Design Therapeutics, Inc. Income Taxes Disclosure
10. Income Taxes
The Company is subject to taxation in the United States and various state jurisdictions. All of the Company’s tax years are subject to examination by federal and state tax authorities due to the carryforward of unutilized net operating losses and research and development credits. The Company’s policy is to recognize interest and penalties related to income tax matters as tax expense. The Company had no accrued interest or penalties related to income tax matters on its balance sheets at December 31, 2025 or 2024, and has not recognized interest or penalties in its statements of operations and comprehensive loss for the years ended December 31, 2025 and 2024, respectively. Further, the Company is not currently under examination by any federal, state or local tax authority.
At December 31, 2025, the Company had federal and state net operating loss (“NOL”) carryforwards of $145.5 million and $13.1 million, respectively. Federal NOL carryforwards totaling $0.1 million begin to expire in 2037, unless previously utilized. The federal and certain state NOL carryforwards of $145.5 million and $1.5 million, respectively, generated after 2017, may be carried forward indefinitely but can only be utilized to offset 80% of future taxable income. The remaining state NOL carryforwards totaling $11.6 million begin to expire in 2037, unless previously utilized. In addition, the Company has federal and state research and development (“R&D”) credit carryforwards totaling $11.0 million and $4.2 million, respectively. The federal R&D credit carryforwards will begin to expire in 2038 unless previously utilized. The state R&D credit carryforwards do not expire.
Utilization of the Company’s NOL and R&D credit carryforwards may be subject to substantial annual limitations in the event a cumulative ownership change has occurred, or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction, or series of transactions over a three-year period, resulting in an ownership change of more than 50% of the outstanding common stock of a company by certain stockholders or public groups. Such an ownership change may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. The Company completed a study to assess whether an ownership change had occurred from the Company's formation through December 31, 2021. Based upon the study, the Company determined that it had experienced multiple ownership changes during 2020, causing the annual utilization of the NOL and credit carryforwards to be limited. The
Company does not believe any of the NOL and credit carryforwards generated through December 31, 2021 would expire solely as a result of annual limitations on the utilization of those attributes. If ownership changes occurred after December 31, 2021 or occur in the future, the amount of remaining tax attribute carryforwards available to offset taxable income and income tax expense in future years may be restricted or eliminated. If eliminated, the related asset would be removed from deferred tax assets with a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, will not impact the Company’s effective tax rate.
The Company has not recorded a current or deferred tax expense or benefit nor has it paid cash taxes to any jurisdiction for the years ended December 31, 2025 or 2024. The net losses for the years ended December 31, 2025 and 2024 were generated solely in the United States.
Significant components of the Company's net deferred tax assets at December 31, 2025 and 2024 were as follows (in thousands):
|
|
December 31, |
|
|
December 31, |
|
||
Deferred tax assets: |
|
|
|
|
|
|
||
Net operating losses |
|
$ |
31,412 |
|
|
$ |
18,885 |
|
Capitalized research costs |
|
|
19,621 |
|
|
|
20,545 |
|
Research and development credits |
|
|
11,678 |
|
|
|
9,352 |
|
Lease liability |
|
|
326 |
|
|
|
492 |
|
Stock-based compensation |
|
|
3,810 |
|
|
|
3,908 |
|
Other |
|
|
1,026 |
|
|
|
797 |
|
Total gross deferred tax assets |
|
|
67,873 |
|
|
|
53,979 |
|
Valuation allowance |
|
|
(67,327 |
) |
|
|
(53,143 |
) |
Total deferred tax assets |
|
|
546 |
|
|
|
836 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
||
Right of use asset |
|
|
(305 |
) |
|
|
(467 |
) |
Other |
|
|
(241 |
) |
|
|
(369 |
) |
Total deferred tax liabilities |
|
|
(546 |
) |
|
|
(836 |
) |
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
A reconciliation of the Company's income tax expense (benefit) to the amount computed by applying the federal statutory income tax rate for the periods presented were as follows (in thousands):
|
|
Year ended December 31, |
||||||||||||||
|
|
2025 |
|
2024 |
||||||||||||
Income taxes (benefit) at statutory rate: |
|
$ |
(14,656 |
) |
|
21.00 |
|
% |
|
$ |
(10,413 |
) |
|
21.00 |
|
% |
State and local income taxes, net of federal benefit:* |
|
|
(181 |
) |
|
0.26 |
|
% |
|
|
(141 |
) |
|
0.28 |
|
% |
Tax credits: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development credits |
|
|
(1,997 |
) |
|
2.86 |
|
% |
|
|
(2,104 |
) |
|
4.24 |
|
% |
Change in valuation allowance: |
|
|
13,271 |
|
|
(19.02 |
) |
% |
|
|
10,159 |
|
|
(20.49 |
) |
% |
Nontaxable or nondeductible items: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Officer's compensation |
|
|
1,721 |
|
|
(2.47 |
) |
% |
|
|
799 |
|
|
(1.61 |
) |
% |
Stock-based compensation |
|
|
1,381 |
|
|
(1.98 |
) |
% |
|
|
1,310 |
|
|
(2.64 |
) |
% |
Other |
|
|
25 |
|
|
(0.04 |
) |
% |
|
|
(29 |
) |
|
0.06 |
|
% |
Changes in Unrecognized Tax Benefits: |
|
|
474 |
|
|
(0.68 |
) |
% |
|
|
452 |
|
|
(0.91 |
) |
% |
Other, net |
|
|
(38 |
) |
|
0.07 |
|
% |
|
|
(33 |
) |
|
0.07 |
|
% |
|
|
$ |
— |
|
|
0.00 |
|
% |
|
$ |
— |
|
|
0.00 |
|
% |
* State taxes in California comprise the majority (greater than 50 percent) of the tax effect in this category.
The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination by tax authorities. The Company does not expect that there will be a
significant change in the unrecognized tax benefits over the next twelve months. Further, due to the existence of the valuation allowance, future changes in the Company's unrecognized tax benefits will not impact the effective tax rate.
The following table summarizes the changes to the Company's unrecognized tax benefits for the periods presented (in thousands):
|
|
December 31, |
|
|
December 31, |
|
||
Balance at beginning of period |
|
$ |
2,289 |
|
|
$ |
1,799 |
|
Increases (decreases) related to prior year tax positions |
|
|
— |
|
|
|
(3 |
) |
Increases to current year tax positions |
|
|
523 |
|
|
|
493 |
|
Balance at end of period |
|
$ |
2,812 |
|
|
$ |
2,289 |
|
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 9, 2026 | Showing above |
| 2024 | Mar 10, 2025 | |
| 2023 | Mar 19, 2024 | |
| 2022 | Mar 14, 2023 | |
| 2021 | Mar 10, 2022 | |
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.