 740 “Accounting for Income Taxes” (“ASC 740”), the Company evaluates deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. ASC 740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. The analysis that the Company prepared to determine the valuation allowance required significant judgment and assumptions regarding future market conditions, as well as forecasts for profits, taxable income, and taxable income by jurisdiction. Due to the sensitivity of the analysis, changes to the assumptions in subsequent periods could have a material effect on the valuation allowance. At January 31, 2026 and February 1, 2025, the Company had a full valuation allowance on its deferred tax assets. Based on an evaluation in accordance with the accounting standards, as of January 31, 2026, the valuation allowance established against the entire net deferred tax asset totaled $15.4 million.

The effective income tax rate for fiscal 2025, 2024 and 2023 included the recognition of benefits arising from various federal and state tax credits. Under current IRS and state income tax regulations, these credits may be carried back for one year or carried forward for periods up to 20 years. The income tax benefit included $0.0 million, $0.0 million, and $2.2 million related to such credits in each of fiscal 2025, 2024 and 2023, respectively. The credits generated for fiscal year 2025 and fiscal year 2024 were recorded with a full valuation allowance.