CXApp Inc. Income Taxes Disclosure

NOTE 13 – Income Tax

 

The Company’s net deferred tax assets/(liabilities) consisted of the effects of temporary differences attributable to the following:

 

Schedule of company’s net deferred tax assets
(In thousands)		December 31, 2025				December 31, 2024
Organizational costs/startup expenses		$	1,382			$	1,432
Deferred revenue			10				23
Section 174 - software development cost			2,409				2,188
Stock based compensation			157				453
Other accruals			118				16
ROU Liability			57				-
Other			-				2
Net operating loss carryforward			6,591				4,894
Total deferred tax asset			10,724				9,008
Less: Valuation allowance			(7,649	)			(5,498	)
Deferred tax asset, net of valuation allowance		$	3,075			$	3,510

 

		December 31, 2025				December 31, 2024
Intangibles		$	(3,013	)		$	(3,508	)
Property, plant & equipment			(6	)			(2	)
Other			(56	)			-
Total deferred tax liabilities			(3,075	)			(3,510	)
Net Deferred Tax Asset (Liability)		$	-			$	-

 

 

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

 

Schedule of income tax provision
		December 31, 2025				December 31, 2024
Federal
Current		$	-			$	-
Deferred			-				(681	)
State and Local
Current			(46	)			2
Deferred			-				44
Income tax benefit		$	(46	)		$	(635	)

 

As of December 31, 2025, the Company has U.S. federal and state net operating loss carryovers of approximately $16,418 thousand and $12,266 thousand respectively.

 

Under the CARES Act, the federal net operating loss carryforwards that originated after 2017 will have an indefinite life and may be used to offset 100% of a future year’s taxable income until 2020. For tax year beginning January 1, 2021, federal net operating losses may be used to offset 80% of a future year’s taxable income. The state net operating losses carryforward for between 15-20 years and begin to expire in 2039.

 

The Company’s federal and state income tax returns prior to December 31, 2021 and 2020, respectively, are closed. The Company’s foreign subsidiary’s tax returns prior to 2018 are also closed. Management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realization 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 temporary differences representing net future deductible amounts become deductible. Deferred income tax is presented under noncurrent liabilities and in other assets in the consolidated balance sheets as of December 31, 2025, and 2024.

 

In assessing the realization of the deferred tax assets, management considers whether it is more likely than not that some portion of all 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 temporary differences representing net future deductible amounts become deductible. Management considers the projected future taxable income and availability of taxable temporary differences in making this assessment. After consideration of all the information available, management believes that positive evidence does not outweighs the negative evidence and thus it is more likely than not that the benefit from deferred tax asset may not be realized in foreseeable future. In view of this, valuation allowance has been created as at December 31, 2025 and December 31, 2024.

 

The Company’s policy for recording interest and penalties associated with unrecognized tax benefits is to record such interest and penalties as interest expense and as a component of income tax expense. There were no amounts accrued for interest or penalties for the years ended December 31, 2025 and December 31, 2024. Management does not expect any material changes in its unrecognized tax benefits in the next year.

 

A reconciliation of the federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2025, and 2024 are as follows:

 

Schedule of reconciliation of the federal income tax rate to the Company’s effective tax rate
		Year ended December 31, 2025				Year ended December 31, 2024
Statutory federal income tax rate			21.00	%			21.00	%
Incentive stock options			-	%			-	%
Change in fair value of derivative warrant liabilities			-	%			(3.52	)%
Effects of changes in tax laws or rates enacted in the current period			(0.20	)%			-	%
Effects of cross-border tax laws			(4.42	)%			-	%
Permanent difference			-	%			(2.04	)%
Cancellation of debt income			-	%			-	%
Rate differential on foreign earnings			4.42	%			0.44	%
State taxes, net of federal tax benefit			(0.01	)%			(0.24	)%
Current federal tax true-up			-	%			(1.27	)%
Nontaxable or deductible items			(1.30	)%			-	%
Payable true-up			0.35	%			-	%
Other			(0.76	)%			-	%
Valuation allowance			(18.74	)%			(11.20	)%
Income tax benefit			0.34	%			3.17	%

 

The Company files income tax returns in the U.S. federal jurisdiction in various state and local jurisdictions as well as in foreign jurisdictions and is subject to examination by the various taxing authorities.

 

The Company recorded an income tax benefit/expense of approximately $46 thousand and $635 thousand for the years ended December 31, 2025 and December 31, 2024, respectively.

 

The effective tax rate for the years ended December 31, 2025 and December 31, 2024 was 0.34% and 3.17%, respectively. The income tax benefit for the year ended December 31, 2025 is a result of the reversal of deferred tax liability attributable to acquired intangible assets from the Business Combination. The company believes that positive evidence does not outweighs the negative evidence and thus it is more likely than not that the benefit from deferred tax asset may not be realized in foreseeable future. In view of this, valuation allowance has been created as of December 31, 2025.

 

Uncertain Tax Positions

 

The Company records tax positions as liabilities and adjusts these liabilities when its judgment changes because of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current estimate of the recognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of December 31, 2025, and December 31, 2024 the Company has not recorded any liabilities for uncertain tax positions in its consolidated financial statements.

 

The Company records interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2025 and December 31, 2024, no accrued interest or penalties are recorded on the balance sheets, and the Company has not recorded any related expenses. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examinations by federal, foreign, and state and local jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years currently open under statute range from 2021 to the present in the U.S. and from 2020 to the present in its foreign operations. To the extent the Company has tax attribute carryforwards, the tax years in which those attributes were generated may remain subject to adjustment upon examination by the Internal Revenue Service, state and local tax authorities, and non-U.S. tax authorities—including those in Canada and the Philippines—if and when the attributes are utilized in a future period.

Following the acquisition, the Company transitioned its Canadian operations from a client-facing business to a cost center. A formal transfer pricing study between the U.S. and Canada has not been performed, and as such, there may be a potential for a Canadian tax liability. However, based on currently available information, management believes that any such liability would not be material to the financial statements as a whole

 

On July 4, 2025, the One Big Beautiful Bill (“OBBB”) was enacted into law. Among its provisions, the reinstatement of full expensing for research and development expenditures is applicable to the Company. While further regulatory guidance is anticipated regarding the treatment of prior periods, the Company expects that the previously recognized deferred tax asset related to Section 174 will be reversed, resulting in an increase in net operating loss carryforwards. The Company is currently evaluating potential other impacts of the passage of OBBB.