PIONEER POWER SOLUTIONS, INC. Income Taxes Disclosure

10. INCOME TAXES

 

The components of loss before income taxes related to continuing operations are summarized below:

 SCHEDULE OF LOSS BEFORE INCOME TAXES

		2024				2023
		For the Years Ended
		December 31,
		2024				2023
Loss before income taxes
U.S. operations		$	(4,767	)		$	(6,279	)
Loss from continuing operations		$	(4,767	)		$	(6,279	)

 

The components of the income tax benefit related to continuing operations were as follows:

 SCHEDULE OF INCOME TAX PROVISION

		2024				2023
		For the Years Ended
		December 31,
		2024				2023
Current
Federal		$	(1,128	)		$	-
State			(290	)			-
Total income tax benefit		$	(1,418	)		$	-

 

A reconciliation from the statutory U.S. income tax rate and the Company’s effective income tax rate for continuing operations, as computed on loss before taxes, is as follows:

 SCHEDULE OF INCOME TAX RATE RECONCILIATION

		2024				2023
		For the Years Ended
		December 31,
		2024				2023
Federal income tax at statutory rate		$	(1,001	)		$	(1,319	)
State and local income tax, net			(316	)			-
Other permanent items			120				(9	)
Expired foreign tax credits			652				28
Valuation allowance			(922	)			1,300
True-up			49				-
Total		$	(1,418	)		$	-

 

The Company’s provision for income taxes reflects an effective tax rate on loss before income taxes of 29.7% in 2024, as compared to 0.0% in 2023. The increase in the Company’s effective tax rate during 2024 primarily reflects the reduction of the valuation allowance and the utilization of its net operating losses.

 

The net deferred income tax asset (liability) was comprised of the following:

 SCHEDULE OF DEFERRED INCOME TAX ASSETS LIABILITY

		2024				2023
		For the Years Ended
		December 31,
		2024				2023
Noncurrent deferred income taxes
Total assets		$	749			$	110
Total liabilities			(749	)			(110	)
Net noncurrent deferred income tax asset			-				-
Net deferred income tax asset		$	-			$	-

 

 

The tax effect of temporary differences between GAAP accounting and federal income tax accounting creating deferred income tax assets and liabilities were as follows:

 SCHEDULE OF ACCOUNTING CREATING DEFERRED INCOME TAX

		2024				2023
		For the Years Ended
		December 31,
		2024				2023
Deferred tax assets
U.S. net operating loss carry forward		$	1,051			$	858
Non-deductible reserves			830				923
Tax credits			3,581				4,233
Intangibles			1,294				1,025
Total deferred tax assets			6,756				7,039
Valuation allowance			(6,007	)			(6,929	)
Net deferred tax assets			749				110
Deferred tax liabilities
Fixed assets			(749	)			(110	)
Total deferred tax liabilities			(749	)			(110	)
Deferred asset, net		$	-			$	-

 

As of December 31, 2024, The Company had $6,756 of deferred tax assets on which it is taking a $6,007 valuation allowance. The total valuation allowance of $6,007 as of December 31, 2024, represents a decrease of $922 from December 31, 2023.

 

A valuation allowance is established when it is determined that it is more likely than not that the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, management assessed all available positive and negative evidence, including historical operating results, cumulative losses, projections of future taxable income, and sources of taxable income such as future reversals of existing taxable temporary differences, tax-planning strategies, and the realization of the gain from the subsidiary sale. Significant judgment is required in assessing the weight of both positive and negative evidence, particularly in determining the likelihood and timing of future taxable income.

 

During the year ended December 31, 2024, the Company recognized pre-tax income from the divestiture of PCEP Subsidiary, resulting in a tax gain of approximately $37 million. This gain enabled the Company to fully recognize its existing tax attributes, net operating losses (NOLs), §163(j) interest expense limitations, and R&D credits available at the time of the divestiture. Despite this positive evidence, the Company determined that it was insufficient to overcome substantial negative evidence. This negative evidence includes cumulative losses incurred over recent years, continued uncertainty regarding sustained future taxable income, and the expectation of continued accumulation of new tax attributes due to ongoing operating results. Furthermore, the anticipated annual generation of NOLs upon reversal of deferred tax liabilities significantly reduces the reliability of future taxable income as a viable source for realizing deferred tax assets.

