FUEL TECH, INC. Income Taxes Disclosure

3.     INCOME TAXES

 

Within the calculation of the Company’s annual effective tax rate, the Company has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions.  For example, the Company anticipates that the state jurisdictions will continue to determine and announce their conformity to the U.S. Tax Act which could have an impact on the annual effective tax rate.

 

On August 16, 2022, President Biden signed into law the Inflation Reduction Act (IRA) of 2022, which, among other things, imposes a new 15% corporate Alternative Minimum Tax (AMT) based on audited financial statement income ("AFSI") applicable to corporations with a three-year average AFSI over $1 billion. The AMT was effective starting with the 2023 tax year and, if applicable, corporations must pay the greater of the regular corporate income tax or the AMT. Although NOL carryforwards created through the regular corporate income tax system cannot be used to reduce the AMT, financial statement net operating losses can be used to reduce AFSI and the amount of AMT owed. The IRA of 2022 as enacted requires the U.S. Treasury to provide regulations and other guidance necessary to administer the AMT, including further defining allowable adjustments to determine AFSI, which directly impacts the amount of AMT to be paid. Based on interim guidance issued by the U.S. Treasury in late December 2022, the Company was not subject to the AMT in the years 2023 through 2025. Further, the Company believes that it is more likely than not it will not be subject to the AMT beginning 2026. The Company continues to evaluate the impacts of the Inflation Reduction Act of 2022 but does not expect this legislation to have a material impact on the Company's financial statements.

 

For tax years beginning after December 31, 2024, taxpayers can make an election with respect to research and experimental (R&E) expenditures incurred in connection with a trade or business to either currently deduct or defer and amortize such expenditures over a period of not less than 60 months under the One Big Beautiful Bill Act (OBBBA). For tax years beginning before December 31, 2024 and after January 1, 2022, the Tax Cuts and Jobs Act of 2017 (TCJA) required taxpayers to capitalize R&E expenditures with R&E expenditures attributable to US-based research to be amortized over a period of five years and R&E expenditures attributable to research conducted outside of the US to be amortized over a period of 15 years. Further, the statute provided that the definition of R&E expenditures includes amounts paid or incurred in connection with the development of any software.  The Company has recorded a deferred tax asset of $1,920 related to research and experimental expenditures for the year ending December 31, 2025.

 

The U.S. Tax Cuts and Jobs Act of 2017, or the Tax Act, imposed a mandatory transition tax on accumulated foreign earnings as of December 31, 2017 and created a new territorial tax system in which we recognize the tax impact of including certain foreign earnings in U.S. taxable income as a period cost. For the years ended December 31, 2025 and 2024, we incurred income tax expense under the global intangible low-taxed income, or GILTI, provisions and have treated it as a component of income tax expense in the period incurred.

 

The components of loss before taxes for the years ended December 31, are as follows:

 

Origin of loss before taxes		2025				2024
United States		$	(2,268	)		$	(1,740	)
Foreign			(41	)			(126	)
Loss before income taxes		$	(2,309	)		$	(1,866	)

 

Significant components of income tax expense for the years ended December 31, are as follows:

 

		2025				2024
Current:
Federal		$	—			$	—
State			(4	)			(51	)
Foreign			—				(22	)
Total current			(4	)			(73	)
Deferred:
Federal			—				(2	)
State			(11	)			(2	)
Total deferred			(11	)			(4	)
Income tax expense		$	(15	)		$	(77	)

 

ASC 740 requires entities to annually disaggregate the income tax rate reconciliation between the following nine categories by both percentages and reporting currency amounts. A reconciliation between the provision for income taxes calculated at the U.S. federal statutory income tax rate and the consolidated income tax expense in the consolidated statements of operations for the year ended  December 31, 2025 is as follows:

 

		Amount				Percentage
Provision at the U.S. federal statutory rate			(485	)			21.0	%
State and local income taxes, net of federal income tax effect
IL state and local income tax			12				(0.6	)%
All other state and local income tax			3				(0.1	)%
Foreign tax effects, including foreign valuation allowance			9				(0.4	)%
Effect of changes in tax laws or rates enacted in the current period			—				—	%
Effect of cross-border tax laws			(17	)			0.7	%
Tax credits
R&D tax credits			(202	)			8.8	%
Other tax credits			6				(0.3	)%
Changes in valuation allowances (federal only)			612				(26.4	)%
Nontaxable or nondeductible items
Stock compensation			(44	)			1.9	%
Other			26				(1.2	)%
Changes in unrecognized tax benefits			—				—	%
Other adjustments: deferred revenue			73				(3.1	)%
Other adjustments			22				(1.0	)%
Income tax expense			15				(0.7	)%

 

A reconciliation between the provision for income taxes calculated at the U.S. federal statutory income tax rate and the consolidated income tax expense in the consolidated statements of operations for the year ended December 31, 2024 is as follows:

 

		2024
Provision at the U.S. federal statutory rate			21.0	%
State taxes, net of federal benefit			4.9	%
Foreign tax rate differential			0.2	%
Valuation allowance			105.6	%
Chile outside basis differential			(0.8	)%
Accrual to return			2.1	%
Research and development credit			11.2	%
State rate change			0.9	%
Share based compensation			(9.0	)%
Net Operating Loss expiration			(144.3	)%
Other Deferred true up			6.4	%
Other			(2.3	)%
Income tax expense effective rate			(4.1	)%

