KUSTOM ENTERTAINMENT, INC. Income Taxes Disclosure

NOTE 13. INCOME TAXES 

 

The components of income tax provision (benefit) for the years ended December 31, 2025 and 2024 are as follows:

 SCHEDULE OF COMPONENTS OF INCOME TAX PROVISION (BENEFIT)

			2025				2024
Current taxes:
Federal		$	—			$	—
State			—				—
Total current taxes			—				—
Deferred tax provision (benefit)			—				—
Income tax provision (benefit)		$	—			$	—
Allocated to:
Continuing operations		$	—			$	—
Discontinued operations			—				—
Total		$	—			$	—

 

 

A reconciliation of the income tax (provision) benefit at the statutory rate of 21% for the years ended December 31, 2025, and 2024 to the Company’s effective tax rate is as follows:

 SCHEDULE OF RECONCILIATION OF INCOME TAX (PROVISION) BENEFIT

		2025				2024
U.S. Statutory tax rate			21.0	%			21.0	%
State taxes, net of Federal benefit			6.0	%			6.0	%
Change in valuation reserve on deferred tax assets			(28.0	)%			(21.6	)%
Non allowable expenses and excludable income			(0.3	)%			—	%
Expiring net operating loss and tax credit carryforwards			(2.2	)%			—	%
Other, net			3.5	%			(5.4	)%
Income tax (provision) benefit			—	%			—	%

 

The effective tax rate for the years ended December 31, 2025, and 2024 varied from the expected statutory rate due to the Company continuing to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of December 31, 2025, primarily because of the current year operating losses.

 

Significant components of the Company’s deferred tax assets (liabilities) as of December 31, 2025 and 2024 are as follows:

 SCHEDULE OF SIGNIFICANT COMPONENTS OF DEFERRED TAX ASSETS (LIABILITIES)

		2025				2024
Deferred tax assets:
Stock-based compensation		$	50,000			$	540,000
Start-up costs			110,000				110,000
Inventory reserves			475,000				535,000
							-
Investment in subsidiaries			—				185,000
Intangible assets			175,000				—
Research & development expenses			845,000				1,030,000
Allowance for doubtful accounts receivable			20,000				60,000
Property, plant and equipment depreciation			—				90,000
Deferred revenue			2,100,000				2,340,000
Accrued litigation reserve			1,060,000				985,000
Accrued expenses			15,000				60,000
Net operating loss carryforward			41,530,000				39,275,000
Research and development tax credit carryforward			1,685,000				1,740,000
State jobs credit carryforward			235,000				230,000
Charitable contributions carryforward			115,000				115,000
Uniform capitalization of inventory costs			15,000				15,000
Total deferred tax assets			48,430,000				47,310,000
Valuation reserve			(47,955,000	)			(46,290,000	)
Total deferred tax assets			475,000				1,020,000
Deferred tax liabilities:
Investment in subsidiaries			(305,000	)			—
Property, plant and equipment depreciation			(30,000	)			—
Warrant derivative liabilities			—				(650,000	)
Intangible assets			—				(230,000	)
Domestic international sales company			(140,000	)			(140,000	)
Total deferred tax liabilities			(475,000	)			(1,020,000	)
Net deferred tax assets (liability)		$	—			$	—

 

The valuation allowance on deferred tax assets totaled $47,955,000 and $46,290,000 as of December 31, 2025, and 2024, respectively. The Company records the benefit it will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred tax assets.” In accordance with ASC 740, “Income Taxes,” the Company records a valuation allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

The Company incurred operating losses in 2025 and 2024 and it continues to be in a three-year cumulative loss position at December 31, 2025 and 2024. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it determined to fully reserve its deferred tax assets at December 31, 2025. The Company expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity.

 

As of December 31, 2025, the Company had the following estimated Federal net operating loss carry-forwards available to offset future taxable income:

 SCHEDULE OF FEDERAL NET OPERATING LOSS CARRY FORWARDS

		Amount
Tax years generated:
2017 and before		$	48,890,000
2018 and after			119,515,000
Federal net operating loss carry-forwards available		$	168,405,000

 

Such tax net operating loss carry-forwards expire between 2026 and 2037 relative to Federal net operating loss carry-forwards generated in tax years 2017 and prior. Federal net operating loss carry-forwards generated in tax years 2018 and after cannot be carried back to prior years and have an indefinite life since the enactment of the Tax Cuts and Jobs Act of 2017. The Tax Cuts and Jobs Act of 2017 further provides for an annual limitation on usage equivalent to 80% of taxable income. In addition, the Company had research and development tax credit carry-forwards totaling $1,685,000 available as of December 31, 2025, which expire between 2026 and 2037.

 

In July 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted into law in the U.S. The OBBBA includes numerous provisions that affect corporate taxation, including changes to bonus depreciation, the expensing of domestic research costs, and modifications to certain U.S. international tax rules. The Company has analyzed the impacts of the OBBBA and reflected them in the current period. These impacts do not have a material effect on the tax rate for the year ended December 31, 2025. The majority of the tax law changes will take effect in future years.

 

The Company’s 2022 federal tax return was recently examined by the Internal Revenue Service resulting in no proposed adjustments.