NOTE 10 – INCOME TAXES

For the years ended December 31, 2025 and 2024, income from continuing operations before taxes consisted of amounts related to U.S. operations and income associated with the Company’s foreign operations. The geographical breakdown of the Company’s income (loss) from continuing operations before income tax expense (benefit) was as follows (in thousands):


	Year Ended December 31,
	2025			2024
Domestic	$	988		$	1,274
International		(3,844	)		1,710
Income (loss) before income tax expense	$	(2,856	)	$	2,984

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


	Year Ended December 31,
	2025			2024
Current tax expense:
Federal	$	(268	)	$	1,271
Foreign		282			(1,107	)
State		366			584
Total current		380			748
Deferred tax expense (benefit):
Federal		(617	)		(1,078	)
Foreign		1,101			480
State		41			(180	)
Total deferred tax expense:		525			(778	)
Total income tax expense (benefit)	$	905		$	(30	)

Tax rate reconciliation

The following table presents a reconciliation of the federal statutory rate to the Company’s effective tax rate:


	Year Ended December 31, 2025
	Amount			%
US Federal Statutory Income Tax Rate	$	(600	)		21.0	%
State income taxes, net of federal effect(1)		334			-11.7	%
Tax credits
Research credits		(784	)		27.5	%
Nontaxable and nondeductible Items, net
Meals & Entertainment		133			-4.7	%
Transaction Costs		210			-7.4	%
Foreign Taxes		(78	)		2.7	%
Capital Gain		876			-30.7	%
Stock Comp (Windfall)		41			-1.4	%
367a Gain		63			-2.2	%
Goodwill Impairment		191			-6.7	%
Other Nontaxable and non-deductible items		10			-0.4	%
Return to provision and other true ups		(1,674	)		58.6	%
Other		(2	)		0.1	%
Foreign tax effects
Canada
Rate differential		32			-1.1	%
Payable true up		362			-12.7	%
Other		2			-0.1	%
Withholding		914			-32.0	%
Future withholding		(183	)		6.4	%
Germany
Rate differential		(10	)		0.4	%
Trade tax		81			-2.8	%
Netherlands
Rate differential		(27	)		0.9	%
Other		(81	)		2.8	%
United Kingdom
Rate differential		(196	)		6.9	%
Nontaxable and nondeductible Items, net
Patent Box Deduction		(78	)		2.7	%
Other		7			-0.2	%
Research credits		(16	)		0.6	%
Change in valuation allowance		1,299			-45.5	%
Other		15			-0.5	%
Kuwait
Branch income tax		64			-2.2	%
Effective tax rate	$	905			-31.7	%

(1) State taxes in Texas represented the majority (greater than 50 percent) of the tax effect in this category.

The following table presents a reconciliation of the federal statutory rate to the Company’s effective tax rate in accordance with the guidance prior to the adoption of ASU 2023-09, Improvements to Income Tax Disclosure:


	December 31,
	2024
U.S. federal tax benefit at statutory rate		21.0	%
State taxes, net of federal benefit		12.7	%
Permanent differences		22.7	%
Permanent differences related to foreign items		-5.8	%
Transfer pricing		1.2	%
Foreign rate differential		1.4	%
Foreign taxes		-10.4	%
Valuation allowance		-0.3	%
Credits		-12.1	%
Income taxes deferred adjustment		27.0	%
Income taxes payable adjustment		-58.8	%
Other		0.4	%
Effective tax rate		-1.0	%

Income taxes paid (net of refunds)

The following table presents income taxes paid for the years ended December 31, 2025 and 2024 (in thousands):


	Year Ended December 31,
	2025		2024
Income taxes paid (net of refunds):
Federal	$	—	$	2,663
State:
New Mexico		—		175
Texas		495		435
Louisiana		70		22
Other		62		90
Total State		627		722
Foreign
Canada		797		—
Total cash paid for income tax	$	1,424	$	3,385

Significant components of deferred taxes

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2025 and 2024 are presented below (in thousands):


	Year Ended December 31,
	2025			2024
Deferred tax assets
Net operating loss carryforward	$	8,213		$	3,488
Allowance for credit losses		296			321
Share-based compensation		2,262			1,800
Bonus accrual		151			70
Inventory		200			220
Intangible assets		—			1,815
Federal credits		784			3,252
Other		6,073			2,681
Gross deferred tax assets		17,979			13,647
Valuation allowance		(4,228	)		(3,019	)
Net deferred tax assets		13,751			10,628
Deferred tax liabilities
Depreciation on property, plant, and equipment		(10,750	)		(10,902	)
Withholding tax on unremitted earnings		(247	)		(431	)
Intangible assets		(4,277	)		—
Other		(5,643	)		(5,221	)
Deferred tax liabilities		(20,917	)		(16,554	)
Net deferred liabilities	$	(7,167	)	$	(5,926	)

At December 31, 2025 and 2024, the Company had federal net operating loss carryforwards of approximately $2.8 million and nil, respectively, which may be carried forward indefinitely and state and local net operating loss carryforwards of approximately $0.6 million and $7.0 million, respectively, which expire at various dates.

The utilization of the Company’s net operating losses may be subject to a limitation due to the “change in ownership provisions” under Section 382 of the Internal Revenue Code and similar state and foreign provisions. Such limitations may result in the expiration of the net operating loss carryforwards before their utilization.

The Company is subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions as well as Canada. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company’s tax years remain open for examination by all tax authorities since inception and carryover attributes remain open to adjustment by the U.S. and state authorities.

On July 4th, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted in the U.S. The OBBBA includes significant provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act, modifications to the international tax framework and restoration of favorable tax treatment for certain business provisions. The legislation has multiple effective dates, with certain provisions effective in 2025 and others implemented through 2027. The Company incorporated these provisions effective during the quarter, and they had no material impact on our consolidated financial statements for the year ended December 31, 2025.

Historical Timeline

Fiscal Year	Filed
2025	Mar 6, 2026	Showing above
2024	Mar 14, 2025

2023	Mar 28, 2024

2022	Mar 21, 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.

Drilling Tools International Corp Income Taxes Disclosure

Historical Timeline

About Income Taxes Disclosures

Other Available Disclosures