PepGen Inc. Income Taxes Disclosure
11. Income Taxes
The Company’s loss before income taxes for the years ended December 31, 2025 and 2024 were generated in the following jurisdictions (in thousands):
|
|
Year Ended |
|
|||||
|
|
2025 |
|
|
2024 |
|
||
Domestic |
|
$ |
(89,606 |
) |
|
$ |
(87,466 |
) |
Foreign |
|
|
— |
|
|
|
(3,132 |
) |
Worldwide |
|
$ |
(89,606 |
) |
|
$ |
(90,598 |
) |
The components of net deferred income taxes consisted of the following as of December 31, 2025 and 2024 (in thousands):
|
|
December 31, |
|
|||||
|
|
2025 |
|
|
2024 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
||
Net operating loss carryforwards |
|
$ |
49,762 |
|
|
$ |
17,039 |
|
General business credits |
|
|
11,134 |
|
|
|
7,769 |
|
Accrued expenses |
|
|
1,138 |
|
|
|
864 |
|
Capitalized Section 174 R&D Costs |
|
|
30,687 |
|
|
|
41,821 |
|
Stock compensation |
|
|
6,181 |
|
|
|
4,511 |
|
Right-of-use liability |
|
|
4,629 |
|
|
|
5,086 |
|
Intangible asset amortization |
|
|
6,269 |
|
|
|
6,847 |
|
Other, net |
|
|
(1 |
) |
|
|
4 |
|
Deferred tax assets |
|
|
109,799 |
|
|
|
83,941 |
|
Deferred tax liabilities |
|
|
|
|
|
|
||
Right-of-use-Asset |
|
|
(5,206 |
) |
|
|
(5,842 |
) |
Fixed Assets |
|
|
(979 |
) |
|
|
(1,316 |
) |
Deferred tax liabilities |
|
|
(6,185 |
) |
|
|
(7,158 |
) |
Net deferred tax assets |
|
|
103,614 |
|
|
|
76,783 |
|
Valuation allowance |
|
|
(103,614 |
) |
|
|
(76,783 |
) |
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
The components of income tax expense were as follows for the years ended December 31, 2025 and 2024 (in thousands):
|
|
Year Ended |
|
|||||
|
|
2025 |
|
|
2024 |
|
||
Current expense: |
|
|
|
|
|
|
||
U.S. Federal |
|
$ |
— |
|
|
$ |
— |
|
State |
|
|
49 |
|
|
|
84 |
|
Foreign |
|
|
— |
|
|
|
(701 |
) |
Total current expense |
|
|
49 |
|
|
|
(617 |
) |
Deferred expense: |
|
|
|
|
|
|
||
U.S. Federal |
|
|
— |
|
|
|
— |
|
State |
|
|
— |
|
|
|
— |
|
Foreign |
|
|
— |
|
|
|
— |
|
Total deferred expense |
|
|
— |
|
|
|
— |
|
Provision for income taxes |
|
$ |
49 |
|
|
$ |
(617 |
) |
A reconciliation of income tax expense to the amount computed by applying the 21% statutory federal income tax rate to the loss from operations is summarized for the year ended December 31, 2025 after the adoption of ASU 2023-09 is as follows:
Description |
Year Ended |
|
|||||
|
Amount |
|
|
Percent |
|
||
U.S. Federal Statutory Tax Rate |
$ |
(18,816 |
) |
|
|
21.0 |
% |
State and Local Income Tax, Net of Federal (National) Income Tax Effect |
|
39 |
|
|
|
(0.0 |
)% |
Foreign Tax Effects |
|
|
|
|
|
||
Statutory tax rate difference between local country and United States |
|
— |
|
|
|
0.0 |
% |
Effect of Changes in Tax Laws or Rates Enacted in the Current Period |
|
— |
|
|
|
0.0 |
% |
Effect of Cross-Border Tax Laws |
|
— |
|
|
|
0.0 |
% |
Tax Credits |
|
— |
|
|
|
0.0 |
% |
R&D |
|
(1,533 |
) |
|
|
1.7 |
% |
Orphan drug credit |
|
(1,435 |
) |
|
|
1.6 |
% |
Changes in valuation allowances |
|
20,925 |
|
|
|
(23.4 |
)% |
Nontaxable or Nondeductible Items |
|
— |
|
|
|
0.0 |
% |
Permanent Adjustments |
|
706 |
|
|
|
(0.8 |
)% |
Changes in Unrecognized Tax Benefits |
|
— |
|
|
|
0.0 |
% |
Other Adjustments |
|
— |
|
|
|
0.0 |
% |
Other |
|
163 |
|
|
|
(0.2 |
)% |
Income tax expense (benefit) |
$ |
49 |
|
|
|
(0.1 |
)% |
A reconciliation of the provision for income taxes to the amount computed by applying the 21% statutory federal income tax rate to the loss from operations is summarized for the tax year ended December 31, 2024 prior to the adoption of ASU 2023-09 is as follows:
|
|
Year Ended |
|
|
|
|
2024 |
|
|
Tax at statutory rate |
|
|
21.0 |
% |
State tax (net of federal benefit) |
|
|
(0.1 |
)% |
Permanent differences |
|
|
(0.8 |
)% |
Research and development credit |
|
|
3.4 |
% |
GILTI Inclusion |
|
|
0.0 |
% |
U.K. R&D credit |
|
|
0.0 |
% |
Foreign rate differential |
|
|
1.0 |
% |
Change in valuation allowance |
|
|
(23.6 |
)% |
Other |
|
|
(0.2 |
)% |
Income tax expense (benefit) |
|
|
0.7 |
% |
Disclosed below is a summary of income taxes paid by jurisdiction pursuant to the disclosure requirements of ASU 2023-09 for the year ended December 31,2025:
