HighPeak Energy, Inc. Income Taxes Disclosure

NOTE 13. Income Taxes

 

Income Tax Expense

 

The following table presents the Company’s income tax expense (in thousands):

 

		Year Ended December 31,
		2025				2024				2023
Current income tax (benefit) expense:
Federal		$	(17	)		$	52			$	—
State			(16	)			469				—
Total current income tax (benefit) expense			(33	)			521				—
Deferred income tax expense:
Federal			6,167				33,945				63,002
State			1,071				1,585				2,903
Deferred income tax expense			7,238				35,330				65,905
Income tax expense		$	7,205			$	35,851			$	65,905

 

The income tax expense differed from the amounts computed by applying the U.S. federal income tax rate to earnings before income taxes as a result of the following (in thousands, except rate):

 

		Year Ended December 31,
		2025								2024								2023
Income tax expense at U.S. federal statutory rate		$	5,495				21	%		$	27,493				21	%		$	59,172				21	%
State income tax, net of federal income tax effect (1)			1,059				4				1,955				1				2,903				1
Tax Credits			—				—				—				—				—				—
Changes in valuation allowances			—				—				—				—				—				—
Nontaxable or nondeductible items:
Limited tax benefit due to compensation			369				2				3,388				3				3,811				1
Other			26				—				16				—				19				—
Changes in unrecognized tax benefits
162m stock compensation limitation			—				—				2,999				2				—				—
Other, net			256				1				—				—				—				—
Income tax expense		$	7,205				28	%		$	35,851				27	%		$	65,905				23	%

 

(1)

State taxes in Texas make up 100% of the tax effect of this category.

 

Income taxes were paid in the following jurisdictions (in thousands):

 

		Year Ended December 31, 2025
Federal		$	33
State			465
Total income taxes paid		$	498

 

On July 4, 2025, the “One Big Beautiful Bill” (“OBBB”) was signed into law. The OBBB is a significant piece of tax legislation that includes provisions that restore 100% bonus depreciation under section 168(k) for certain property place in service after January 19, 2025, allow for the expensing of domestic R&D expenditures beginning in 2025, and allow for the deduction of intangible drilling costs as part of the computation of the corporate alternative minimum tax beginning in 2026. The OBBB did not have a significant impact on the Company’s 2025 income tax expense.

 

Deferred Tax Assets and Liabilities

 

The following table presents the tax effects of temporary differences that give rise to the Company’s deferred tax assets and liabilities (in thousands):

 

		December 31,
		2025				2024
Deferred tax assets:
Interest expense limitations		$	94,623			$	73,013
Net operating loss carryforwards			28,360				13,089
Stock-based compensation			3,322				3,351
Other			44				35
Less: Valuation allowance			—				—
Deferred tax assets			126,349				89,488
Deferred tax liabilities:
Crude oil and natural gas properties, principally due to differences in basis and depreciation and the deduction of intangible drilling costs for tax purposes			(358,853	)			(321,411	)
Unrecognized derivative gains, net			(7,132	)			(475	)
Deferred tax liabilities			(365,985	)			(321,886	)
Net deferred tax liabilities		$	(239,636	)		$	(232,398	)

 

As required by ASC Topic 740, “Income Taxes,” (“ASC 740”) the Company uses reasonable judgments and makes estimates and assumptions related to evaluating the probability of uncertain tax positions. The Company bases its estimates and assumptions on the potential liability related to an assessment of whether the income tax position will “more likely than not” be sustained in an income tax audit. Based on that analysis, the Company believes the Company has not taken any material uncertain tax positions, and therefore has not recorded an income tax liability related to uncertain tax positions. However, if actual results materially differ, the Company’s effective income tax rate and cash flows could be affected in the period of discovery or resolution. The Company also reviews the estimates and assumptions used in evaluating the probability of realizing the future benefits of the Company’s deferred tax assets and records a valuation allowance when the Company believes that a portion or all the deferred tax assets may not be realized. If the Company is unable to realize the expected future benefits of its deferred tax assets, the Company is required to provide a valuation allowance. The Company uses its history and experience, overall profitability, future management plans, tax planning strategies, and current economic information to evaluate the amount of valuation allowance to record. As of December 31, 2025 and 2024, the Company had not recorded a valuation allowance for deferred tax assets arising from its operations because the Company believed they met the “more likely than not” criteria as defined by the recognition and measurement provisions of ASC 740. The Company reversed a portion of its deferred tax asset related to stock-based compensation based on the assumption that the tax deduction will be subject to IRC Section 162(m) limits when the stock options are exercised and the restricted stock vests. IRC Section 162(m) limits compensation deductions to $1.0 million per year for certain Company executives. This resulted in a $3.0 million reduction in the deferred tax asset and increased the amount of income tax expense realized during the year ended December 31, 2024.

 

The Company is also subject to Texas margin tax. The Company realized a benefit of $16,000 and an expense of $469,000 in current Texas margin tax in the accompanying consolidated financial statements for the years ended December 31, 2025 and 2024, respectively, and zero for the year ended December 31, 2023 as the Company did not owe any Texas margin tax for 2023. The Company has recognized a net deferred Texas margin tax liability of $9.7 million and $8.6 million as of December 31, 2025 and 2024, respectively, in the accompanying consolidated balance sheets.

 

In addition to the provision for income taxes, the Company recognized and paid an excise tax of 1% on its stock repurchases during the year ended December 31, 2024 of $351,000 recognized as part of the cost basis of the stock repurchased in the condensed consolidated statements of changes in stockholders’ equity.