ONE STOP SYSTEMS, INC. Income Taxes Disclosure
NOTE 15 – INCOME TAXES
For the years ended December 31, 2025 and 2024, pre-tax (loss) income was attributed to the following jurisdictions:
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For the Year Ended December 31, |
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2025 |
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2024 |
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Domestic: |
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Continuing operations |
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$ |
(3,086,538 |
) |
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$ |
(15,165,728 |
) |
Discontinued operations |
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6,544,749 |
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- |
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$ |
3,458,211 |
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$ |
(15,165,728 |
) |
Foreign: |
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Continuing operations |
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$ |
- |
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$ |
- |
|
Discontinued operations |
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2,292,451 |
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2,257,896 |
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$ |
2,292,451 |
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$ |
2,257,896 |
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Income (loss) before taxes |
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$ |
5,750,662 |
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$ |
(12,907,831 |
) |
The components of the tax provision for income taxes are as follows:
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For the Year Ended December 31, |
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2025 |
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2024 |
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Current: |
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Federal |
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$ |
- |
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$ |
- |
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State |
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11,310 |
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2,560 |
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International |
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695,201 |
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695,860 |
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706,511 |
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698,420 |
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Deferred: |
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Federal |
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- |
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- |
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State |
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- |
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- |
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International |
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(43,543 |
) |
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28,082 |
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(43,543 |
) |
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28,082 |
|
Total provision for income taxes |
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$ |
662,968 |
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$ |
726,502 |
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For the year ended December 31, 2025, the provisions for income tax allocated to continuing and discontinued operations were $11,310 and $651,658, respectively. For the year ended December 31, 2024, the provisions for income tax allocated to continuing and discontinued operations were $2,560 and $723,942, respectively.
Taxes on income vary from the statuatory federal income tax rate applied to earnings before tax on income as follows:
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For the Year Ended December 31, 2025 |
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Provision at U.S. federal statuatory tax rate (21% applied to earnings before income taxes) |
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$ |
1,207,639 |
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21.0 |
% |
State and local income taxes, net of federal income tax effect (1) |
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(159,454 |
) |
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-2.8 |
% |
Foreign tax effects: |
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Statuatory tax rate difference between Germany and United States |
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165,780 |
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2.9 |
% |
Research and development tax credits: |
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Federal |
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(201,624 |
) |
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-3.5 |
% |
State and local |
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(134,078 |
) |
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-2.3 |
% |
Changes in valuation allowance: |
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Federal |
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951,711 |
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16.5 |
% |
Nontaxable or nondeductible items: |
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Tax loss on sale of subsidiary |
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(1,474,457 |
) |
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-25.6 |
% |
Stock based compensation |
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(99,381 |
) |
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-1.7 |
% |
Other permanent items |
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24,882 |
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0.4 |
% |
Change in Unrecognized tax benefits: |
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Federal |
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90,577 |
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1.6 |
% |
State and local |
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40,384 |
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0.7 |
% |
Other adjustments |
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250,991 |
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4.4 |
% |
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$ |
662,968 |
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11.5 |
% |
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For the Year Ended December 31, 2024 |
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Provision at U.S. federal statuatory tax rate (21% applied to earnings before income taxes) |
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$ |
(2,710,645 |
) |
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21.0 |
% |
State and local income taxes, net of federal income tax effect (1) |
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290,615 |
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-2.3 |
% |
Foreign tax effects: |
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Statuatory tax rate difference between Germany and United States |
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166,818 |
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-1.3 |
% |
Effect of changes in tax laws or rates enacted in the current period |
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1,078 |
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0.0 |
% |
Research and development tax credits: |
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Federal |
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(189,489 |
) |
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1.5 |
% |
State and local |
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(16,044 |
) |
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0.1 |
% |
Changes in valuation allowance |
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Federal |
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3,034,221 |
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-23.7 |
% |
Nontaxable or nondeductible items: |
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Stock based compensation |
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(2,757 |
) |
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0.0 |
% |
Other permanent items |
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72,621 |
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-0.5 |
% |
Change in Unrecognized tax benefits: |
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Federal |
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100,189 |
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-0.8 |
% |
State and local |
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(13,024 |
) |
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0.1 |
% |
Other adjustments |
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(7,081 |
) |
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0.1 |
% |
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$ |
726,502 |
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-5.8 |
% |
(1) State tax in California made up the majority (greater than 50%) of the tax effect in this category.