|
|
Year Ended |
|
|
|
|
2025 |
|
|
United States - Federal |
|
$ |
— |
|
United States - State and local |
|
|
82 |
|
Foreign |
|
|
— |
|
Income tax expense (benefit) |
|
$ |
82 |
|
The Company's income tax expense was $48,865 for the year ended December 31, 2025 and a benefit of $0.7 million for the year ended December 31, 2024. The net income tax expense for the year ended December 31, 2025 was primarily attributable to the state income taxes on interest income generated from the Company’s cash equivalents and marketable securities. On January 1, 2022, or the Transfer Date, the Company’s wholly owned subsidiary, PepGen Limited, transferred all IP assets to the parent company, PepGen, in an arm’s length transaction at fair value pursuant to an asset transfer agreement. The Company recognized a tax expense in 2022 of $3.7 million, inclusive of a $0.7 million unrecognized tax benefit. The income tax benefit for the year ended December 31, 2024 was due to the derecognition of the unrecognized tax benefit of $0.7 million upon the dissolution of our U.K.-based entity, PepGen Limited on December 10, 2024.
As of December 31, 2025, the Company has federal net operating losses ("NOLs") of $177.3 million and federal tax credits of $13 million, before consideration of limitations under IRC Section 382 of the Internal Revenue Code of 1986, as amended, or Section 383, as further described below. The federal NOLs do not expire, but generally limit the NOLs deduction to the lesser of the NOL carryover or 80% of a corporation's taxable income. The tax credits will begin to expire in 2042.
As of December 31, 2025, The Company has state net operating losses ("NOLs") of $199.6 million and state research and development credits of $2.5 million. The state NOLs will begin to expire in 2041, and the tax credits will begin to expire in 2037.
Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the IRC, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. An assessment of such ownership changes under Section 382 was not completed through December 31, 2025. To the extent that an assessment is completed in the future, the Company’s ability to utilize tax attributes could be restricted on a year-by-year basis and certain attributes could expire before they are utilized. The Company will examine the impact of any potential ownership changes in the future. A full valuation allowance has been provided against the deferred tax assets related to the Company's net operating loss and tax credits carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In a normal course of business, the Company is subject to examination by U.S. federal and state as well as foreign jurisdictions, where applicable. The Company’s tax years are still open since inception. To the extent that the Company has tax attribute carryforwards, the tax year in which the attributes were generated may still be adjusted upon examination by the U.S. Internal Revenue Services or state tax authorities to the extent utilized in a future period. The Company is not currently under examination by any tax authorities.
The following table summarizes the reconciliation of the beginning and ending amount of total unrecognized tax benefits recorded in the statement of operations in the prior year:
|
|
December 31, |
|
|
|
|
2024 |
|
|
Balance at beginning of the period |
|
$ |
713 |
|
Increase related to current year tax positions |
|
|
— |
|
Increase related to prior year tax positions |
|
|
— |
|
Decrease related to prior year tax positions |
|
|
(701 |
) |
Currency translation |
|
|
(12 |
) |
Balance at the end of the period |
|
$ |
— |
|
The Company's policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company released approximately $0.7 million in unrecognized tax benefits due to the liquidation of its U.K. subsidiary, PepGen Limited in 2024. As of December 31, 2025, the Company had no unrecognized tax benefits or accrued interest or penalties.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 4, 2026 | Showing above |
| 2024 | Feb 24, 2025 | |
| 2023 | Mar 6, 2024 | |
| 2022 | Mar 23, 2023 | |
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.