Eton Pharmaceuticals, Inc. Income Taxes Disclosure

Note 14 – Income Taxes

 

The provision for income taxes for the Company consists of the following for the years ended December 31, 2025, 2024 and 2023:

 

		Year ended
		December 31,				December 31,				December 31,
		2025				2024				2023
Current:
Federal		$	(16	)		$	24			$	61
State			59				(9	)			186
Total current expense			43				15				247
Deferred:
Federal			—				(223	)			(85	)
State			—				1,150				(31	)
Change in valuation allowance			—				(927	)			116
Total deferred expense			—				—				—
Total provision		$	43			$	15			$	247

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income taxes. The significant components of the Company’s deferred tax assets as of December 31, 2025 and 2024 are as follows:

 

		December 31,				December 31,
		2025				2024
Deferred tax assets:
Net operating loss carryforwards		$	14,089			$	14,145
Stock-based compensation			2,551				2,021
Research & development capitalization			1,286				2,007
Research & development credits			1,438				42
Medicare reserves			2,390				1,767
Accruals and other			2,829				1,011
Total deferred tax assets			24,583				20,993
Valuation allowance			(23,101	)			(20,589	)
Deferred tax assets		$	1,482			$	404
Deferred tax liabilities:
Prepaid expenses		$	(838	)		$	(174	)
IRC 481(a) adjustments			(483	)			—
Deferred consideration discount			(62	)			(182	)
Right-of-use assets			(79	)			(45	)
Other deferred tax liabilities			(20	)			(3	)
Deferred tax liabilities		$	(1,482	)		$	(404	)
Net deferred tax assets (liabilities)		$	—			$	—

 

In assessing the realizability of deferred tax assets, the Company considers all available positive and negative evidence to evaluate whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2025, the Company believes it is more likely than not that the Company's net deferred tax assets would not be realized and continues to record a full valuation allowance on its net deferred tax assets. The Company's valuation allowance represents the amount of tax benefits that are likely to not be realized. 

 

The Company has gross federal net operating losses of $49,697, which can be carried forward indefinitely, and gross state net operating losses of $52,400, which begin to expire in 2035. The Company's federal net operating losses, and certain state net operating losses, are subject to an 80% annual utilization limitation. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited.

 

A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income taxes after the adoption of ASU 2023-09 is as follows:

 

		Year ended December 31, 2025
		Amount				%
U.S federal statutory tax rate		$	(957	)			21.00	%
State and local income taxes (1)
State income tax, net of federal tax benefit			(170	)			3.75	%
Change in valuation allowance			207				(4.54	%)
Change in state tax rate			21				(0.47	%)
Change in uncertain tax position reserve			(22	)			0.48	%
Return to provision related to tax credit study			23				(0.51	%)
Income tax credits
Research and development tax credits			(63	)			1.37	%
Orphan drug tax credits			(391	)			8.58	%
Return to provision related to tax credit study			(741	)			16.25	%
Changes in valuation allowance			2,305				(50.59	%)
Nontaxable or nondeductible items
Section 162(m) limitation			389				(8.53	%)
Stock-based compensation			(424	)			9.30	%
Return to provision adjustments			64				(1.41	%)
Other			9				(0.15	%)
Changes in unrecognized tax benefits			(207	)			4.53	%
Effective tax rate		$	43				(0.94	%)

 

(1) The state jurisdiction that contributes to the majority (greater than 50%) of the tax effect in this category is Tennessee.

A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income before income taxes after the adoption of ASU 2023-09 is as follows:

 

		Year ended
		December 31,				December 31,
		2024				2023
Benefit based on federal statutory rate		$	(800	)		$	(145	)
Stock-based compensation			880				254
Change in state tax rate			814				-
State income tax, net of federal tax benefit			(31	)			(45	)
Section 162(m) limitation			169				-
Other permanent differences			18				299
Research and development credits			(277	)			-
Change in uncertain tax position reserve			382				-
Return to provision			(213	)			-
Change in valuation allowance			(927	)			(116	)
Income tax expense		$	15			$	247

 

The Company recognizes tax benefits from uncertain positions if it is more likely than not that the tax position will be sustained by the tax authority upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. If a tax position meets the more likely than not threshold, the Company measures the tax position as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. A reconciliation of uncertain tax positions at the beginning and end of the years below is as follows:

 

		Year ended
		December 31,				December 31,				December 31,
		2025				2024				2023
Beginning balance		$	382			$	—			$	—
Gross increases (decreases) related to prior year positions			(61	)			243				-
Gross increases (decreases) related to current year positions			113				139				-
Ending balance		$	434			$	382			$	—

 

 

As of December 31, 2025, approximately $434, would reduce the Company’s annual effective tax rate, if recognized. The Company recognizes interest and, if applicable, penalties for any uncertain tax positions. Interest and penalties related to uncertain tax positions are recorded as a component of income tax expense. The Company accrued for interest and penalties associated with unrecognized tax benefits for the years ended December 31, 2025 and 2024 in the amount of $3 and $6, respectively. No interest or penalties associated with unrecognized tax benefits were accrued for in the year ended December 31, 2023.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With the exception of tax attributes created in prior years that may potentially be adjusted, the federal statute of limitations remains open for the 2022 tax year to present and the state statutes of limitations generally remain open for the 2021 tax year to present.

 

The amounts of cash income taxes, net of refunds, paid by the Company during the year ended December 31, 2025 was as follows:

 

Federal		$	—
Tennessee			75
Other states			43
Total net payments (refunds)		$	118

 

The amount of cash income taxes, net of refunds, paid by the Company during the years ended December 31, 2024 and 2023 was $82 and $247, respectively.