 

Considering the significant judgment required in assessing the likelihood, timing, and magnitude of future taxable income, and given the relative weight and persuasiveness of the available evidence, management concluded that the negative evidence continues to outweigh the positive evidence. As a result, the Company has determined that the continuation of a full valuation allowance remains appropriate as of December 31, 2024. This includes a full valuation allowance for the Company’s foreign tax credits (“FTCs”) as the Company does not anticipate generating any foreign source income to realize this benefit. As of December 31, 2024, the remaining balance of the Company’s FTCs was $3,581.

 

The Company has state net operating loss (“NOLs”) carryforwards of approximately $16,431 as of December 31, 2024. Certain of these amounts are subject to annual limitations under applicable tax law. If not utilized, a portion of these losses will expire in varying amounts between 2030 and 2043.

 

Internal Revenue Code Section 382 imposes an annual limitation on the utilization of net operating loss (NOL) carryforwards and certain other tax attributes following a change in ownership. An ownership change generally occurs if the percentage of stock owned by 5-percent shareholders increases by more than 50 percentage points during a rolling three-year period. As of December 31, 2024, the Company conducted an analysis under Section 382 and determined that no ownership change occurred during the year. Therefore, there is no annual limitation imposed on the utilization of the Company’s federal NOL carryforwards. Furthermore, the sale of a subsidiary completed prior to year-end is expected to allow the Company to fully utilize these NOL carryforwards. The Company has also evaluated the implications of Section 382 limitations at the state level. Given that state conformity to federal Section 382 provisions varies significantly, additional state-specific considerations may apply. The Company will continue to monitor any future ownership changes, legislative updates, or interpretive guidance related to Section 382, as such changes could impact the Company’s ability to realize these deferred tax assets.

 

 

The following table summarizes the Company’s state losses by jurisdiction, as well as the expiration date:

 SCHEDULE OF STATE LOSSES BY JURISDICTION

						Oldest				Carry
						Remaining				Forward				Expiration				Expiration
		December 31, 2024				NOL				Years				Start Date				End Date
California		$	12,844				2015				23				2038				2043
Florida			1,833				2015				20				2035				Indefinitely
Illinois			208				2018				12				2030				2043
Iowa			733				2017				20				2037				Indefinitely
Maryland			40				2017				20				2037				Indefinitely
Minnesota			248				2022				15				2037				2038
Nebraska			234				2017				20				2037				2043
North Carolina			130				2017				20				2037				2038
North Dakota			160				2015				20				2035				Indefinitely
Total		$	16,430

 

The Company incurs research and development expenses as part of its ongoing operations. These expenditures generate a research and development credit for tax purposes. All research and development tax credits have been fully utilized and the Company has $0 of research and development credits remaining on December 31, 2024.

 

Under the provisions of the Tax Cuts and Jobs Act (TCJA) and as further modified by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Internal Revenue Code Section 163(j) generally limits our deductible business interest expense to the sum of (i) our business interest income, (ii) 30% of adjusted taxable income (ATI), and (iii) floor plan financing interest expense. Adjusted taxable income is defined as taxable income with adjustments for interest, depreciation, amortization, and depletion through 2021. Beginning in 2022, depreciation, amortization, and depletion deductions are no longer added back when calculating ATI. The limitation imposed by Section 163(j) may create interest expense carryforwards, which can be utilized indefinitely in future tax periods subject to the same limitation. For the year ended December 31, 2024, due to the gain realized on the sale of PCEP, the Company generated sufficient adjusted taxable income to support interest expense deductions, resulting in an interest expense deduction of $2,897 from prior year carryforwards. The amount available for carryover to future periods of IRC 163(j) as of December 31, 2024 is $0. The Company expects the interest limitation will continue to apply in future years.

 

The Company has determined there are no uncertain tax positions requiring recognition or disclosure, including positions related to the sale of PCEP. The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with ASC 740-10. As a result, the Company may adjust the reserves for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitations. Management has concluded that the current reserves are appropriate. The Company continues to monitor and evaluate uncertain tax positions that may arise from future developments in tax law interpretations, regulations, or audit outcomes. The Company’s tax returns remain subject to examination by the U.S. Internal Revenue Service and most state jurisdictions include the years 2021 and forward.