POWER SOLUTIONS INTERNATIONAL, INC.PSIX
POWER SOLUTIONS INTERNATIONAL, INC. Income Taxes Disclosure
Income Taxes
Income tax expense was as follows:
| (in thousands) | For the Year Ended December 31, | |||||||||||||
| 2024 | 2023 | |||||||||||||
| Current tax expense | ||||||||||||||
| Federal | $ | 443 | $ | 61 | ||||||||||
| State | 389 | 639 | ||||||||||||
| Total current tax expense | $ | 832 | $ | 700 | ||||||||||
| Deferred tax expense (benefit) | ||||||||||||||
| Federal | $ | 229 | $ | 64 | ||||||||||
| State | (139) | 136 | ||||||||||||
| Total deferred tax expense | 90 | 200 | ||||||||||||
| Total tax expense | $ | 922 | $ | 900 | ||||||||||
The Company made net cash payments for income taxes of $1.6 million and $0.6 million in 2024 and 2023, respectively.
A reconciliation between the Company’s effective tax rate on income before income taxes and the statutory tax rate is as follows:
| (in thousands) | For the Year Ended December 31, | |||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||||||||||||
| Income tax expense at federal statutory rate | $ | 14,742 | 21.0 | % | $ | 5,713 | 21.0 | % | ||||||||||||||||||
| State income tax, net of federal benefit | 3,860 | 5.5 | % | 1,486 | 5.5 | % | ||||||||||||||||||||
Other permanent differences | 27 | — | % | 22 | 0.1 | % | ||||||||||||||||||||
Research and development tax credits | (706) | (1.0) | % | (601) | (2.2) | % | ||||||||||||||||||||
Other tax credits | (552) | (0.8) | % | 277 | 1.0 | % | ||||||||||||||||||||
Tax reserve reassessment | (119) | (0.2) | % | 158 | 0.6 | % | ||||||||||||||||||||
Change in valuation allowance | (15,815) | (22.5) | % | (5,366) | (19.7) | % | ||||||||||||||||||||
Return adjustment | (637) | (0.9) | % | (673) | (2.5) | % | ||||||||||||||||||||
Other, net | 122 | 0.2 | % | (116) | (0.5) | % | ||||||||||||||||||||
| Income tax expense | $ | 922 | 1.3 | % | $ | 900 | 3.3 | % | ||||||||||||||||||
For the years ended December 31, 2024 and 2023, the Company recognized pretax income of $70.2 million and $27.2 million, respectively.
The Company generates R&D tax credits as a result of its R&D activities, which reduce the Company’s effective income tax rate. In general, these credits are general business credits and may be carried forward up to 20 years to be offset against future taxable income. The income tax expense for both 2024 and 2023 primarily related to federal and state income taxes offset by R&D credits and a reduction in the valuation allowance against deferred tax assets.
Significant components of deferred income tax assets and liabilities consisted of the following:
| (in thousands) | As of December 31, | |||||||||||||
| 2024 | 2023 | |||||||||||||
Deferred tax assets: | ||||||||||||||
| Net operating loss carryforwards | $ | 7,454 | $ | 18,067 | ||||||||||
| Capital loss carryforwards | 182 | 195 | ||||||||||||
| Research and development credits | 4,818 | 6,167 | ||||||||||||
| Other state credits | 3,142 | 2,244 | ||||||||||||
| Inventory | 3,925 | 2,569 | ||||||||||||
| Allowances and bad debts | 492 | 1,646 | ||||||||||||
| Accrued warranty | 3,392 | 5,165 | ||||||||||||
| Accrued wages and benefits | 405 | 353 | ||||||||||||
| Other accrued expenses | 5,042 | 6,505 | ||||||||||||
| Stock-based compensation | 676 | 240 | ||||||||||||
| Capitalized research and development costs | 9,884 | 8,078 | ||||||||||||
| 163(j) disallowed interest | — | 2,868 | ||||||||||||
| Contract liabilities | 348 | 698 | ||||||||||||
| Operating lease liability | 6,420 | 7,917 | ||||||||||||
| Other | 870 | 804 | ||||||||||||
| Total deferred tax assets | 47,050 | 63,516 | ||||||||||||
Valuation allowance | (38,498) | (54,314) | ||||||||||||
| Total deferred tax assets, net of valuation allowance | $ | 8,552 | $ | 9,202 | ||||||||||
Deferred tax liabilities: | ||||||||||||||
| ROU operating lease asset | $ | (5,827) | $ | (7,274) | ||||||||||
| Intangible amortization | (1,846) | (1,006) | ||||||||||||
| Depreciation on property, plant and equipment | (2,008) | (2,400) | ||||||||||||
| Other | $ | (439) | $ | — | ||||||||||
| Total deferred tax liabilities | $ | (10,120) | $ | (10,680) | ||||||||||
Net deferred tax liability | $ | (1,568) | $ | (1,478) | ||||||||||
The Company’s net deferred tax liability is presented as a separate line item in the Consolidated Balance Sheets.