 

The deferred tax assets and liabilities at December 31 are as follows:

 

		2025				2024
Deferred tax assets:
Stock compensation expense		$	36			$	80
Royalty accruals			9				10
Bad debt allowance			52				51
Net operating loss carryforwards			10,192				9,067
Credit carry-forwards			1,668				1,472
Inventory reserve			157				154
Depreciation			402				433
Research and Development Costs			1,920				2,233
Other			569				399
Total deferred tax assets			15,005				13,899
Deferred tax liabilities:
Goodwill			(353	)			(296	)
Intangible assets			(78	)			(82	)
Total deferred tax liabilities			(431	)			(378	)
Net deferred tax asset before valuation allowance			14,574				13,521
Valuation allowances for deferred tax assets			(14,761	)			(13,697	)
Net deferred tax liability		$	(187	)		$	(176	)

 

The change in the valuation allowance for deferred tax assets for the years ended December 31 is as follows:

 

Year		Balance at January 1				Charged to costs and expenses				(Deductions)/Other				Balance at December 31
2024		$	15,699				(2,002	)			—			$	13,697
2025		$	13,697				1,064				—			$	14,761

 

For the years ended December 31, 2025 and 2024, there were $0 and $0 exercises of stock options, respectively.

 

As required by ASC 740, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

 

The table below sets forth a reconciliation of the beginning and ending amount of unrecognized tax benefit.

 

Year		Balance at January 1				Change in positions taken in a current period				Balance at December 31
202		$	326				144			$	470
2025		$	470				85			$	555

 

 

Income taxes paid (net of refunds) by jurisdiction are as follows:

 

		2025
Federal		$	—
State			11
Foreign			—
Total		$	11

 

Income taxes paid (net of refunds) exceeded 5% of total income taxes paid (net of refunds) in the following jurisdictions:

 

		2025
California		$	1
Louisiana			(1	)
New Jersey			2
Pennsylvania			7
Other			2
Total		$	11

 

 

If upon examination interest and penalties related to unrecognized tax benefits were assessed, they would be included in income tax expense for all periods presented. There were no interest and penalties recognized in income tax expense during the years ended December 31, 2025 and 2024. There were no unrecognized tax benefits as of December 31, 2025 and 2024. There is unrecognized tax benefit of $555 and $470 for the years ended December 31, 2025 and 2024, respectively, that would impact the future effective tax rate, if recognized.  We believe the unrecognized tax benefit will change in the next twelve months, either due to the generation or utilization of research and development credits.  We are unable to estimate the amount of change.  Tax years December 31, 2015 through December 31, 2025 remain open to assessment related to the unrecognized tax benefit.

 

We are subject to taxation in the U.S., various states, and in non-U.S. jurisdictions. Our U.S. income tax returns are primarily subject to examination from 2022 through 2024; however, U.S. tax authorities also have the ability to review prior tax years to the extent loss carryforwards and tax credit carryforwards are utilized. The open years for the non-U.S. tax returns range from 2017 through 2024 based on local statutes.

 

Management periodically estimates our probable tax obligations using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for both federal and state tax issues are included in current liabilities on the consolidated balance sheet.

 

The investment in foreign subsidiaries other than Fuel Tech S.p.A (Chile) and Beijing Fuel Tech is considered to be indefinite in duration and therefore we have not provided a provision for deferred U.S. income taxes on the unremitted earnings from those subsidiaries. A provision has not been established because it is not practicable to determine the amount of unrecognized deferred tax liability for such unremitted foreign earnings and because it is our present intention to reinvest the undistributed earnings indefinitely.

 

As required by ASC 740, a valuation allowance must be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. We have approximately $30,357 of U.S. net operating loss carryforwards available to offset future U.S. taxable income as of  December 31, 2025.  The net operating loss carry-forwards related to tax losses generated in years ending December 31, 2018 and before in the U.S. totaling $8,040 begin to expire in 2036.  Further, we have tax loss carry-forwards of approximately $6,361 available to offset future foreign income in Italy as of December 31, 2025. We have recorded a full valuation allowance against the deferred tax asset because we cannot anticipate when or if this entity will have taxable income sufficient to utilize the net operating losses in the future. There is no expiration of the net operating loss carry-forwards related to tax losses generated in prior years in Italy. Finally, we have tax loss carry-forwards of approximately $1,087 available to offset future foreign income in China as of December 31, 2025. 

 

As of December 31, 2019, the investment in Fuel Tech S.p.A (Chile) was no longer considered to be indefinite and a provision for deferred U.S. income taxes was recorded. As of December 31, 2024, the provision for deferred U.S. income taxes related to the Fuel Tech S.p.A (Chile) investment was $136. As of December 31, 2025, Fuel Tech S.p.A (Chile) was still included in continuing operations. As a result an additional $23 was recorded, adjusting the total consideration to $159. The deferred income taxes associated with this investment are offset by a valuation allowance of ($159).