Empery Digital Inc. Income Taxes Disclosure

NOTE 13 – INCOME TAXES

 

Deferred taxes are determined by applying the provisions of enacted tax laws and rates for the jurisdictions in which the Company operates to the estimated future tax effects of the differences between the tax basis of assets and liabilities and their reported amounts in the Company’s financial statements. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.

 

Due to losses since inception and for all periods presented, no income tax benefit or expense has been recognized as a full valuation allowance has been established for any tax benefit that would have been recognized for the loss in any period presented.

 

The components of income tax expense (benefit) for the year ended December 31, 2024 and 2023 are as follows:

Schedule of components of income tax expense (benefit)
		2024				2023
Expected federal income tax benefit at statutory rate		$	(9,557,165	)		$	9,464,954
Non-deductible expenses			3,594,293				1,183,767
Write off of deferred tax asset for stock-based compensation			3,235,732				–
Return to provision and true ups			345,266				108,959
Change in valuation allowance			2,381,874				(10,757,680	)
Income tax benefit		$	–			$	–

 

The non-deductible expenses for the year ended December 31, 2024 includes the loss on the extinguishment of the Convertible Notes of $345,998, interest expense on the Convertible Notes of $66,116, and loss recognized on the November 2023 Warrants classified as liabilities of $3,101,361, and other non-deductible expenses of $80,818. Due to the impact of the reverse stock split in June 2024 on the adjusted number of outstanding options and exercise prices, the Company concluded that it was a remote possibility that any options will be exercised and therefore wrote off the deferred tax asset and related valuation allowance for stock-based compensation.

 

Significant components of the Company’s deferred tax assets and liabilities at December 31, 2024 and December 31, 2023 are as follows:

Schedule of deferred tax assets and liabilities
		December 31, 2024				December 31, 2023
Deferred tax assets
Net operating losses		$	20,932,619			$	15,468,757
Debt basis difference			–				5,121,397
Depreciation and amortization			1,562,438				1,701,768
Research & development credit			1,099,535				1,099,535
Lease liability			162,786				246,704
Stock-based compensation			–				3,235,732
Inventory			–				152,749
Accrued expenses			94,561				66,909
Capital loss carryover			178,442				176,950
Dealer rebates			12,052				459,713
Vendor settlements and reserves			689,253				–
Other			29,502				21,828
Total			24,761,188				27,752,042
Valuation allowance			(24,431,492	)			(27,171,016	)
Net deferred tax asset			329,696				581,026
Deferred tax liabilities
Prepaid expenses			(174,457	)			(342,421	)
Right-of-use assets			(155,239	)			(238,605	)
Total net deferred taxes deferred tax liabilities		$	–			$	–

 

Management currently believes that since the Company has a history of losses it is more likely than not that the deferred tax regarding the loss carry forwards and other temporary differences will not be realized in the foreseeable future. The utilization of the Company’s net operating losses and credit carryovers may be subject to limitation due to the “change in ownership provisions” under Section 382 of the Internal Revenue Code. The Company’s cumulative net operating loss carry forward of $99.7 million as of December 31, 2024, may be limited in future years depending on future taxable income in any given fiscal year. The net operating losses can be carried forward indefinitely.

 

The Company has recorded no liability for income taxes associated with unrecognized tax benefits at the date of adoption and has not recorded any liability associated with unrecognized tax benefits. Accordingly, the Company has not recorded any interest or penalty in regard to any unrecognized benefit.