A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes provides important factors in determining whether a deferred tax asset will be realized, including whether there has been sufficient taxable income in recent years and whether sufficient income can reasonably be expected in future years in order to utilize the deferred tax asset.
The Company has assessed the need to maintain a valuation allowance for deferred tax assets based on an assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. In assessing the realizability of the Company’s deferred tax assets, the Company considered whether it is more likely than not that some or all of the deferred tax assets will be realized through the generation of future taxable income. In making this determination, the Company assessed all of the evidence available at the time, including recent earnings, forecasted income projections, historical performance, and that substantial doubt exists about the Company’s ability to continue as a going concern. The Company determined that the negative evidence outweighed the objectively verifiable positive evidence and continues to maintain a valuation allowance against deferred tax assets. The Company’s valuation allowance is $38.5 million and $54.3 million as of December 31, 2024 and December 31, 2023, respectively.
As of December 31, 2024, the Company has, on a tax-effected basis, $8.0 million in R&D and state tax credit carryforwards which begin to expire in 2025. The Company has $0.6 million and $6.9 million of federal and state (tax effected, net of federal
tax benefit) net operating loss carryforwards, respectively, that are available to offset taxable income in the future. The state net operating loss carryforwards begin to expire in 2026. The federal net operating loss carryforwards do not expire.
The change in unrecognized tax benefits excluding interest and penalties were as follows:
| (in thousands) | For the Year Ended December 31, | |||||||||||||
| 2024 | 2023 | |||||||||||||
Balance at beginning of year | $ | 1,819 | $ | 1,660 | ||||||||||
Additions based on tax positions related to the current year | 129 | 117 | ||||||||||||
| Additions for tax positions of prior years | 12 | 43 | ||||||||||||
| Reduction for tax positions of prior years | (264) | $ | (1) | |||||||||||
Balance at end of year | $ | 1,696 | $ | 1,819 | ||||||||||
The Company recognizes interest and penalties related to unrecognized tax benefits in Income tax expense. As of December 31, 2024 and 2023, the amount accrued for interest and penalties was not material. The Company reflects the liability for unrecognized tax benefits as Other noncurrent liabilities in its Consolidated Balance Sheets. The amounts included in “reductions for tax positions of prior years” represent decreases in the unrecognized tax benefits relating to expiration of the statutes during each year shown, as well as settlements with Illinois tax authorities.
As of December 31, 2024, the Company believes the liability for unrecognized tax benefits, excluding interest and penalties, could decrease by an immaterial amount in 2025 due to lapses in the statute of limitations. Due to the various jurisdictions in which the Company files tax returns, it is possible that there could be other changes in the amount of unrecognized tax benefits in 2025, but the amount cannot be estimated. Unrecognized tax benefits that, if recognized, would affect the effective tax rate are not expected to be material.
With few exceptions, the major jurisdictions subject to examination by the relevant tax authorities and open tax years, stated as the Company’s fiscal years, are as follows:
| Jurisdiction | Open Tax Years | ||||||||||
| U.S. Federal | 2014 | to | 2023 | ||||||||
| U.S. States | 2015 | to | 2023 | ||||||||
| Canada | 2020 | ||||||||||
The Company is currently under federal income tax audit for tax years 2014, 2015 and 2016. The Company is currently under Illinois income tax audit for tax years 2015 and 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.