INNODATA INC Income Taxes Disclosure

5.           Income Taxes

United States and foreign components of income before provision for income taxes for each of the years ended December 31, were as follows (in thousands):

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The significant components of the provision for income taxes for the years ended December 31, 2025 and 2024 were as follows (in thousands):

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The Company elected to prospectively adopt the guidance in ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The following table reconciles the U.S. federal statutory income tax rate of 21% to the Company’s effective income tax rate for the year ended December 31, 2025 in accordance with the guidance in ASU No. 2023-09 (In thousands, except percentages):

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* State taxes in California, Florida, Minnesota, New York, Pensylvania and Texas comprise the majority (greater than 50%) of the tax effect in this category.

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For the year ended December 31, 2025, the Company’s effective income tax rate was 22.3%, compared to the U.S. federal statutory income tax rate of 21%. The increase primarily reflects the impact of state and local income taxes, net of federal benefit, foreign income taxed at rates different from the U.S. statutory rate, and permanent differences, including non-deductible stock-based compensation resulting from the executive compensation limitations under Section 162(m). These impacts were partially offset by tax benefits associated with stock-based compensation, state tax true-ups, and other items. Additional differences resulted from cross-border tax effects, withholding taxes, deemed interest, and changes in unrecognized tax benefits.

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The reconciliation of the U.S. statutory rate of 21% to the Company’s effective tax rate for the years ended December 31, 2024 in accordance with the ASC 740 Income taxes prior to the adoption of ASU No. 2023-09 is summarized as follows:

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The estimated annual effective tax rate applied to the year ended December 31, 2024 is lower than the U.S. federal statutory rate of 21% principally due to the effect of stock-based compensation and the release of the U.S. valuation allowance, offset in part by IRS section 162(m) adjustments.

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Deferred tax assets and liabilities are classified as non-current. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2025 and 2024 were as follows (in thousands):

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* Prior period deferred tax components have been reclassified to align with the current period presentation, with no impact on the Company’s consolidated results.

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In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realizable. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and net operating losses are available. As of December 31, 2025, the Company continues to maintain a valuation allowance of $4.8 million on one of the Company’s Canadian subsidiary’s deferred tax assets.

The Company determined on March 31, 2025 that it was more likely than not that one of the Company’s subsidiaries in Canada would be able to realize the benefit of the deferred tax assets in Canada, resulting in the release of the valuation allowance. In reaching this determination, the Company considered the growing trend of profitability over the last three years in the Canadian subsidiary, as well as expectations regarding the generation of future taxable income.

The Company determined on June 30, 2025 that it was more likely than not that the Company’s subsidiary in Germany would be able to realize the benefit of the deferred tax assets in Germany, resulting in the release of the valuation allowance. In reaching this determination, the Company considered the growing trend of profitability over the last three years in the German subsidiary, as well as expectations regarding the generation of future taxable income.

The Company intends to indefinitely reinvest the foreign earnings of its foreign subsidiaries. Unremitted earnings of foreign subsidiaries amounted to approximately $58.8 million at December 31, 2025. If such earnings are repatriated in the future or are no longer deemed to be indefinitely reinvested, the Company would have to accrue the applicable amount of foreign jurisdiction withholding taxes associated with such remittances.

At December 31, 2025, the Company had available U.S. state and foreign Net Operating Loss (NOL) carryforwards of $3.8 million and $23.3 million, respectively. Canadian R&D credit carryforwards were approximately $1.4 million. The U.S. state and foreign NOL carryforwards expire over the course of several years starting in 2026 through 2037.

At December 31, 2024, the Company had available U.S. federal, state and foreign Net Operating Loss (NOL) carryforwards of $10.6 million, $6.5 million and $24.3 million, respectively. U.S. Federal and Canadian R&D credit carryforwards were approximately $0.1 million and $1.3 million, respectively.

The Company is subject to Federal income tax, as well as income tax in various states and foreign jurisdictions. The Company has open tax years for U.S. federal and state taxes from 2021 through 2025. Various foreign subsidiaries have open tax years from 2005 through 2025, some of which are under audit by local tax authorities. The Company believes that its accruals for uncertain tax positions as of December 31, 2025 under ASC 740, Income Taxes are adequate to cover the Company’s income tax exposures.

Impact of Recent Tax Legislation

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted, amending U.S. tax law in several areas, including domestic research and development deductibility and bonus depreciation. The Company has included the estimated effect of provisions relevant to the current fiscal year in its reported income tax expense as of December 31, 2025. As a result of the OBBBA in the current period, Federal cash taxes were reduced due to bonus depreciation and the deductibility of R&D expenses. Due to the nature of these changes, there was little to no impact on the effective tax rate. Management is continuing to evaluate the OBBBA’s potential impact on future periods, particularly with respect to deferred tax assets and liabilities, the effective tax rate, and cash tax obligations.

Income taxes paid (net of refunds received) consisted of the following (in thousands):

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The following table represents a roll forward of the Company’s unrecognized tax benefits and associated interest for the years ended (in thousands):

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The Company had reserves for uncertain tax positions of $1.2 million and $1.0 million as of December 31, 2025 and 2024, respectively, where the ultimate tax determination is uncertain due to complexities of tax laws.