Phio Pharmaceuticals Corp. Income Taxes Disclosure

10. Income Taxes

 

As further described in Note 1, Summary of Significant Accounting Policies, the Company has elected to prospectively adopt the guidance in ASU No. 2023-09. The following table is a reconciliation of the U.S. federal statutory rate of 21% to the Company's effective tax rate for the year ended December 31, 2025 in accordance with the guidance in ASU No. 2023-09, in thousands, except percentages:

 

		Year Ended December 31,
		2025				%
Provision for income taxes at U.S. federal statutory rate		$	(1,827	)			21.00
Tax Credits			(179	)			2.06
Changes in valuation allowances			1,993				(22.91	)
Non-taxable or non-deductible items			10				(0.11	)
Other reconciling items			3				(0.03	)
Effective tax rate			-				-

 

 

The following table is a reconciliation of the U.S. federal statutory rate of 21% to the Company's effective rate for the year ended December 31, 2024 in accordance with the guidance prior to the adoption of ASU 2023-09:

 

		Year Ended December 31,
		2024
Federal statutory rate			21.0	%
State income taxes, net of federal benefit			10.6
Non-deductible expenses			(0.8	)
Income tax credits			0.1
Valuation allowance			(30.9	)
Effective tax rate			0.00	%

 

The provision for income taxes for the years ended December 31, 2025 and 2024 are as follows, in thousands:

 

		Year Ended December 31,
		2025				2024
Current
Federal		$	-			$	-
State			-				-
Total current			-				-
Deferred
Federal			2,255				1,589
State			358				623
Total deferred			2,613				2,212
Valuation allowance		$	(2,613	)		$	(2,212	)
Total provision for income taxes		$	-			$	-

 

 

The Company recognizes deferred tax assets and liabilities to reflect the tax effects of temporary differences between the tax basis of assets or liabilities and their reported amounts in the consolidated financial statements in accordance with ASC 740. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled.

 

ASC 740 requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred asset will not be realized. The Company evaluates the realizability of its net deferred income tax assets and valuation allowances as necessary, at least on an annual basis. During this evaluation, the Company reviews its forecasts of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is required. As a result of this evaluation, the Company has recorded a full valuation allowance against its deferred tax assets as the Company believes it is more likely than not that the benefit of all of its deferred tax assets will not be realized.

 

The significant components of the Company’s deferred tax assets and liabilities are as follows, in thousands:

 

		Year Ended December 31,
		2025				2024
Deferred tax assets:
Net operating loss carryforwards		$	1,986			$	26
Tax credit carryforwards			212				5
Stock-based compensation			84				21
Capitalized research and development expenses			248				295
License fees			2				3
Lease liability			-				-
Other timing differences			98				-
Deferred tax assets			2,630				350
Deferred tax liabilities:
Right of use asset			-				-
Other timing differences			(17	)			(13	)
Deferred tax liability			(17	)			(13	)
Valuation allowance			(2,613	)			(337	)
Net deferred tax asset		$	-			$	-

 

During the year ended December 31, 2025, the Company paid no federal income taxes, net of refunds. Additionally, the amount paid in state income taxes, net of refunds received, was immaterial for the year ended December 31, 2025.

 

On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was enacted, reinstating full expensing of domestic research and experimental (R&E) expenditures under new Internal Revenue Code Section 174A, effective for tax years beginning after December 31, 2024. The legislation also provides taxpayers with the option to accelerate deductions for unamortized domestic R&E costs incurred during the 2022–2024 period. The Company intends to continue Tax Cuts and Jobs Act amortization for unamortized domestic R&E costs incurred during 2022–2024 period. As of December 31, 2025, $77,000 remained unamortized related to domestic R&D costs. Final elections will be made with the 2025 tax return filing.

 

Ownership changes may limit the amount of net operating loss (“NOL”) carryforwards or tax credit carryforwards that can be utilized to offset future taxable income or tax liability. Pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), NOL and tax credit carryforwards may be subject to annual limitations in the event a cumulative change in ownership of more than 50% occurs within a three-year period. Any limitation may result in expiration of a portion of the NOL carryforwards or tax credit carryforwards before utilization.

 

For 2024, the Company updated its previously completed assessment of the available NOL and tax credit carryforwards to determine the annual Section 382 NOL utilization limitation as a result of a change in ownership that occurred on December 20, 2024. As a result of this ownership change, federal and state NOLs were reduced by $6,265,000 and $4,893,000 respectively, federal and state research and development tax credits carryforwards were reduced by $401,000 and $174,000 respectively.

 

The federal capitalized research and development expense deferred tax asset has been reduced by $0 and $4,122,000 as a result of the Section 382 limitations as of December 31, 2025 and 2024, respectively.

 

Under Section 382 of the Internal Revenue Code the utilization of the Company's NOLs and certain other tax attributes may be limited if the Company experiences an ownership change, as defined in Section 382. An ownership change generally occurs when there is a cumulative change in ownership of more than 50 percentage points among certain stockholders over a three-year testing period.

 

The Company did not complete a formal Section 382 study during the year ended December 31, 2025 to determine whether an ownership change has occurred. Accordingly, no assurance can be given that the Company has not experienced, or will not experience in the future, an ownership change that could limit the ability to utilize its NOLs and other tax attributes. If such limitations were to apply, the Company's future cash flows and income tax expense could be adversely affected.

 

At December 31, 2025, the Company had federal and state NOL carryforwards of approximately $8,153,000 and $4,331,000, respectively, to reduce future taxable income. The utilization of the federal carryforwards as an available offset to future taxable income is subject to limitations under federal income tax laws. Under current federal income tax law, federal NOLs incurred in tax years beginning after December 31, 2017 may be carried forward indefinitely, but are limited to offset up to 80% of future taxable income. As of December 31, 2025, all of the Company's federal NOL carryforwards will carry forward indefinitely. The Company's available state NOL carryforwards will begin to expire in 2045, unless previously utilized.

 

At December 31, 2025, the Company also had federal and state research and development credits of approximately $185,000 and $34,000, respectively. The federal tax credit carryforwards will begin to expire in 2045.

 

The Company has not recorded any uncertain tax positions as of December 31, 2025 or 2024. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

 

The Company has not incurred any interest or penalties. In the event that the Company is assessed interest or penalties at some point in the future, they will be classified in the financial statements as general and administrative expenses.

 

The Company files income tax returns in the United States and in multiple state jurisdictions. The Company is subject to tax examinations for federal and state purposes for tax years 2022 through 2025.Ownership changes may limit the amount of NOL carryforwards or tax credit carryforwards that can be utilized to offset future taxable income or tax liability. Pursuant to Sections 382 and 383 of the Code, NOL and tax credit carryforwards may be subject to annual limitations in the event a cumulative change in ownership of more than 50% occurs within a three-year period. Any limitation may result in expiration of a portion of the NOL carryforwards or tax credit carryforwards before utilization.