Note 18 – Income Taxes

As discussed in Note 2 – Summary of Significant Accounting Policies, the Company has retrospectively adopted ASU 2023–09 for the annual period ended December 31, 2025 and has conformed its income tax disclosures below to reflect the additional disclosure requirements around income taxes, specifically related to the rate reconciliation and income taxes paid.

The following table presents the Company’s provision for income taxes for continuing operations for the years indicated:

	Year Ended December 31,
	2025		2024
	(In thousands)
Current:
U.S. Federal	$	—	$	—
State		2		—
Total current	$	2	$	—
Deferred:
U.S. Federal	$	16,706	$	—
State		4,946		—
Total deferred	$	21,652	$	—
Total income tax expense	$	21,654	$	—

For the years ended December 31, 2025 and 2024, the Company had income from operations before income taxes of $53.7 million and a loss from operations before income taxes of $39.9 million, respectively. The Company’s effective rate for its provision for income taxes differs from the federal statutory rate as follows for the years indicated:

	Year Ended December 31,
	2025						2024
	Amount			Percent			Amount			Percent
	(In thousands, except percentages)
U.S. federal statutory rate	$	11,278			21.00	%	$	(8,372	)		21.00	%
State and local income taxes, net of federal income tax effect ⁽¹⁾		3,909			7.28	%		—			—	%
Change in valuation allowance		(7,941	)		(14.79	)%		5,444			(13.65	)%
Nondeductible items
Loss on adjustment to fair value		13,302			24.77	%		1,763			(4.42	)%
Officer compensation disallowance		188			0.35	%		1,649			(4.14	)%
Other		44			0.08	%		35			(0.09	)%
Other		874			1.63	%		(519)			1.30	%
Total income tax expense	$	21,654			40.32	%	$	—			—	%

⁽¹⁾	For the year ended December 31, 2025, the state taxes in Colorado made up the majority of tax effect in this category.

The Company’s cash taxes paid, net of refunds, were as follows for the years indicated:

	Year Ended December 31,
	2025		2024
Federal	$	—	$	—
State		1,800		—
Total cash taxes paid, net of refunds	$	1,800	$	—

Deferred income taxes are provided to reflect the future tax benefits of temporary differences between the tax basis of assets and liabilities, operating losses, and credit carryforwards to the extent which management assesses that realization is more likely than not. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. The Company closely monitors and weighs all available evidence, including both positive and negative, in making its determination whether to maintain a valuation allowance.

As a result of negative evidence as of December 31, 2024, the Company recognized a full valuation allowance as of December 31, 2024. However, due to cumulative income and positive evidence as of December 31, 2025, the Company released the majority of the valuation allowance, except for a valuation allowance of $6.7 million related to certain net operating losses which are not considered to be more–likely–than–not realizable as of December 31, 2025.

The following table presents the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating losses and tax credit carryforwards which give rise to deferred tax assets and liabilities for the years indicated:

	Year Ended December 31,
	2025			2024
	(In thousands)
Deferred tax assets
Stock–based compensation	$	977		$	581
Commodity derivative contracts		—			1,071
Lease liabilities, net		530			333
Net operating losses		58,339			15,137
Total deferred tax assets	$	59,846		$	17,122
Deferred tax liabilities
Property and equipment	$	(61,359	)	$	(438	)
Right–of–use asset, net		(499	)		(322	)
Commodity derivative contracts		(12,984	)		—
Investment in partnership		—			(37	)
Total deferred tax liabilities	$	(74,842	)	$	(797	)

Valuation allowance	$	(6,656	)		(16,325	)
Net deferred tax liability	$	(21,652	)	$	—

The Company had the following net operating losses (“NOLs”) as of the years presented in the following table. The Company did not have any tax credit carryforwards for either of the years presented.

	As of December 31, 2025
	Amount		Expiration
	(In thousands, excluding expiration dates)
Net operating losses, federal (Post– December 31, 2017)	$	234,692		Do not expire
Net operating losses, federal (Pre–January 1, 2018)	$	8,940		2030 – 2037
Net operating losses, CO& CA	$	218,233		2040 – 2045
Net operating losses, UT & LA	$	21,100		Do not expire

The Company believes that it is likely that an ownership change as defined in Section 382 of the Code has occurred. If the Company has experienced such an ownership change, utilization of the NOLs 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, as required. Any such limitation may result in the expiration of a portion of the NOLs before utilization. Any carryforwards that expire prior to utilization as a result of the limitation will be removed from deferred tax assets with a corresponding adjustment to the valuation allowance.

The Company files income tax returns in the U.S. and various state jurisdictions and is subject to examination in the various jurisdictions in which it files. The Company’s tax years 2022 to present remain open for federal examination. Additionally, tax years 2010 through 2021 remain subject to examination for the purpose of determining the amount of federal NOL. The number of years open for state tax audits varies, depending on the state, but is generally from three to five years.

The Company did not have any unrecognized tax benefits as of December 31, 2025 or 2024.

Historical Timeline

Fiscal Year	Filed
2025	Mar 31, 2026	Showing above
2024	Mar 6, 2025

2023	Mar 19, 2024

2021	Mar 31, 2022

2019	Mar 30, 2020

2018	Apr 1, 2019

2017	Apr 2, 2018

2016	Apr 17, 2017

2015	Apr 14, 2016

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.

Prairie Operating Co. Income Taxes Disclosure

Historical Timeline

About Income Taxes Disclosures

Other Available Disclosures