Pyxis Oncology, Inc. Income Taxes Disclosure

16. Income Taxes

On January 1, 2025, the Company adopted the guidance in ASU 2023-09, Income Taxes - Improvements to Income Tax Disclosures on a prospective basis.

The majority of state tax was paid to Massachusetts.

(1) State taxes in Massachusetts made up the majority (greater than 50%) of the tax effect in this category.

The Company recorded an income tax expense of $1.4 million with an effective tax rate of (1.8%) for the year ended December 31, 2025.

The Company recorded an income tax benefit with an effective tax rate of 2.6% for the year ended December 31, 2024. A full valuation allowance eliminated the company's net deferred tax assets.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts recorded for income tax purposes. Significant components of the Company’s net deferred tax assets as of December 31, 2025 and 2024 were as follows (in thousands):

As of December 31, 2025, the Company's federal and state net operating losses in the United States were $82.1 million ($390.9 million before tax) and $14.3 million ($218.2 million before tax), respectively. The federal net operating loss carryforward generated in the United States after tax year 2017 can be carried forward indefinitely but may be subject to annual usage limitations to the extent certain substantial changes in the entity's ownership occur. The federal net operating loss carryforward relating to tax years prior to 2017 of $5.9 million ($28.3 million before tax), acquired with Apexigen, begin to expire in 2033. The state net operating loss carryforwards begin expiring in 2035. In addition, as of December 31, 2025, the Company had $10.0 million and $3.6 million of federal and state credit carryovers which begin to expire in 2030. These loss and credit carryforwards are subject to review and possible adjustment by the relevant taxing authorities.

The Company assesses the realizability of the deferred tax assets at each balance sheet date based on the available positive and negative evidence in order to determine the amount which is more likely than not to be realized and records a valuation allowance as necessary. Due to the Company's cumulative loss position which provides significant negative evidence, which is difficult to overcome, the Company has recorded a valuation allowance of $151.6 million as of December 31, 2025, representing the portion of the deferred tax asset that is not more likely than not to be realized. For the years ended December 31, 2025 and 2024, the valuation allowance for deferred tax assets increased by $11.1 million and $21.0 million, respectively. The amount of the deferred tax asset considered realizable, could be adjusted for future factors that would impact the assessment of the objective and subjective evidence. The Company will continue to assess the realizability of deferred tax assets at each balance sheet date in order to determine the proper amount, if any, required for a valuation allowance.

The Company has not completed a recent study of its research and development credit carryforward; accordingly, a portion of the tax credit carryforward may not be available to offset future income tax. Until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company's research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance.

The U.S. tax attributes may be subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986 (the “Code”), and similar state provisions if the Company experiences one or more ownership changes, which would limit the amount of the tax attributes that can be utilized to offset future taxable income. In general, an ownership change as defined by Section 382, results from the transactions increasing ownership of certain stockholders or public groups in the stock of the corporation of more than fifty percentage points over a three-year period. If a change in ownership occurs in the future, the net operating loss and research and development credit carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, will not impact the Company’s effective tax rate.

The Company is subject to tax and will continue to file federal income tax returns in the United States as well as in certain state and local jurisdictions. The Company is subject to tax examinations for tax years ended December 31, 2022 and forward in all applicable income tax jurisdictions. Tax audits and examinations can involve complex issues, interpretations and judgments. The resolution of matters may span multiple years particularly if subject to litigation or negotiation. The Company believes that it has appropriately recorded its tax position using reasonable estimates and assumptions, however the potential tax benefits may impact the results of operations or cashflows in the period of resolution, settlement, or when the statutes of limitations expire. The Company has recorded reserves related to unrecognized tax benefits on historical positions taken by Apexigen in periods before the merger. No interest or penalties have been calculated on the reserves for unrecognized tax benefits due to taxable losses in the years in which the benefits were recorded.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):