PDF SOLUTIONS INC Income Taxes Disclosure

11. INCOME TAXES

 

Income before income tax expense was as follows (in thousands):

 

		Year Ended December 31,
		2025				2024				2023
U.S.		$	2,691			$	4,765			$	3,220
Foreign			510				1,814				1,649
Income before income tax expense		$	3,201			$	6,579			$	4,869

 

The components of income tax expense were as follows (in thousands): 

 

		Year Ended December 31,
		2025				2024				2023
Current tax expense:
Federal		$	398			$	213			$	1,854
State			333				286				(437	)
Foreign			2,228				1,976				452
Total current tax expense			2,959				2,475				1,869
Deferred tax expense:
Federal			926				6				6
State			35				3				(3	)
Foreign			(79	)			38				(108	)
Total deferred tax expense			882				47				(105	)
Total income tax expense		$	3,841			$	2,522			$	1,764

 

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted in the U.S. The OBBBA makes permanent key elements of the Tax Cuts and Jobs Act, including 100% bonus depreciation, domestic research cost expensing, and the business interest expense limitation. ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. OBBBA contained U.S. corporate tax provisions under which the Company elected to expense U.S. incurred research or experimental expenditures immediately. As a result of this election, the Company recognized a favorable cash tax benefit of approximately $1.3 million and reduction of effective tax rate by approximately 40% in 2025. The OBBBA includes multiple effective dates, with certain provisions effective in 2025 and others phased in through 2027. The Company will continue to assess the impact on the effective tax rate for future periods.

 

During the year ended December 31, 2025, the Company adopted ASU 2023-09 prospectively to enhance the income taxes disclosures regarding income taxes paid and the rate reconciliation disclosure. Prior period disclosures have not been adjusted to reflect the new disclosure requirements.

 

Income taxes paid by jurisdiction, net of refunds received were as follows (in thousands):

 

		Year Ended December 31, 2025
US Federal		$	—
State and Local:
US State			111
Total State and Local			111
Foreign:
China			1,311
Taiwan			665
Japan			252
Other			144
Total Foreign			2,372
Total income taxes paid, net of refunds		$	2,483

 

The reconciliation between the statutory federal income tax expense and the Company’s effective income tax expense after the adoption of ASU 2023-09 were as follows (amounts in thousands):

 

		Year Ended December 31, 2025
Federal statutory income tax expense		$	676				21	%
State and local income taxes, net of federal income tax effect			7				—		*
Change in valuation allowance			965				30
Nontaxable or nondeductible items:
Stock compensation expense			2,093				65
Meals expense			100				3
Section 162(m) limitation			64				2
U.S. branch income			70				2
Sales-type lease interest income			(83	)			(3	)
Other nontaxable or nondeductible items			14				—		*
Tax credits:
Foreign tax credits			(1,995	)			(62	)
Other tax credits			(10	)			—		*
Cross-border tax laws:
Foreign-derived intangible income deduction			(403	)			(13	)
Worldwide changes in unrecognized tax benefits			575				18
Foreign tax effects:
Taiwan
Foreign permanent differences			61				2
Prior year true up			(35	)			(1	)
Foreign withholding tax			567				18
Other adjustment			(4	)			—		*
China
Foreign permanent differences			(133	)			(4	)
Foreign withholding tax			1,306				41
Other adjustment			23				1
Canada
Foreign permanent differences			247				8
Tax rate differential			(64	)			(2	)
Other adjustment			(1	)			—		*
Malaysia
Foreign withholding tax			55				2
Other foreign jurisdictions			20				1
Other:
Deferred tax asset adjustment			(88	)			(3	)
Transaction costs			(198	)			(6	)
Other adjustment			12				—		*
Global effective income tax expense		$	3,841				120	%

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*         Percentage rounds to less than 1.0%. 

 

The reconciliation between the statutory federal income tax expense and the Company’s effective income tax expense for the years prior to the adoption of ASU 2023-09 were as follows (in thousands):

 

		Year Ended December 31,
		2024				2023
Federal statutory income tax expense		$	1,382			$	1,016
State income tax expense			738				(65	)
Stock compensation expense			286				(1,747	)
Tax credits			(2,795	)			(3,214	)
Foreign taxes, net			1,707				1,859
Foreign-derived intangible income deduction			(2,052	)			(1,612	)
Change in valuation allowance			2,882				5,043
Section 162(m) limitation			148				424
Unrealized tax benefit reserve changes			232				99
Other			(6	)			(39	)
Global effective income tax expense		$	2,522			$	1,764

 

As of December 31, 2025, the Company had federal and California net operating loss carry-forwards (“NOLs”) of $2.0 million and $13.0 million, respectively. Some of the federal NOLs, acquired as part of past acquisitions, have expirations in 2025 onwards, and approximately $0.9 million of the federal NOLs have no expiration. The California NOLs begin expiring in 2028 onwards.

