HURCO COMPANIES INC Income Taxes Disclosure

6.     INCOME TAXES

We utilize the asset and liability method of accounting for income taxes. Under this method, the provision (benefit) for income taxes represents income taxes payable or refundable for the current year plus the change in deferred taxes during the year.

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The Budget Reconciliation Act (H.R. 1) (“OBBB”) was signed into law on July 4, 2025. The OBBB did not have a material impact on our consolidated financial statements and related disclosures as of and for the fiscal year ended October 31, 2025. While further evaluation is ongoing, the OBBB is not expected to have a material impact on our consolidated financial statements and related disclosures in future years.

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The components of income (loss) before taxes are (in thousands):

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In the fiscal years set forth below, the provision (benefit) for income taxes consisted of the following (in thousands):

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A comparison of income tax expense at the U.S. statutory rate to our effective tax rate is as follows:

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The Tax Reform Act enacted on December 22, 2017, made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S. federal income tax. As of October 31, 2025, the undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested and retained for continuing operations. Accordingly, we did not accrue any withholding taxes on the undistributed earnings of our foreign subsidiaries, consistent with the position adopted on January 1, 2018.

Deferred income taxes are determined based on the difference between the amounts used for financial reporting purposes and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred taxes are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Net deferred tax assets and liabilities are classified as non-current in the consolidated financial statements.

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Our effective tax rate for the fiscal year ended October 31, 2025 was (24)%, compared to (69)% in the prior fiscal year. Income tax expense for fiscal year 2025 was $2.9 million, compared to $6.8 million for fiscal year 2024. The year-over-year decrease in annual income tax expense was primarily due to an $8.4 million non-cash change in valuation allowance recorded in fiscal year 2024 on U.S. and China deferred tax assets, compared to a $4.8 million non-cash change in valuation allowance recorded in fiscal year 2025 on U.S., China, and certain Italian deferred tax assets. Additionally, income taxes were also impacted by a change in geographic mix of income and loss that includes jurisdictions with differing tax rates and discrete items related to unvested stock compensation. As a result of a cumulative three-year loss in the U.S., China and Italy, we have a $13.2 million full valuation allowance recorded against our U.S., Chinese and certain Italian deferred tax assets and we did not record a tax benefit for our net losses in these countries for fiscal year 2025. The valuation allowance recorded during the fiscal year ended October 31, 2025 reflects a full valuation allowance of U.S, Chinese, and certain Italian deferred tax assets and was recorded based on our conclusion that the deferred tax assets were not more likely than not going to be realized.

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As of October 31, 2025, we had deferred tax assets established for accumulated net operating loss carryforwards of $8.6 million, primarily related to federal, state and foreign jurisdictions. We also have deferred tax assets for tax credits of $2.2 million. We established a valuation allowance against these carryforwards due to the uncertainty of their full realization. As of October 31, 2025, and 2024, the balance of this valuation allowance was $13.2 million and $9.2 million, respectively.

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Significant components of our deferred tax assets and liabilities as of October 31, 2025 and 2024 are as follows (in thousands):

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As of October 31, 2025, we had net operating loss carryforwards for international and U.S. income tax purposes of $54.6 million. Our U.S. federal net operating loss has an unlimited carryforward potential. Our U.S. state net operating losses will either expire at various tax years from 2026 to 2045 or have unlimited carryforward potential. Our foreign net operating losses will either expire at various tax years from 2026 to 2030 or have unlimited carryforward potential. As of October 31, 2025, we also have tax credits of $2.2 million which will expire at various tax years from 2026 to 2045.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding the related accrual for interest or penalties, is as follows (in thousands):

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The balance of the unrecognized tax benefits and related interest was zero on October 31, 2025 because all previous balances expired as of August 2025 due to the statute of limitations with respect to unrecognized tax benefits.

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We file U.S. federal and state income tax returns, as well as tax returns in applicable foreign jurisdictions.

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A summary of open tax years by major jurisdiction is presented below:

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