HARMONIC INC. Income Taxes Disclosure

NOTE 11: INCOME TAXES

As described in Note 2, "Summary of Significant Accounting Policies", the Company has elected to prospectively adopt the guidance in ASU 2023-09. The following table is a reconciliation of the U.S. federal statutory rate of 21% to the Company's effective rate for the year ended December 31, 2025 in accordance with guidance in ASU 2023-09.

The company's effective tax rate of 86% for the year ended December 31, 2025 was due primarily to tax expense related to the method change for capitalization of research and development expenses under Section 174 of the Internal Revenue Code, which reduced our Internal Revenue Code Section 250 tax benefits, and the geographical mix of income and losses.

The Company’s effective tax rate of 29% for the year ended December 31, 2024 was due primarily to tax expense related to the geographical mix of income and losses and the resulting income and withholding taxes from operations in the foreign tax jurisdictions, offset by federal tax credits.

The Company’s effective tax rate of (217)% for the year ended December 31, 2023 was due primarily to tax benefit related to the release of the valuation allowance against U.S. Federal and certain state deferred tax assets due to improved historical earnings and projected earnings.

The Company operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. The Company’s effective income tax rate differs from the U.S. federal statutory rate primarily due to geographical mix of income and losses, non-deductible stock-based compensation, and the resulting income and withholding taxes from operations in the foreign tax jurisdictions. The Company’s effective income tax rate may be affected by changes in its interpretations of tax laws and tax agreements in any given jurisdiction, changes in geographical mix of income and expense, and changes in management's assessment of matters such as the ability to realize deferred tax assets, as well as one-time discrete items.

The Company's valuation allowance as of December 31, 2025, was lower compared to 2024, primarily due to a release of valuation allowance on the net operating loss (“NOL”) for Switzerland, partially offset by an increase related to newly generated California R&D credits.

Management regularly assesses the ability to realize deferred tax assets recorded based upon the weight of available evidence, including such factors as recent earnings history and expected future taxable income on a jurisdiction-by-jurisdiction basis. In 2023, the Company determined that deferred tax assets in the U.S federal and certain state jurisdictions would be realizable and released the valuation allowance against those assets accordingly. In the event that the Company changes its determination as to the amount of realizable deferred tax assets, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

As of December 31, 2025, the Company had $70 million, $6.3 million, and $24.9 million, of federal, foreign, and U.S. state NOL carryforwards, respectively. The federal NOLs will carryforward indefinitely. Certain foreign NOLs expire beginning in 2026, if not utilized, while the majority of the foreign NOLs carryforward indefinitely. Certain U.S states NOLs carryforward expires at various dates beginning in 2030 if not utilized.

As of December 31, 2025, the Company had U.S. federal and California state tax credit carryforwards of approximate $4.9 million and $37.1 million, respectively. If not utilized, the U.S. federal tax credit carryforwards will begin to expire in 2031, while the California tax credit carryforward will not expire.

In the event the Company experiences an ownership change within the meaning of Section 382 of the Internal Revenue Code (“IRC”), the Company’s ability to utilize U.S. net operating losses, tax credits and other tax attributes may be limited.

The Company applies the provisions of the applicable accounting guidance regarding accounting for uncertainty in income taxes, which require application of a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits the recognition of a tax benefit measured at the largest amount of such tax benefit that, in the Company’s judgment, is more than fifty percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions to be recognized in earnings in the period in which such determination is made. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of December 31, 2025, the Company had $13.8 million of unrecognized future tax benefits, including interest and penalties. Of these, $5.6 million would favorably impact the effective tax rate in future periods if recognized, and $8.2 million will have no or minimal impact on the effective tax rate in future periods if recognized due to a valuation allowance on such unrecognized tax benefits.

The Company recognizes interest and penalties related to unrecognized tax positions in income tax expenses on the Consolidated Statements of Operations. The net interest and penalties charges recorded for the years ended December 31, 2023 through 2025, were not material.

The 2022 through 2024 tax years generally remain subject to examination by U.S. federal and most state tax authorities. Net operating losses generated on a tax return basis by the Company for the 2015 to 2020 tax years and research and development credits for 2011 to 2024 tax years remain open to examination. In addition, the Company remains subject to income tax examination for several other jurisdictions, including in Switzerland for years after 2019, Israel for years after 2019, and France for years after 2023.

During the year ended December 31, 2025, the Company paid $10.5 million in federal income taxes. The amounts paid in state and foreign income taxes, net of refunds received, were $1.6 million and $0.6 million, respectively for the same period.