Crexendo, Inc. Income Taxes Disclosure

15. Income Taxes

The Income (loss) before income taxes consisted of the following for the years ended December 31, 2025 and 2024 (in thousands):

The income tax benefit/(provision) consisted of the following for the years ended December 31, 2025 and 2024 (in thousands):

The income tax provision attributable to income before income tax benefit for the years ended December 31, 2025 and 2024 differed from the amounts computed by applying the U.S. federal statutory tax rate of 21%, as a result of the following (in thousands):

As of December 31, 2025 and 2024, significant components of net deferred income tax assets and liabilities were as follows (in thousands):

As of December 31, 2025, we had NOL and research credit carry-forwards for U.S. federal income tax reporting purposes of approximately $27,770 and $0, respectively. $8,939 of the NOLs will begin to expire in 2034 through 2037, and the remaining $18,831 of the NOLs will not expire. A valuation allowance of $7,687 and $5,417 was recorded against our gross deferred tax asset balance as of December 31, 2025 and 2024, respectively.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the evidence available, it is more-likely-than-not that such assets will not be realized. In making the assessment under the more-likely-than-not standard, appropriate consideration must be given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods by jurisdiction, unitary versus stand-alone state tax filings, our experience with loss carryforwards expiring unutilized, and all tax planning alternatives that may be available. As of December 31, 2025, management reviewed the weight of all the positive and negative evidence available. Management reviewed positive evidence such as three years of cumulative pretax income in the U.S. federal tax jurisdiction, and projections of future pretax income and the duration of statutory carry-forward periods and negative evidence such as the impact of future acquisitions on our cumulative pretax net income in the U.S. federal tax jurisdiction. As of December 31, 2025 the Company has a cumulative pretax income for the three-year lookback, excluding the gain on the sale of property and equipment, which is considered significant objectively verifiable negative evidence. Management also evaluated projections of future pretax income and the duration of statutory carry-forward periods to determine if the NOL carryforwards could be utilized in whole or in part before they expire unutilized. In our forecast and projections of future income, we also consider the impact of probable future acquisitions, and the impact additional intangible asset amortization expenses will have on our future pretax income.  Forecasts and projections of future income are inherently subjective and therefore generally are given less weight, based on the extent to which the assumptions can be objectively verified based on historical experience. Although historical trends utilized in our projections are objectively verifiable, we assigned less weight to this positive evidence given the subjective nature of assumptions in projections and the unknown impact of the additional intangible asset amortization expense will have in future periods from the acquisition closed subsequent to the year ended December 31, 2025, see Note 21.  Management reviewed negative evidence related to experience of credits and loss carryforwards expiring unutilized, and determined that although negative evidence exists, it was not significant evidence, as the current loss carryforwards do not begin to expire until 2034 and therefore risk is minimal. After reviewing the weight of the positive and negative evidence, management determined that the positive evidence was not sufficient enough to overcome the negative evidence of potentially returning to a cumulative pretax loss position for the three-year lookback in future periods as a result of additional intangible asset amortization expense from the business combination completed subsequent to year ended December 31, 2025. Therefore, management determined that it is more likely than not that deferred tax assets of $7,687 are realizable. Therefore, a valuation allowance of $7,687 was recorded against our gross deferred tax asset balance as of December 31, 2025.

We also have state NOL and research and development credit carryforwards of approximately $39,513 and $0, which expire on specified dates as set forth in the rules of the various states to which the carryforwards relate. The company has recorded a valuation allowance of $0 and $19 against the research and development credit carryforwards as of December 31, 2025 and 2024, respectively.

Accounting guidance clarifies the accounting for uncertain tax positions and requires companies to recognize the impact of a tax position in their financial statements, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Although we believe our estimates are reasonable, there can be no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our historical income tax provisions and accruals. Such a difference could have a material impact on our income tax provision and operating results in the period in which it makes such determination.

The aggregate changes in the balance of unrecognized tax benefits during the years ended December 31, 2025 and 2024 were as follows (in thousands):

Estimated interest and penalties related to the underpayment or late payment of income taxes are classified as a component of income tax provision in the consolidated statements of operations. There were no accrued interest and penalties as of December 31, 2025 and 2024, respectively.

Our U.S. federal income tax returns for fiscal 2022 through 2025 are open tax years. We also file in various states, with few exceptions, we are no longer subject to state income tax examinations by tax authorities for years prior to fiscal 2019.

The Company paid income taxes for the years ended December 31, 2025 and 2026 as follows (in thousands):

The Company paid income taxes (net of refunds) exceeding five percent of total income tax paid (net of refunds) in the following jurisdictions during the years ended December 31, 2025 and 2024 (in thousands):