Spectral AI, Inc. Income Taxes Disclosure

12. INCOME TAXES

 

Effective Tax Rate

 

The overall effective tax rate (“ETR”) for the Company, as calculated under ASC 740 guidance for the years ended December 31, 2024, and 2023 is (1.78%) and (0.10%), respectively. The following table reconciles the federal statutory income rate to the Company’s effective income tax rate:

 

		2024				2023
Federal income tax rate			21.00	%			21.00	%
State income tax benefit			(0.65	)%			(0.10	)%
Impact of non-U.S. Earnings			(0.63	)%			0.10	%
Permanent items			(7.34	)%			(8.20	)%
Return to provision adjustments			(0.05	)%			0.00	%
Non-deductible stock compensation			(1.03	)%			(1.10	)%
Non-deductible executive compensation			(1.35	)%			0.00	%
Tax Credits			0.16	%			0.00	%
Difference and changes in tax rates			0.06	%			0.00	%
Other			0.01	%			0.00	%
Change in valuation allowance			(11.95	)%			(11.82	)%
Effective income tax rate			(1.78	)%			(0.10	)%

 

The above schedule beaks out the key components of the ETR. The main drivers between the federal statutory rate of 21% and ETR of (1.78%) are permanent adjustments and change in valuation allowance.

Components of Income Tax Expense/(Benefit)

 

The components of income tax expense/(benefit) for the years ended December 31, 2024 and 2023 are as follows (in thousands):

 

		2024				2023
Current
US Federal		$	157			$	(5	)
US State			114				15
Total current provision			271				10
Total provision for income taxes		$	271			$	10

 

The Company is in a taxable loss position for the year ending December 31, 2024. The current tax expense of $271,000 is resulting from a reversal of a federal income tax refund and the gross margin tax for the Company’s state filing in Texas.

 

Deferred Income Taxes

 

The main components of deferred tax assets/(liabilities) for the periods ended December 31, 2024 and 2023, are as follows (in thousands):

 

		2024				2023
Deferred income tax assets:
Net operating loss carryforwards		$	4,518			$	2,419
Capitalized research expenses			870				717
Stock-based compensation			337				278
Lease liabilities			-				179
Tax credits			118				44
Other			81				875
Total deferred income tax assets			6,661				4,512
Deferred income tax liabilities:
Right-of-use assets			(412	)			(163	)
Lease liabilities			(75	)			-
Other			-				-
Total deferred income tax liabilities		$	(487	)		$	(163	)
Net deferred income tax assets		$	6,174			$	4,349
Valuation allowance			(6,174	)			(4,349	)
Deferred income tax assets, net of valuation allowance			-				-

 

Valuation Allowance Considerations

 

ASC 740, “Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. After consideration of all the information available, management believes that uncertainty exists with respect to future realization of its deferred tax assets and has, therefore, established a full valuation allowance as of December 31, 2024, and 2023. The net change in valuation allowance for the years ended December 31, 2024 and 2023 was an increase of $1.8 million and $3.0 million, respectively.

 

Section 174 Capitalization

 

The Tax Cuts and Jobs Act of 2017 (TCJA) made a significant change to Section 174 that went into effect for taxable years beginning after December 31, 2021. The change eliminated the ability to currently deduct R&D expenses. Instead, taxpayers must now capitalize and amortize these costs. Capitalized Section 174 costs must be amortized over five years (15 years for expenditures attributable to foreign research) beginning with the midpoint of the tax year in which the expenditures are paid or incurred.

 

The Company had an estimated $1.7 million of domestic R&D expenses for the tax year ending December 31, 2024. The domestic R&D expenses will be capitalized and amortized over a five-year period.

Net Operating Losses

 

As of December 31, 2024 and 2023, the Company had available federal net operating loss carryforwards (“NOLs”) of $19.2 million and $11.0 million, respectively, which are available to offset future federal taxable income. Under the Tax Cuts and Jobs Act (“TCJA”), all NOLs incurred after December 31, 2017 are carried forward indefinitely for federal tax purposes. Utilization of net operating losses and credits may be subject to substantial 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 before utilization.

 

Section 382 of the Internal Revenue Code limits the utilization of U.S. net operating loss (“NOL”) carryforwards following a change of control. We have not performed an analysis of whether a change of control defined under Section 382 may have occurred.  Upon performing an analysis of whether an ownership change has occurred, any future NOL deductions may be limited.  However, our NOL carryforward as discussed above does not expire.

 

The Company is subject to taxation in the U.S and in various state, local and foreign jurisdictions. The Company’s tax returns for years 2021 through present are open to tax examinations by U.S. Federal, state, local and foreign tax authorities; however, carryforward attributes that were generated prior to January 1, 2018, remain subject to adjustment upon examination if they either have been utilized or will be utilized in a future period.