HCW Biologics Inc. Income Taxes Disclosure

14. Income Taxes

The Company did not have a provision for income taxes (current or deferred tax expense) for tax years ended December 31, 2024 and 2025.

A valuation allowance is recorded to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of December 31, 2025, after consideration of all the evidence, both positive and negative, management has determined that a valuation allowance of $27.4 million is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized. During the year ended December 31, 2025, the valuation allowance increased by $1.2 million.

As of December 31, 2024 and 2025, the Company had available federal NOL carryforwards of $62.2 million and $70.0 million, respectively. The Company also has available state NOLs carryforwards of approximately $62.3 million and $70.2 million, as of December 31, 2024 and 2025, respectively. The federal and state NOLs will carryforward indefinitely. The Federal NOLs are available to offset 80% of taxable income. In addition, the Company had federal research and development credits carryforwards of $1.5 million and $1.7 million, as of December 31, 2024 and 2025, respectively, to reduce future federal income taxes, if any. These carryforwards expire from 2038 through 2045 and are subject to review and possible adjustment.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, (the Code), substantial changes in the Company’s ownership may limit the amount of net operating loss and research and development credit carryforwards that could be used annually in the future to offset taxable income. A formal Section 382 study has not been completed to determine if an ownership change has occurred and if its net operating losses are subject to an annual limitation. Such annual limitations could affect the utilization of NOL and tax credit carryforwards in the future.

On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was enacted in the U.S. The OBBBA includes significant provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act of 2017, modifications to the international tax framework, and the restoration of favorable tax treatment for certain business provisions. The provisions in the OBBBA have multiple effective dates, with certain provisions effective in 2025 and others implemented through future years.

One of the most significant provisions for the Company is the repeal of the requirement to capitalize and amortize domestic research and experimental (R&E) expenditures under Section 174 of the Internal Revenue Code. Effective for tax years beginning after December 31, 2024, the Company is permitted to immediately deduct domestic R&E expenditures as incurred for federal income tax purposes. The requirement to amortize foreign R&E expenditures over 15 years remains unchanged. The Company has included the impact of the provisions effective in 2025, including the Section 174 change, in its Consolidated Financial Statements. The impact of these provisions was not material to the Company’s results of operations and financial condition for the year ended December 31, 2025.

The Company’s tax returns remain subject to examination by tax authorities beginning with the tax year ended December 31, 2021. However, due to NOLs and credits carried forward from prior tax years, substantially all tax years may also be subject to examination. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon review by the taxing authorities based on the technical merits. The Company recognizes interest accrued and penalties for unrecognized tax benefits in its tax provision. As of December 31, 2024 and 2025, the Company had not recognized any expense related to uncertain tax position in its statements of operations.