EMPIRE PETROLEUM CORP Income Taxes Disclosure

Note 11 – Income Taxes

 

The following table represents the current and deferred income tax provisions:

 

		For the Years Ended December 31,
		2024				2023
Current		$	—			$	(132,192	)
Deferred			—				—
Income tax provision		$	—			$	(132,192	)

 

 

 

In the event that an entity has an “ownership change” (as defined in Section 382 of the Internal Revenue Code of 1986, as amended (“IRC”), an entity’s federal net operating loss carryforwards (“NOLs”) generated prior to an ownership change would be subject to annual limitations, which could defer or eliminate the Company’s ability to utilize these tax losses against future taxable income. Generally, an “ownership change” occurs if one or more stockholders, each of whom owns 5% or more in value of a corporation’s stock, increase their aggregate percentage ownership by more than 50% over the lowest percentage of stock owned by those stockholders at any time during the preceding three-year period. A full Section 382 analysis was prepared in 2024 and it was determined that our NOLs were subject to limitations under IRC Section 382. The Company's ability to use NOLs and other tax attributes to reduce taxable income and income taxes could be materially impacted by a future IRC 382 ownership change. Future transactions involving the Company's stock including those outside of the Company's control could cause an IRC Section 382 ownership change resulting in a limitation on tax attributes currently not limited and a more restrictive limitation on tax attributes currently subject to the previous IRC 382 limitation.

At December 31, 2024, the Company had approximately $35.8 million of federal NOLs generated in prior years available to offset against future taxable income, net of NOLs expected to expire unused due to IRC Section 382 limitations. Of the $35.8 million NOLs, approximately $35.4 million relate to periods after 2017 and have an indefinite life. Additionally, approximately $0.5 million will begin to expire between 2024-2037 if not used. Approximately $2.4 million of the NOLs were limited as of December 31, 2024, due to previous ownership changes.

 

Deferred tax assets and liabilities are the result of temporary differences between the financial statement carrying values and the tax basis of assets and liabilities. The Company’s net tax position is as follows:

 

		As of December 31,
		2024				2023
Deferred tax assets:
Loss carry-forwards		$	9,248,840			$	6,269,503
Stock option grants			2,527,263				2,022,184
Asset retirement obligation			7,954,720				7,433,670
Other			784,505				526,873
Total deferred tax assets			20,515,328				16,252,230
Deferred tax liabilities:
Oil and gas properties			(7,863,169	)			(7,327,620	)
Other property and equipment			(62,125	)			(123,915	)
Financial Derivatives			—				(104,956	)
Lease liabilities			(15,281	)			(25,133	)
Total deferred tax liabilities			(7,940,575	)			(7,581,624	)
Net deferred tax asset before valuation allowance			12,574,753				8,670,606
Valuation allowance			(12,574,753	)			(8,670,606	)
Net deferred taxes		$	—			$	—

 

 

Utilization of the Company’s loss carryforwards is dependent on realizing taxable income. The Company’s recorded valuation allowances of approximately $12.6 million and $8.7 million as of December 31, 2024 and 2023, respectively, are due to the uncertainty related to its ability to utilize some of its deferred income tax assets, primarily consisting of net operating loss carryforwards prior to expiration or the limitation under Section 382 as discussed above.

 

For 2024 and 2023, our effective tax rates were 0% and 1%, respectively. Other than the full year of 2022, Empire has generated net operating losses since inception, which would normally reflect a tax benefit in the consolidated statements of operations and a deferred asset on the consolidated balance sheets. However, because of the current uncertainty as to Empire’s ability to achieve sustained profitability, a full valuation reserve has been established that offsets the amount of any tax benefit available for each period presented in the consolidated statements of operations.

 

The following table presents a reconciliation of its income tax (benefit) provision and effective income tax rate to the U.S. statutory income tax rate: 

Schedule of reconciliation of effective income tax rate 

		For the Years Ended December 31,
		2024								2023
(Benefit) provision at statutory rate		$	(3,401,578	)			21.0%			$	(2,646,378	)			21.0%
State Taxes (net of federal impact)			(733,390	)			4.5%				(598,191	)			4.7%
Nondeductible Expenses			(119,525	)			0.7%				31,037				-0.2%
Return to Accrual			35,686				-0.2%				(72,448	)			0.6%
Derivative Liability, Promissory Note Conversion			314,660				-1.9%				—				0.0%
NOLs Expected to Expire Unused Due to Section 382 Limitation			—				0.0%				1,877,230				-14.9%
Valuation Allowance			3,904,147				-24.1%				1,276,558				-10.1%
Income tax (benefit) provision		$	—				0.0%			$	(132,192	)			1.0%

 

 

The Company has evaluated all tax positions for which the statute of limitations remains open and believes that the material positions taken would more likely than not be sustained by examination. Therefore, at December 31, 2024, the Company has not established any reserves for, nor recorded any unrecognized benefits related to uncertain tax positions.

 

The Company’s only taxing jurisdiction is the United States. The Company’s tax years 2021 to present remain open for federal examination. Additionally, tax years 2004 through 2020 remain subject to examination for the purpose of determining the amount of federal NOL and other carryforwards. The number of years open for state tax audits varies, depending on the state, but is generally from three to five years.