 

As of December 31, 2025, the Company had federal and state research and experimental and other tax credit (“R&D credits”) carry-forwards of $24.7 million and $26.5 million, respectively. The federal credits began to expire in 2022, while the California credits have no expiration. The extent to which the federal and state credit carry-forwards can be used to offset future tax liabilities, respectively, may be limited, depending on the extent of ownership changes within any three-year period as provided in the Tax Reform Act of 1986 and the California Conformity Act of 1987.

 

The Company assesses its deferred tax assets for recoverability at each reporting period, and where applicable, a valuation allowance is recorded to reduce the total deferred tax assets to an amount that will, more likely than not, be realized in the future. Based on all available evidence, both positive and negative, the Company determined a full valuation allowance was still appropriate for its U.S. federal and state net deferred tax assets (“DTAs”) as of December 31, 2025. The valuation allowance was $69.9 million and $67.9 million as of December 31, 2025 and 2024, respectively. The increase in the valuation allowance from  December 31, 2024 to  December 31, 2025 was primarily driven by an increase in deferred revenues and various accrual items in the current year which require a valuation allowance. Management will continue to evaluate the need for a valuation allowance and may change its conclusion in a future period based on any change in facts (e.g., significant new revenue and other relevant factors). If the Company concludes that it is more likely than not to utilize some or all of its U.S. DTAs, it will release some or all of its valuation allowance and the Company’s income tax expense will decrease in the period in which such determination is made. Net DTAs, after the U.S. valuation allowance, were immaterial as of December 31, 2025 and 2024.

 

The components of the net DTAs and liabilities consisted of the following (in thousands):

 

		December 31,
		2025				2024
Deferred tax assets:
Net operating loss carry-forwards		$	1,880			$	2,414
Research and development and other credit carry-forwards			32,657				31,988
Foreign tax credit carry-forwards			2,256				1,977
Capitalized research and experimental expenses			24,932				26,426
Accruals deductible in different periods			8,717				6,049
Leases			952				1,113
Stock-based compensation			2,066				2,087
Total deferred tax assets			73,460				72,054
Less: valuation allowance			(69,874	)			(67,946	)
Total deferred tax assets, net of valuation allowance			3,586				4,108
Deferred tax liabilities:
Property and equipment, net			(1,233	)			(752	)
Operating lease right-of-use assets			(922	)			(1,082	)
Intangible assets			(2,418	)			(2,366	)
Total deferred tax liabilities			(4,573	)			(4,200	)
Net deferred tax liabilities		$	(987	)		$	(92	)

 

The Company classifies its liabilities for income tax exposures as long-term. The Company includes interest related to unrecognized tax benefits within the Company’s income tax expense. As of December 31, 2025 and 2024, the Company had accrued interest related to unrecognized tax benefits of $0.7 million and $0.6 million, respectively. For the years ended December 31, 2025, 2024 and 2023, the Company recognized changes in interest charges related to unrecognized tax benefits of $(75,000), $(20,000), and $(15,000), respectively, in the Consolidated Statements of Operations and Comprehensive Income (Loss).

 

The Company’s total amount of unrecognized tax benefits, excluding interest, as of  December 31, 2025 was $17.1 million, of which $2.5 million, if recognized, would impact the Company’s effective tax rate. As of December 31, 2025, the Company has recorded unrecognized tax benefits of $3.2 million, including interest of $0.7 million, as long-term income taxes payable in its Consolidated Balance Sheet. The remaining $14.6 million has been recorded within DTAs, which is subject to a full valuation allowance. The Company does not expect the change in unrecognized tax benefits over the next twelve months to materially impact its results of operations and financial position.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits were as follows (in thousands):

 

		Year Ended December 31,
		2025				2024				2023
Gross unrecognized tax benefits, beginning of year		$	16,569			$	15,937			$	15,109
Increases in tax positions for current year			1,171				1,290				1,469
Increases in tax positions for prior years			—				—				91
Lapse in statute of limitations			(615	)			(658	)			(732	)
Gross unrecognized tax benefits, end of year		$	17,125			$	16,569			$	15,937

 

The Company does not provide deferred taxes on undistributed earnings of its foreign subsidiaries as it intends to indefinitely reinvest those earnings.

 

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. federal, various state and foreign jurisdictions. For U.S. federal and California income tax purposes, the statute of limitations currently remains open for the years ended 2022 to present and 2021 to present, respectively. In addition, all of the NOLs and R&D credit carry-forwards that may be utilized in future years may be subject to federal and state examination. The Company is not currently under income tax examinations in the U.S. or in any other of its major foreign subsidiaries’ jurisdictions.

 

Valuation allowance for DTAs is summarized as follows (in thousands):

 

		Balance at Beginning of Year				Charged to Income Tax Expense				Deductions/ Write-offs of Accounts				Balance at End of Year
2025		$	67,946			$	1,928			$	—			$	69,874
2024		$	64,152			$	3,794			$	—			$	67,946
2023		$	59,215			$	4,937			$	—			$	64,152