Heritage Global Inc. Income Taxes Disclosure

Note 13 – Income Taxes

In 2014 the Company recorded a valuation allowance against its deferred tax assets, reducing the carrying value of those assets to zero as a result of historical losses. The following table summarizes the change in the valuation allowance during 2024 and 2025, (in thousands):

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. At December 31, 2024 management reevaluated the Company's performance and forecast for the following five years and concluded that it is more likely than not that the Company would be able to use $24.3 million of the remaining $41.0 million federal net operating loss carry forwards. Based on management's estimate at December 31, 2024, the Company believed it was appropriate to increase the valuation allowance to a total of $3.5 million, recognizing $1.3 million as a discrete expense (tax effected at 21%) at December 31, 2024. As of December 31, 2025, approximately $18.9 million of federal net operating loss carry forwards were unused and expired. The Company recorded discrete expense (tax effected at 21%) of $0.5 million during 2025, reflecting the difference between the Company's valuation allowance estimate at December 31, 2024 and actual results in 2025.

As of December 31, 2025, the Company has aggregate federal net operating loss carry forwards of approximately $15.5 million. These net operating loss carry forwards begin to expire in 2026. The Company expects to utilize all remaining federal net operating loss carry forwards and no longer records a valuation allowance against its deferred tax assets.

The Company’s utilization of restricted net operating tax loss carry forwards against future income for tax purposes is restricted pursuant to the “change in ownership” rules in Section 382 of the Internal Revenue Code. These rules, in general, provide that an ownership change occurs when the percentage shareholdings of 5% direct or indirect stockholders of a loss corporation have, in aggregate, increased by more than 50 percentage points during the immediately preceding three years.

All loss taxation years remain open for audit pending the application of the respective tax losses against income in a subsequent taxation year. In general, the statute of limitations expires three years from the date that a company files a tax return applying prior year tax loss carry forwards against income for tax purposes in the later year. The 2022 through 2024 taxation years remain open for audit.

The Company is subject to state income tax in multiple jurisdictions. In most states, the Company does not have tax loss carry forwards available to shield income attributable to a particular state from being subject to tax in that particular state.

Cash paid by the Company in 2025 related to state income tax (net of refunds received) was $0.7 million. In 2025, the states and local jurisdictions that contribute to the majority (greater than 50%) of the tax effect in this category include California and Illinois. The states and local jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received) are Illinois, where $0.3 million was paid for income taxes, and California where $0.2 million was paid for income taxes. The Company did not incur or pay any foreign income taxes in 2025.