Processa Pharmaceuticals, Inc. Income Taxes Disclosure

Note 8 - Income Taxes

 

We have incurred net operating losses since inception. At December 31, 2025 and 2024, we had available federal and state net operating loss carryforwards of $54.8 million and $36.0 million, respectively. The federal net operating losses generated in 2018 and later of $54.5 million will carry forward indefinitely. Net operating losses generated prior to 2018 will expire beginning in 2037. We have not recognized any deferred tax assets related to the federal orphan drug or other research and development tax credits as of December 31, 2025 and 2024. The federal research and development tax credits have a 20-year carryforward period. No cash payments were made for income taxes, net of refunds, for the years ended December 31, 2025 and 2024.

 

Pre-tax loss from continuing operations is disaggregated between U.S. domestic and foreign jurisdictions in accordance with ASU 2023-09 and is presented below:

Schedule of Domestic and Foreign Components of Net Loss Before Income Taxes

		2025				2024
		December 31,
		2025				2024
Components of pre-tax loss
Domestic		$	(13,204,883	)		$	(10,992,106	)
Foreign			(358,951	)			(858,012	)
Total loss before income taxes		$	(13,563,834	)		$	(11,850,118	)

 

Pursuant to Code Sec. 382 of the Internal Revenue Code (“the Code”), the utilization of our net operating loss carryforwards could be limited as a result of a cumulative change in stock ownership of more than 50% over a three-year period. We have not completed a Sec. 382 study and as such our net operating loss carryforwards may be subject to such limitation.

 

 

The following table is a reconciliation of our effective income tax rate and statutory income tax rate for the years ended December 31, 2025 and 2024 in accordance with the guidance in ASU 2023-09:

 

Schedule of Effective Income Tax Rate Reconciliation

		Year Ended December 31,
		2025								2024
At federal statutory income tax rate		$	(2,848,405	)			21.00	%		$	(2,488,525	)			21.00	%
State tax rate, net of federal benefit			(315,309	)			2.32	%			(494,140	)			4.17	%
Change in state tax rate			301,856				(2.23	)%			81,784				(0.69	)%
Nontaxable or nondeductible items:
Stock compensation – restricted stock units			1,284,795				(9.47	)%			560,835				(4.73	)%
Other			155,827				(1.15	)%			71,375				(0.60	)%
Other – deferred adjustments			-				-				11,319				(0.10	)%
Federal orphan drug tax credit			(1,824	)			0.01	%			(6,247	)			0.05	%
Change in valuation allowance			1,423,060				(10.48	)%			2,263,599				(19.10	)%
Total		$	-				0.00	%		$	-				0.00	%

 

The significant components of our deferred tax assets and liabilities for Federal and state income taxes consisted of the following:

Schedule of Deferred Tax Assets and Liabilities 

		2025				2024
		December 31,
		2025				2024
Deferred tax assets:
Non-current:
Net operating loss carry forward – Federal		$	11,507,543			$	7,566,071
Net operating loss carry forward – State			2,957,337				2,074,542
Stock compensation expense and other			1,322,468				2,794,464
Unrealized gain related to digital asset			(75,871	)			-
Purchased in-process R&D			2,394,596				2,477,193
Federal orphan drug credits			1,211,026				1,209,202
Capitalized research and development costs			2,008,637				3,781,193
Total non-current deferred tax assets			21,325,736				19,902,665
Valuation allowance for deferred tax assets			(21,325,736	)			(19,902,665	)
Total deferred tax assets			-				-
Deferred Tax Liabilities:
Non-current:
Intangible asset			-				-
Total non-current deferred tax liabilities			-				-
Total deferred tax asset (liability)		$	-			$	-

 

In 2022, the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the immediate deduction of research and development (R&D) expenditures, requiring taxpayers to amortize these costs over five or fifteen years pursuant to IRC Section 174. Consequently, we capitalized approximately $3.8 million of research and development expenditures, net of annual amortization during 2024. However, the enactment of the One Big Beautiful Bill Act (OBBBA) reinstated the full deductibility of domestic research and development expenditures effective January 1, 2025. In accordance with the OBBBA’s transition rules, we deducted 50% of the remaining unamortized domestic research and development balance in 2025 and plan to deduct the remaining 50% in 2026. We continue to capitalize and amortize foreign research and development expenditures over a 15-year period as required.

 

 

A valuation allowance is maintained to reduce deferred tax assets to the amount more-likely-than-not to be realized. In assessing the need for this allowance, we evaluate all available positive and negative evidence, including the timing and extent of future taxable income. Due to significant negative evidence - primarily in the form of cumulative operating losses - we determined that it is not more-likely-than-not that the deferred tax assets will be realized. Consequently, a full valuation allowance has been established. The valuation allowance increased by $1.4 million and $2.3 million for the years ended December 31, 2025 and 2024, respectively.

 

We evaluate uncertain tax positions through a two-step process in accordance with ASC 740. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is cumulatively greater than 50% likely to be realized upon settlement. We have not recorded any uncertain tax positions. As of December 31, 2025 and 2024, we have no unrecognized tax benefits and have not accrued penalties or interest related to uncertain tax positions.

 

We file a U.S. Federal income tax return, as well as state income tax returns for California, Florida, Georgia, Maryland, and North Carolina. There are currently no income tax examinations underway for these jurisdictions. However, tax years from and including 2017 remain open for examination by federal and state income tax authorities.