Karat Packaging Inc.KRT

Karat Packaging Inc. Income Taxes Disclosure

10-KFiled Mar 14, 20253 min read
Income Taxes
The provision for income taxes for the years ended December 31, 2024 and 2023, respectively, consisted of:

Year Ended December 31,
20242023
(in thousands)
Current
Federal $11,594 $8,987 
State 2,048 1,776 
13,642 10,763 
Deferred
Federal (3,428)(1,052)
State (343)93 
(3,771)(959)
Provision for income taxes $9,871 $9,804 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for federal and state income tax purposes.

The Company’s deferred tax assets (liabilities), calculated using effective tax rates is as follows:
December 31, 2024December 31, 2023
(in thousands)
Deferred tax assets:
State taxes $402 $436 
Reserves 666 503 
Accruals and deferred expenses
1,592 794 
Research and development credit
— 40 
Inventory1,137 1,012 
Government grant 328 — 
Stock-based compensation
537282
Capitalized research and development costs1,852 1,741 
Operating lease liabilities14,118 9,140 
Total deferred tax assets 20,632 13,948 
Deferred tax liabilities:
Fixed assets – depreciation (8,504)(9,902)
Investment in Global Wells Investment Group (176)(234)
Operating ROU asset(12,378)(8,009)
Total deferred tax liabilities (21,058)(18,145)
Net deferred tax liability $(426)$(4,197)

Reconciliation of income taxes are as follows from statutory rate of 21% to the effective tax rate for the year ended December 31, 2024 and 2023, respectively:

December 31, 2024December 31, 2023
(in thousands)
Income tax computed at the federal statutory rate$8,546 $8,988 
State taxes, net of federal tax benefits 1,459 1,609 
Noncontrolling interest - Income not subject to tax
(241)(115)
Permanent items 22 42 
Excess tax liability (benefit) from stock based compensation
19 (187)
Research and development credit (76)(417)
Others
142 (116)
Provision for income taxes $9,871 $9,804 

The Company may be audited by the Internal Revenue Service and various state tax authorities. Disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income and expenses among various tax jurisdictions because of differing interpretations of tax laws and regulations. The Company evaluates its exposures associated with the tax filing positions and, while it believes its positions comply with applicable laws, may record liabilities based upon estimates of the ultimate outcome of these matters and the guidance provided in ASC 740. As of December 31, 2024 and 2023, the Company does not have any unrecognized tax benefit.

The Company remains subject to IRS examination for the 2021 through 2023 tax years. Additionally, the Company files multiple state and local income tax returns and remains subject to examination in various of these jurisdictions for the 2020 through 2023 tax years. The Company continues to work with the IRS relating to the 2016 and 2017 tax years and does not expect a material impact to the financial statements.

ASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of these assets is more-likely-than-not. In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income
on a jurisdiction-by-jurisdiction basis. Based upon the level of historical taxable income, at this time, the Company determined that sufficient positive evidence existed to conclude that it is more likely than not there will be full utilization of the deferred tax assets in each jurisdiction. As such, as of December 31, 2024, and 2023, based on the available evidence, the Company did not record any valuation allowance.

Historical Timeline

Fiscal YearFiled
2024Mar 14, 2025Showing above
2022Mar 16, 2023
2021Mar 31, 2022

About Income Taxes Disclosures

The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.

Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.

Other Available Disclosures

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