POWER INTEGRATIONS INC Income Taxes Disclosure

11. PROVISION (BENEFIT) FOR INCOME TAXES:

Income Taxes

The Company accounts for income taxes under the provisions of ASC 740, Income Taxes. Under the provisions of ASC 740, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

U.S. and foreign components of income before income taxes were:

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The Company’s effective tax rate is impacted by the geographic distribution of the Company’s world-wide earnings in lower-tax jurisdictions, federal research tax credits and the recognition of excess tax benefits related to share-based payments. The rate was further reduced by the release of federal uncertain tax position caused by an expiration in the statute of limitations on these positions. These benefits were partially offset by foreign income subject to U.S. tax, known as Net Controlled Foreign Corporation Tested Income ("NCTI"). The Company’s primary jurisdiction where foreign earnings are derived is the Cayman Islands, which is a non-taxing jurisdiction. Income earned in other foreign jurisdictions was not material. The Company has not been granted any incentivized tax rates and does not operate under any tax holidays in any jurisdiction.

The Company has adopted Accounting Standards Update (“ASU”) 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” on a prospective basis for the year ended December 31, 2025. See Note 2. Significant Accounting Policies - Adoption of New Accounting Standards for additional details on the adoption of ASU 2023-09.  

The provision (benefit) for income taxes differs from the amount that would result by applying the applicable federal income tax rate to income before income taxes, as follows:

As previously disclosed for the years ended December 31, 2024 and 2023, prior to the adoption of ASU 2023-09, the components of the benefits for income taxes were as follows:

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As previously disclosed for the years ended December 31, 2024 and 2023, prior to the adoption of ASU 2023-09, the effective income tax rate differs from the statutory federal income tax rate as follows:

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The components of the net deferred income tax assets (liabilities) were as follows:

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In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income. In the event that the Company determines, based on available evidence and management judgment, that all or part of the net deferred tax assets will not be realized in the future, the Company would record a valuation allowance in the period the determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations could have a material impact on its results of operations and financial position.

As of December 31, 2025, the Company continues to maintain a valuation allowance primarily as a result of its California, New Jersey and Canada deferred tax assets as the Company believes that it is not more likely than not that the deferred tax assets will be realized.

As of December 31, 2025, the Company had utilized all its federal research and development tax credit carry-forwards. As of December 31, 2025, the Company had California research and development tax credit carry-forwards of approximately $46.0 million (there is no expiration of research and development tax credit carry-forwards for the state of California) and California net operating losses of $36.9 million, which will begin to expire in 2032. As of December 31, 2025, the Company had Canadian scientific research and experimental development tax credit carry-forwards of approximately $3.9 million and New Jersey research and experimental development tax credit carry-forwards of approximately $1.0 million, which will start to expire in 2033 and 2026, respectively.

Tax law signed into law on December 22, 2017, generally allows companies to repatriate accumulated foreign earnings without incurring additional U.S. federal taxes beginning after December 31, 2017. Local foreign and U.S. states taxes may still be incurred upon repatriation. The Company has not provided for U.S. taxes on its undistributed earnings of foreign subsidiaries. The determination of the future tax consequences of the remittance of these earnings is not practicable.

The foregoing items could have a material effect on our business, cash flow, results of operations or financial conditions.

Unrecognized Tax Benefits

The Company applies the provisions of ASC 740-10, relating to accounting for uncertain income taxes. Reconciliation of the beginning and ending amount of unrecognized tax benefits:

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The Company’s total unrecognized tax benefits as of December 31, 2025, 2024 and 2023, were $15.3 million, $15.2 million and $16.4 million, respectively. An income tax benefit of $3.3 million, net of valuation allowance adjustments, would be recorded if fiscal year 2025 unrecognized tax benefits are recognized.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had accrued interest and penalties of $0.5 million and $0.3 million as of December 31, 2025 and 2024, respectively, which have been recorded in long-term income taxes payable in the accompanying consolidated balance sheets.

As of December 31, 2025, the Company’s tax returns continue to remain effectively subject to examination by U.S. federal authorities for the years after 2021. The Company has closed its audit with the California Franchise Tax Board for the tax years 2018 and 2019 without material change. The California Franchise Tax Board has started an audit for the tax years 2020 through 2022, which is currently ongoing.

The amount of cash taxes paid by the Company is as follows:

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