Deferred income tax assets and liabilities arising from differences accounting for financial statement purposes and tax purposes, less valuation reserves at year end are as follows:
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For the Year Ended December 31, |
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2025 |
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2024 |
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Deferred tax assets: |
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Reserves |
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$ |
75,854 |
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$ |
557,566 |
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Deferred compensation |
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137,570 |
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128,748 |
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Stock compensation |
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223,747 |
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347,616 |
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Deferred revenue |
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93,228 |
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66,170 |
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Inventories |
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1,931,181 |
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2,257,220 |
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Credits and loss carryforward |
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7,769,159 |
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4,822,030 |
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Capitalized research and experimental expenditures |
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113,659 |
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1,588,187 |
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Lease liabilities |
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385,668 |
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480,317 |
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Total deferred tax assets before valuation allowance |
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10,730,066 |
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10,247,854 |
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Deferred tax liabilities: |
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Property and equipment |
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(76,799 |
) |
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(217,404 |
) |
Other |
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(496,028 |
) |
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(555,424 |
) |
ROU assets |
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(319,483 |
) |
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(405,910 |
) |
Total deferred tax liabilities |
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(892,310 |
) |
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(1,178,738 |
) |
Net deferred tax assets before valuation allowance |
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9,837,755 |
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9,069,116 |
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Valuation allowance |
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(9,837,755 |
) |
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(9,121,690 |
) |
Net deferred tax liabilities |
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$ |
- |
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$ |
(52,574 |
) |
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of the year ending December 31, 2025, Management believes that it is not more likely than not that the Company will realize the benefits of the net deferred tax assets.
The Company files income tax returns in the U.S. federal jurisdiction, Arizona, Arkansas, California, Florida, Idaho, Massachusetts, Texas and Utah and plans to file a first year return in DC for 2025. The Company has sold its German subsidiary in 2025 and the gain on sale is reflected within the financials. The Company has open tax statutes for U.S. federal taxes for the years ended . For California, the open tax statues are for the years , and for Germany, the open years include .
The Company has federal net operating loss (“NOL”) carryforwards as of December 31, 2025, of approximately $21,619,000. The Company may use these NOL carryforwards indefinitely to offset 80% of Federal taxable income in future years. In addition, the Company has state NOL carryforwards of $12,795,000. State NOLs will carry forward through at least 2042 and may be used to offset future state taxable income.
As of December 31, 2025, the unrecognized tax benefits associated with uncertain tax positions was $1,030,612, of which $20,200 is included in other accrued expenses and liabilities, while $915,514 is included as a direct reduction on the net deferred tax assets on the accompanying consolidated balance sheets. If recognized, this would affect the Company’s effective tax rate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Unrecognized tax benefits balance on December 31, 2023 |
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819,280 |
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Gross decrease for tax positions of the current year |
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- |
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Gross increases for tax positions of the current year |
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69,635 |
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Unrecognized tax benefits balance on December 31, 2024 |
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888,916 |
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Gross decrease for tax positions of prior years |
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23,989 |
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Gross increases for tax positions of the current year |
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117,707 |
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Unrecognized tax benefits balance on December 31, 2025 |
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$ |
1,030,612 |
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Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 18, 2026 | Showing above |
| 2024 | Mar 19, 2025 | |
| 2023 | Mar 21, 2024 | |
| 2022 | Mar 23, 2023 | |
| 2021 | Mar 24, 2022 | |
| 2020 | Mar 25, 2021 | |
| 2019 | Mar 26, 2020 | |
| 2018 | Mar 21, 2019 | |
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.