Motorsport Games Inc. Income Taxes Disclosure

NOTE 12 - INCOME TAXES

 

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 amounts used for income tax purposes. The Company establishes valuation allowances against its net deferred tax assets when it is more likely than not that the benefits will not be realized in the foreseeable future.

 

 

The components of income (loss) before provision for income taxes are as follows:

 

SCHEDULE OF COMPONENTS OF INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 

		2025				2024
Domestic		$	(1,369,854	)		$	1,169,659
Foreign			7,969,493				(4,217,730	)
Income before provision for income taxes		$	6,599,639			$	(3,048,071	)

 

The provision for income taxes consists of the following:

 

SCHEDULE OF PROVISION FOR INCOME TAXES 

		2025				2024
Current:
Federal		$	21,610			$	-
State			3,233				-
Foreign			-				-
Total current tax expense			24,843				-
Deferred:
Federal			-				-
State			-				-
Foreign			(270,101	)			-
Total deferred tax (benefits) expense			(270,101	)			-
Provision for income taxes		$	(245,258	)		$	-

 

The cash paid for income taxes (net of refunds) during the year ended December 31, 2025 was as follows:

 

SCHEDULE OF CASH PAID FOR INCOME TAXES  

		2025
Federal		$	9,022
State and Local
California			857
Tennessee			(6,516	)
North Carolina			339
Total income taxes paid, net of refunds		$	3,702

 

The components of deferred tax assets and liabilities consist of the following at December 31, 2025 and 2024:

 

SCHEDULE OF COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES 

		2025				2024
Assets:
Net operating loss carryforwards		$	14,299,432			$	10,969,756
Stock options			951,817				989,741
Charitable contribution carryforward			-				21,169
Goodwill			743,159				1,043,533
Unrealized loss			-				457,919
Other intangible assets			6,064,511				8,274,403
Other assets			589,493				63,584
Total assets			22,648,412				21,820,105
Liabilities:
Unrealized gain			1,225,900				-
Right-of-use assets			5,155				14,829
Change in fair value of warrants			7,190				-
Total liabilities			1,238,245				14,829
Net asset before valuation allowance			21,410,167				21,805,276
Valuation allowance			(21,140,066	)			(21,805,276	)
Net deferred tax asset		$	270,101			$	-

 

 

Beginning in 2025 annual reporting, we adopted ASU 2023-09 prospectively. See Note 2 – Summary of Significant Accounting Policies – Adoption of Accounting Pronouncements for additional details on the adoption of ASU 2023-09. A reconciliation between the Company’s effective income tax rate and the federal statutory income tax rate pursuant to the disclosure requirements of ASU 2023-09 for the year ended December 31, 2025 is as follows:

 

SCHEDULE OF EFFECTIVE INCOME TAX RATE AND THE FEDERAL STATUTORY INCOME TAX RATE 

			-				-
		2025
Federal statutory income tax expense		$	1,385,924				21.0	%
State income taxes, net of federal income tax effect (a)			2,554				0.0	%
Permanent differences and other
Effect of cross-border tax laws
Foreign disregarded entity income			502,594				7.6	%
Change in valuation allowance			(477,752	)			(7.2	)%
Effect of flow through entity
Nondeductible Items
Noncontrolling interest adjustment			40,428				0.6	%
Other			6,876				0.1	%
Foreign tax effects
United Kingdom
Statutory tax rate difference between U.K. and U.S.			263,300				4.0	%
Valuation allowance			(2,138,364	)			(32.4	)%
Australia
Statutory tax rate difference between Australia and U.S.			41,728				0.6	%
Valuation allowance			(139,093	)			(2.1	)%
Other foreign jurisdictions			28,734				0.4	%
Other
Adjustment to deferred balance			235,677				3.6	%
Other			2,136				0.0	%
Effective income tax rate		$	(245,258	)			(3.7	)%

 

(a)	State taxes in Florida and California made up the majority (greater than 50 percent) of the tax effect in this category for all periods presented.

 

For comparison purposes, a reconciliation between the Company’s effective income tax rate and the federal statutory income tax rate for the year ended December 31, 2024 is as follows:

 

		2024
Federal statutory income tax benefit			21.0	%
State income taxes, net of federal income tax benefit			30.5	%
Permanent differences and other			(0.1	)%
Change in valuation allowance			(52.1	)%
Effect of flow through entity			(6.4	)%
Other adjustments			6.8	%
Effective income tax rate			(0.3	)%

 

At December 31, 2025, the Company had United States federal, state, and foreign net operating loss (“NOL”) carryforwards available to reduce future taxable income in the amount of $39.5 million, $39.7 million, and $13.6 million, respectively. All federal, state, and foreign net operating losses may be carried forward indefinitely. As a result of the 704 Games LLC acquisition during the 2018 tax year, certain pre-change federal and state net operating losses were limited under Section 382 of the Internal Revenue Code and were subject to a valuation allowance to the extent they are not expected to be realized in the foreseeable future.

 

In assessing whether the Company’s deferred tax assets will be realized, management considered whether it was more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the ability to generate future taxable income (including reversals of deferred tax liabilities) during periods in which temporary differences become deductible. A valuation allowance was recognized on all U.S. federal and state net deferred tax assets and certain foreign net deferred tax assets as of December 31, 2025, as management concluded that is not more likely than not that the Company will generate sufficient future income to utilize the NOL carryforward and realize the specified deferred tax assets.

 

The Company does not have any uncertain tax positions (“UTPs”) as of December 31, 2025. While the Company currently does not have any UTPs, it is foreseeable that the calculation of our tax liabilities may involve dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company’s global operations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. Upon identification of a UTP, the Company would (1) record the UTP as a liability in accordance with ASC 740 and (2) adjust these liabilities if/when management’s judgment changes as a result of the evaluation of new information not previously available. Ultimate resolution of UTPs may produce a result that is materially different from an entity’s estimate of the potential liability. In accordance with ASC 740, the Company would reflect these differences as increases or decreases to income tax expense in the period in which new information is available. The Company recognizes and includes interest and penalties accrued on uncertain tax positions as a component of income tax expense.

 

The Company regularly assesses the likelihood of additional tax assessments by jurisdiction and, if necessary, adjusts its tax reserves based on new information or developments. The Company is not currently under any income tax audits or examinations, however, the tax years 2022-2024 remain open for examination.