Hyperscale Data, Inc. Income Taxes Disclosure

24. INCOME TAXES

 

The following is a geographical breakdown of income/loss from continuing operations before the provision for income tax, for the years ended December 31, 2025 and 2024:

Schedule of income loss before the provision for income tax
		2025				2024
Pre-tax loss
U.S. Federal		$	(66,932,000	)		$	(58,979,000	)
Foreign			1,638,000				(2,724,000	)
Total		$	(65,294,000	)		$	(61,703,000	)

 

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

Schedule of deferred tax assets
		2025				2024
Deferred tax asset:
Allowance for doubtful accounts		$	726,000			$	502,000
Unrealized losses			16,479,000				14,603,000
Obsolete inventory			-				-
Stock compensation			4,313,000				4,192,000
Other carryforwards			-				-
Net operating loss carryforwards			81,673,000				55,001,000
Lease liability			731,000				790,000
Impairment			32,925,000				32,626,000
Accrued expenses			834,000				1,823,000
Interest expense			17,897,000				16,293,000
Outside basis difference			3,822,000				3,325,000
Intangible assets, net			-				9,000
Other			963,000				1,563,000
Total deferred tax asset			160,363,000				130,727,000
Deferred tax liability:
Right-of-use assets			(1,812,000	)			(734,000	)
Fixed assets, net			(19,260,000	)			(15,514,000	)
Total deferred income tax liabilities			(21,072,000	)			(16,248,000	)
Net deferred income tax assets			139,291,000				114,479,000
Valuation allowance		$	(139,291,000	)		$	(114,479,000	)
Deferred tax asset (liability), net		$	-			$	-

 

At December 31, 2025, the Company had federal net operating loss carryforwards (“NOLs”) for income tax purposes of approximately $300.8 million related to the years after December 31, 2017 that do not have an expiration under current tax law and $8.1 million related to the years before January 1, 2018 subject to expiration after application of limitation set forth in Section 382 of the Internal Revenue Code (“§382”). The Company had state NOLs for income tax purposes of approximately $342.2 million as of December 31, 2025. The state NOLs may be used to offset future taxable income and will begin to expire in 2029, unless previously utilized. In accordance with §382, future utilization of the Company’s NOLs is subject to an annual limitation as a result of ownership changes that occurred previously. The Company also has foreign net operating loss carryovers of approximately $3.2 million which may be carried forward indefinitely.

 

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not some portion or all deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax assets, projected future taxable income and tax planning strategies in making this assessment. After consideration of all positive and negative evidence, including the Company’s generation of NOLs in current and prior periods, there is substantial doubt regarding the Company’s ability to utilize its deferred tax assets, therefore, the Company recorded a full valuation allowance. For the year ended December 31, 2025, the valuation allowance increased by $24.7 million.

 

The net income tax provision on continuing operations for the years ended December 31, 2025 and 2024 consisted of the following:

Schedule of reconciliation of income tax attributable to operations
		2025				2024
Current
U.S. Federal		$	32,000			$	51,000
U.S. State			221,000				5,000
Foreign			-				-
Total current provision			253,000				56,000
Deferred
U.S. Federal			-				-
U.S. State			-				-
Foreign			-				-
Total deferred provision			-				-
Total provision for income taxes		$	253,000			$	56,000

 

A reconciliation of the provision for income taxes to the amount computed by applying the 21% statutory U.S. federal income tax rate to income before income taxes after the adoption of ASU 2023-09 is as follows:

Schedule of federal income tax rate
		For the Year Ended December 31, 2025				Percent
Current
U.S. Federal statutory tax rate		$	(13,712,000	)			21.0	%
State and local income taxes, net of federal income tax effect (1)			235,000				-0.4	%
Effect of cross-border tax laws			386,000				-0.6	%
Change in valuation allowance			21,400,000				-32.8	%
Nontaxable / Nondeductible Items
Section 162(m)			269,000				-0.4	%
Derivative liability			870,000				-1.3	%
Gain (loss) on deconsolidation of subsidiary			(9,810,000	)			15.0	%
Other			363,000				-0.6	%
Worldwide changes in unrecognized tax benefits			-				-
Other
Deconsolidated adjustments			576,000				-0.9	%
Deferred tax true-ups			(362,000	)			0.6	%
Foreign tax effects
Other foreign jurisdictions			38,000				0.1	%
Total deferred tax provision			-				-
Total provision for income taxes		$	253,000				-0.4	%

 

(1)

The states and local jurisdictions that contribute to the majority (greater than 50%) of the tax effect in this category include California.

 

A reconciliation of the provision for income taxes to the amount computed by applying the 21% statutory U.S. federal income tax rate to income before income taxes for years prior to the adoption of ASU 2023-09 is as follows:

 

Schedule of effective income tax rate reconciliation
		2024				2023
Expected federal income tax benefit			21.0	%			21.0	%
State taxes net of federal benefit			8.2	%			-1.5	%
Effect of change in valuation allowance			79.6	%			-19.1	%
Permanent differences			2.6	%			1.6	%
Goodwill impairment			-				-2.2	%
IRC Section 162(m) compensation limitation			-				-0.0	%
Excess tax benefit - windfall/(shortfall)			-				-0.3	%
Deconsolidation adjustments			-110.5	%			-
Foreign rate differential			0.1	%			-
Other			-1.1	%			0.5	%
Income tax benefit			-0.1	%			-0.1	%

 

The amounts of cash income taxes paid by the Company were as follows:

Schedule of cash income taxes
		For the Year Ended December 31, 2025
Federal		$	-
State and Local
California			7,000
Other			5,200
			12,200
Foreign			-
Other			-
Income taxes, net of amounts refunded		$	12,200

 

The Company accounts for uncertain tax positions in accordance with ASC 740-10-25. ASC 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. To the extent that the final tax outcome of these matters is different than the amount recorded, such differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. ASC 740-10-25 also requires management to evaluate tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions that more likely than not would not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated tax positions taken by the Company and has concluded that as of December 31, 2025 and 2024, there are no uncertain tax positions taken, or expected to be taken, that would require recognition of a liability that would require disclosure in the financial statements.

 

In general, the Company’s statute of limitations remains open for various taxable years, in various U.S. federal, U.S. state and foreign jurisdictions. However, if and when the Company claims net operating loss carryforwards against future taxable income, those losses may be examined by taxing authorities. The Company will perform an analysis to determine the effect, if any, of these loss limitations rules on the NOL carryforward balances. Earnings in all foreign jurisdictions are permanently reinvested.

 

The Organization for Economic Co-operation and Development (“OECD”) has introduced a framework to implement a global minimum corporate tax of 15%, referred to as Pillar Two. Many aspects of Pillar Two were effective beginning in calendar year 2024 and other aspects became effective beginning in calendar year 2025. While it is uncertain whether the U.S. will adopt Pillar Two, certain countries in which the Company operates have adopted legislation and other countries are in the process of introducing legislation to implement Pillar Two. While the Company does not expect Pillar Two to have a material impact on its effective tax rate, the Company’s analysis is ongoing as the OECD releases additional guidance and countries implement additional legislation.

 

The One Big Beautiful Bill Act (“OBBB Act”) was enacted on July 4, 2025, in the United States. The OBBB Act included several significant provisions, including re-establishing a 100% bonus depreciation deduction, re-establishing rules in calculating business interest expense limitations pursuant to Internal Revenue Code §163(j), changing the calculation of international tax inclusions, and removing the capitalization requirements for domestic research or experimental expenditures paid or incurred in tax years beginning after December 31, 2024. Management has considered applicable tax impacts of the OBBB Act within the 2025 financial statements.