Equillium, Inc. Income Taxes Disclosure

11. Income Taxes

During the year ended December 31, 2025, the Company did not record any federal or state tax expense. During the year ended December 31, 2024, the Company recorded a current federal and state tax expense of $340,000 and $21,000, respectively. During the years ended December 31, 2025 and 2024, the Company did not record a deferred federal or state income tax expense.

During the year ended December 31, 2025, federal and state income taxes paid, net of refunds, totaled $342,000 and $10,000, respectively.

The Company adopted ASU 2023-09 on a prospective basis beginning with the year ended December 31, 2025. The following is required disclosure pursuant to ASU 2023-09 and reconciles the U.S. federal statutory tax amount and rate to our effective amount and rate for the year ended December 31, 2025 (in thousands, except for percentages):

The Company has established a valuation allowance against its net deferred tax assets due to the uncertainty surrounding the realization of such assets. The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred assets are realizable, the valuation allowance will be reduced. The Company has recorded a full valuation allowance of $54.7 million as of December 31, 2025, as it does not believe it is more likely than not that certain deferred tax assets will be realized primarily due to the generation of pre-tax book losses in the current year, the lack of feasible tax-planning strategies, the limited existing taxable temporary differences, and the subjective nature of forecasting future taxable income into the future. The Company increased its valuation allowance by approximately $3.8 million during the year ended December 31, 2025.

At December 31, 2025, the Company had federal and state tax loss carryforwards of approximately $139.8 million and $92.1 million, respectively. The federal net operating loss carryover includes $139.8 million of net operating losses generated subsequent to 2017. Federal net operating losses, generated after December 31, 2017, carryover indefinitely but the deductibility of such federal net operating losses is limited to 80% of taxable income. The state net operating loss carryforwards, begin to expire in 2038 unless previously utilized. The Company has $5.0 million of Australian net operating loss carryforwards as of December 31, 2025, that are carried forward indefinitely.

At December 31, 2025, the Company had federal and state tax credit carryforwards of approximately $10.6 million and $3.3 million, respectively, after reduction for uncertain tax positions. The Company has not performed a formal research and development credit study with respect to these credits. The federal credits will begin to expire in 2035, if unused, and the state credits carryforward indefinitely.

Pursuant to the Internal Revenue Code of 1986, as amended (IRC), specifically Sections 382 and 383, the Company’s ability to use tax attribute carryforwards to offset future taxable income is limited if the Company experiences a cumulative change in ownership of more than 50% within a three-year testing period. The Company completed an ownership change analysis through December 31, 2024, pursuant to IRC Section 382 and determined that the Company’s ability to offset taxable income in 2024 is not expected to be impacted by ownership changes occurring prior to that date. Due to our estimated U.S. tax loss for the year ended December 31, 2025, we do not expect to utilize tax attribute carryforwards in 2025. If ownership changes within the meaning of IRC Section 382 occur in the future, the amount of remaining tax attribute carryforwards available to offset future taxable income and income tax expense in future years may be significantly restricted or eliminated. Further, the Company's deferred tax assets associated with such tax attributes could be significantly reduced or eliminated upon realization of an ownership change within the meaning of IRC Section 382. If eliminated, the related asset would be removed from the deferred tax asset schedule, with a corresponding reduction in the valuation allowance. Additionally, limitations on the utilization of the Company's tax attribute carryforwards can increase the amount of taxable income and current income tax expense recognized. Due to the existence of the valuation allowance, ownership change limitations that are not significant may not impact the Company's effective tax rate.

The unrecognized tax benefit amounts are reflected in the determination of the Company's deferred tax assets and tax payables. As of December 31, 2025 and 2024, the Company had unrecognized tax benefits totaling $0.6 million, which, if recognized, would affect the Company's effective tax rate.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on the Company's consolidated balance sheet as of December 31, 2025, and has not recognized interest and/or penalties in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2025.

All tax years for both federal and state purposes remain open and subject to examination by tax jurisdictions. The Company is subject to taxation in the United States, various U.S. state jurisdictions and Australia.

During the year ended December 31, 2025, the Company had no income tax expense. During the year ended December 31, 2024, the Company's income tax expense was $0.4 million. The Company’s 2024 income tax expense was primarily attributable to domestic cash tax expense resulting from differences between book and tax treatment of certain items. The Company does not record a deferred tax provision as there is a full valuation allowance offsetting the Company’s net deferred tax assets.

The One Big Beautiful Bill Act (OBBBA) enacted on July 4, 2025, introduced notable changes to the U.S. Internal Revenue Code, including immediate expensing of domestic Section 174 costs while foreign costs will continue to be capitalized and amortized over 15 years. Section 174 costs are expenditures which represent research and development costs that are incident to the development or improvement of a product, process, formula, invention, computer software, or technique. With the enactment of OBBBA, the Company began deducting domestic Section 174 costs in 2025.