Prime Medicine, Inc.PRME

Prime Medicine, Inc. Income Taxes Disclosure

10-KFiled Feb 28, 20255 min read
Income Taxes
Income tax (benefit) expense consists of the following:
Year Ended December 31,
(in thousands)20242023
Deferred income tax benefit:
Federal$— $(279)
State— — 
Total deferred income tax benefit— (279)
Total provision (benefit) from income taxes$— $(279)
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Year Ended December 31,
20242023
Federal income tax expense at statutory rate21.0 %21.0 %
State income taxes, net of federal benefit7.4 %7.3 %
Tax credits2.6 %2.0 %
Permanent differences(0.9)%(0.9)%
Other0.8 %(0.4)%
Change in valuation allowance(30.8)%(28.9)%
Effective income tax rate— %0.1 %
Net deferred tax assets (liabilities) consisted of the following:
December 31,
(in thousands)20242023
Deferred tax assets:
Capitalized research and development costs$74,605 $49,990 
U.S. and state net operating loss carryforwards61,501 35,977 
Depreciation and amortization12,829 13,204 
Tax credits22,986 12,863 
Accrual2,334 5,817 
Lease Liability12,228 3,711 
Stock Compensation6,005 1,473 
Other141 9 
Total deferred tax assets192,629 123,044 
Deferred tax liabilities:
Right of Use Asset(12,852)(3,794)
Total deferred tax liabilities(12,852)(3,794)
Valuation allowance(179,777)(119,250)
Net deferred tax assets (liabilities)$— $— 
The following is a summary of the Company’s net operating loss and tax credit carryforwards, both of which may be available to reduce future tax liabilities:
December 31,
(in thousands)20242023
U.S. federal net operating loss - do not expire$226,904 $131,608 
State net operating loss - expire at various dates beginning in 2039
219,351 132,009 
Federal research and development tax credits - expire at various dates beginning in 2040
15,082 8,085 
State research and development tax credits - expire at various dates beginning in 2036
10,005 6,047 
Utilization of the U.S. federal and state net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to certain ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income and tax liabilities. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before their utilization. Further, until a study is completed by the Company and any limitation is known, no amounts are being presented as an uncertain tax position.
The Tax Cuts and Jobs Act requires taxpayers to capitalize and amortize research and development expenditures under section 174 for tax years beginning after December 31, 2021. This rule became effective for the Company for the year ended December 31, 2022. For the years ended December 31, 2024 and 2023, the Company capitalized
R&D costs of $141.1 million and $137.2 million, respectively. The Company will amortize these costs for tax purposes over five years if the R&D was performed in the U.S. and over 15 years if the R&D was performed outside the U.S.
The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception, expectation of future losses and lack of other positive evidence. For the years ended December 31, 2024 and 2023, the Company was in a net deferred tax asset position and therefore recorded a valuation allowance against the portion of its deferred tax assets that cannot be fully supported by the future reversal of existing deferred tax liabilities. The Company reevaluates the positive and negative evidence at each reporting period.
For the year ended December 31, 2024, the valuation allowance increased primarily due to the increases in net operating loss carryforwards, capitalized research and development costs, and research and development tax credit carryforwards. The changes in the valuation allowance were as follows:
Year Ended December 31,
(in thousands)20242023
Valuation allowance at beginning of year$119,250 $62,132 
Increases (decreases) recorded to income tax provision60,527 57,118 
Valuation allowance at end of year$179,777 $119,250 
The Company assesses the uncertainty in its income tax positions to determine whether a tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals of litigation processes, based on the technical merits of the position. For tax positions meeting the more-likely-than-not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate settlement with the relevant taxing authority. As of December 31, 2024, the Company had not recorded any reserves for uncertain tax positions or related interest and penalties.
The Company files income tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all years in which a loss carryforward is available. As of December 31, 2024, there were no pending tax examinations. The Company is open to future tax examination under statute from 2019 to the present.
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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.

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