INNOVATIVE SOLUTIONS & SUPPORT INC Income Taxes Disclosure

13.  Income Taxes

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The components of income taxes are as follows:

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Following is a reconciliation of the statutory federal rate to the Company’s effective income tax rate:

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The deferred tax effect of temporary differences giving rise to the Company’s deferred tax assets and liabilities consists of the components below:

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At September 30, 2025 and 2024, the Company had state NOL carryforwards of approximately $17.7 million and $19.2 million, respectively, which begin to expire in varying amounts after the fiscal year ending September 30, 2026. The Company does not have federal R&D Tax Credit carryforwards in fiscal year 2025 and 2024.

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Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be verified objectively, and significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if valuation allowances are required by considering available evidence, including historical and projected taxable income and tax planning strategies which are both prudent and feasible. ASC Topic 740 requires the consideration of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. As a result of positive evidence that the Company’s deferred tax assets are more likely than not to be realized in future years, the Company reduced its valuation allowance of deferred tax assets by $299,908, $7,963 and $4,069 for fiscal years ended September 30, 2025, 2024 and 2023, respectively, reducing the Company’s provision for income taxes in each fiscal year.

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Following is a reconciliation of beginning and ending balances of total amounts of gross unrecognized tax benefits:

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It is anticipated that the balance of unrecognized tax benefits at September 30, 2025 will change significantly over the next twelve months as the majority of the positions will have statue lapses in September 30, 2026 and 2027. The balance of unrecognized tax benefits are recorded within the valuation allowance in the table above at fiscal years ended September 30, 2025 and 2024.

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The Company’s policy is to recognize interest accrued and, if applicable, penalties related to unrecognized tax benefits in income tax expense for all periods presented. At September 30, 2025, the Company currently has no unrecognized tax benefits against which interest has been accrued, and there is no accrual recorded for penalties.

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For the fiscal years ended September 30, 2025, 2024 and 2023, the Company did not recognize any expense for interest (net of federal impact) within income tax expense.

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The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of related tax laws and regulations and require significant judgment to apply. The Company’s federal income tax returns for the fiscal years ended September 30, 2021 and thereafter are open years subject to examination by the Internal Revenue Service. The Company files income tax returns in various state jurisdictions, as appropriate, with varying statutes of limitation. There are no state income tax examinations in process at this time.

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On July 4, 2025, the United States government enacted into law the OBBBA. The OBBBA includes a broad range of tax reform provisions affecting businesses, including: restores bonus depreciation to 100% for all qualified assets placed in service after January 19, 2025, allows for the option to expense all domestic research and experimental expenditures for tax years beginning after December 31, 2024, allows for the option to recaptures all unamortized domestic research and experimental expenditures from prior years, changes the adjusted taxable income formula for interest expense limitation to include depreciation and amortization expense. These changes predominantly apply to tax years beginning after December 31, 2024. This legislation did not have a material impact on the Company’s consolidated financial statements.