GAXOS.AI INC. Income Taxes Disclosure

NOTE 9 – INCOME TAXES

 

The Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The deferred tax asset on December 31, 2025 and 2024 consists of net operating loss carryforwards and the deferred tax asset on December 31, 2024 includes mandatory capitalization of research and development cost for tax purposes pursuant to Section 174, as revised by the Tax Cuts and Jobs Act (“TCJA”). The TCJA amended Section 174 relating to the federal tax treatment of research or experimental expenditures paid or incurred during the taxable year. The new Section 174 rules required taxpayers to capitalize and amortize specified research and experimental expenditures, including software development, over a period of five years (attributable to domestic research) or 15 years (attributable to foreign research).

On July 4, 2025, OBBBA was enacted, which included among other provisions the restoration of immediate expensing of domestic research and experimental (“R&E”) expenditures under Section 174. Pursuant to the OBBBA’s transition rules, the Company elected to expense all unamortized domestic R&E costs previously capitalized between 2022 and 2024. As the Company maintains a valuation allowance against its net deferred tax assets, including NOLs, this election resulted in no change to tax expense for the year ended December 31, 2025.

 

Net deferred tax assets has been fully offset by a valuation allowance because of the uncertainty of the attainment of future taxable income. 

 

As of December 31, 2025 and 2024, components of deferred tax assets and liabilities are as follows:

 

		December 31, 2025				December 31, 2024
Net operating loss carryforward		$	2,607,616			$	1,407,458
Research and development			506,973				618,007
Total deferred tax assets			3,114,589				2,025,465
Valuation allowance			(3,114,589	)			(2,025,465	)
Net Deferred Tax Assets		$	-			$	-

 

A reconciliation of the effective tax rate with the statutory Federal income tax rate was as follows for the years ended December 31, 2025 and 2024:

 

		For the Year ended December 31, 2025 ($)				For the Year ended December 31, 2025 (%)				For the Year ended December 31, 2024 ($)				For the Year ended December 31, 2024 (%)
Federal tax benefit at statutory rate		$	(988,490	)			(21.0	)%		$	(516,812	)			(21.0	)%
State tax benefit, net of Federal tax benefit			(241,709	)			(5.1	)%			(126,373	)			(5.1	)%
Non-deductible expenses			30,041				0.7	%			31,216				0.9	%
Change in valuation allowance			1,200,158				25.4	%			611,969				25.2	%
Effective tax rate		$	-				0	%		$	-				0	%

 

As of December 31, 2025, the Company had approximately $9,977,488 in net operating loss carry forwards for federal income tax purposes of which $5,385,337 may be carried forward indefinitely subject to annual usage limitations of 80% of taxable income. Generally, these can be carried forward and applied against future taxable income at the tax rate applicable at that time. The Company is currently using a 26.135% effective tax rate for its projected available net operating loss carry-forward.

 

In accordance with FASB ASC 740 “Income Taxes”, valuation allowances are provided against deferred tax assets, if based on the weight of available evidence, some or all of the deferred tax assets may or will not be realized. The Company has evaluated its ability to realize some or all of the deferred tax assets on its balance sheet for the coming year and has established a valuation allowance in the amount of $3,114,589 as of December 31, 2025 due to the uncertainty of generating taxable income. The valuation allowance increased in 2025 by $1,089,124.

 

The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2025, 2024 and 2023 Corporate Income Tax Returns are subject to Internal Revenue Service examination.