ESS Tech, Inc.GWH
ESS Tech, Inc. Income Taxes Disclosure
INCOME TAXES
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. The significant components of deferred tax assets and liabilities are as follows (in thousands):
| As of December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Deferred tax assets: | |||||||||||
| Net operating losses | $ | 62,906 | $ | 46,616 | |||||||
| Tax credit carryforward | 1,783 | 1,454 | |||||||||
| Equity compensation | 827 | 1,560 | |||||||||
| Capitalized research and development expenses | 16,646 | 19,644 | |||||||||
| Inventory reserve | 4,247 | 3,159 | |||||||||
| Deferred revenue | 4,611 | 1,002 | |||||||||
| Other | 2,394 | 2,761 | |||||||||
| Total deferred tax assets | 93,414 | 76,196 | |||||||||
| Valuation allowance | (93,009) | (75,590) | |||||||||
| Deferred tax assets, net of valuation allowance | 405 | 606 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Right-of-use assets | (384) | (606) | |||||||||
| Intangible Assets | (21) | — | |||||||||
| Net deferred tax | $ | — | $ | — | |||||||
ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Because of the Company’s history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely and, accordingly, has provided a valuation allowance for fiscal years 2024 and 2023. The valuation allowance increased by $17.4 million during the year ended December 31, 2024.
As of December 31, 2024, the Company has federal and state net operating loss carryforwards of $235.6 million and $235.5 million, respectively. Federal net operating losses generated prior to 2018 will start to expire in 2032. Federal net operating losses generated after 2017 do not expire. The state net operating losses will begin to expire in 2027. The Company also has federal and state research and development tax credit carryforwards totaling $3.5 million and $28 thousand, respectively. The federal research and development credit carryforwards begin to expire in 2039, unless previously utilized. The state research and development credit carryforwards do not expire.
The effective tax rate of the Company’s provision for income taxes differs from the federal statutory rate as follows:
Years Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Federal statutory tax rate | 21.0 | % | 21.0 | % | |||||||
| State tax, net of federal tax benefit | 1.6 | 6.3 | |||||||||
| Stock compensation | (2.0) | (1.9) | |||||||||
| Non-deductible officer compensation | (0.8) | 0.8 | |||||||||
| Permanent differences | (0.1) | (0.1) | |||||||||
| Research and development tax credits | 0.5 | 0.5 | |||||||||
| Other | — | 1.0 | |||||||||
| Valuation allowance | (20.2) | (27.6) | |||||||||
| Effective tax rate | — | % | — | % | |||||||
The changes in the Company's uncertain tax positions are summarized as follows (in thousands):
Balance as of December 31, 2022 | $ | 905 | |||
| Additions related to prior year | 170 | ||||
| Additions related to current year | 382 | ||||
Balance as of December 31, 2023 | 1,457 | ||||
| Additions related to prior year | (68) | ||||
| Additions related to current year | 397 | ||||
Balance as of December 31, 2024 | $ | 1,786 | |||
During both the years ended December 31, 2024 and 2023, the Company recognized an uncertain tax position of $0.4 million, related to a reduction of the research and development credit deferred tax asset. Unrecognized tax benefits may change during the next twelve months for items that arise in the ordinary course of business. The Company does not expect a material change to its unrecognized tax benefits over the next twelve months that would have an adverse effect on its operating results.
The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company had no accrued interest or penalties related to uncertain tax positions as of 2024 and 2023.
The Company files federal and certain state income tax returns, which provide varying statutes of limitations on assessments. However, because of net operating loss carryforwards, substantially all tax years since inception remain open to federal and state tax examination.
Utilization of net operating losses and research and development credit carryforwards may be subject to annual limitations due to ownership changes that have occurred or that could occur in the future, as required by Sections 382 and 383 of the Code, as well as similar state provisions. These ownership changes may limit the amount of net operating losses and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an "ownership change" as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of outstanding stock of a company by certain stockholders. Due to the existence of the valuation allowance, limitations created by past ownership changes, if any, will not impact its effective tax rate.
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About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.