Lineage Cell Therapeutics, Inc. Income Taxes Disclosure

12. Income Taxes

Income taxes paid, net of refunds received, were $0 for the years ended December 31, 2025 and 2024, as the Company did not make any federal, state, or foreign income tax payments during the periods.

During the year ended December 31, 2025, we adopted ASU 2023-09 to enhance the income tax disclosures regarding income taxes paid and the rate reconciliation disclosure. For the year ended December 31, 2025, the income tax provision (benefit) related to continuing operations differs from the amounts computed by applying the statutory income tax rate of 21% to pretax loss as follows (in thousands):

Deferred Tax Assets and Liabilities

Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities for federal and state income taxes at December 31, 2025 and 2024 are as follows (in thousands):

Realization of our deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Because of our lack of U.S. earnings history, the net U.S. deferred tax assets have been fully offset by a valuation allowance. Based on sustained profitability and other positive evidence related to our Israel subsidiary, we released the valuation allowance associated with the Israel subsidiary’s deferred tax assets during 2025. The valuation allowance increased by $3.1 million and $5.8 million during the years ended December 31, 2025 and 2024, respectively.

As required under ASU 2023-09, the Company has included only the portion of the valuation allowance related to federal deferred tax assets in the "change in valuation allowance" line of the rate reconciliation. The following table presents a reconciliation of the total change in the valuation allowance (in thousands):

Undistributed earnings of our foreign subsidiaries are considered to be permanently reinvested and accordingly, no deferred taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we could be subject to various income and withholding taxes. At the present time it is not practicable to estimate the amount of taxes that might be payable if these earnings were repatriated.

Net Operating Loss and Tax Credit Carryforwards

As of December 31, 2025, we had a net operating loss carryforward for federal income tax purposes of approximately $187.3 million, of which $ 113.4 million is subject to expiration beginning in 2030. We had a total state net operating loss carryforward of approximately $214.6 million, which will begin to expire in 2030. Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization.

We have federal credits of approximately $6.8 million, with various amounts expiring annually and state research credits of approximately $6.5 million which have no expiration date. These tax credits are subject to the same limitations discussed above.

Unrecognized Tax Benefits

Our policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations. If we are eventually able to recognize our uncertain positions, our effective tax rate would be reduced. We currently have a full valuation allowance against out net U.S. deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. Any adjustments to our uncertain tax positions would result in an adjustment of our net operating loss or tax credit carry forwards rather than resulting in a cash outlay.

During the years ended December 31, 2025 and 2024, no interest or penalties were required to be recognized relating to unrecognized tax benefits. Due to our history of annual net operating losses, all of our previous tax years are open to examination by federal and state taxing authorities.