Rekor Systems, Inc. Income Taxes Disclosure

NOTE 10 – INCOME TAXES

 

The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company reviewed both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections and the overall prospects of the Company’s business.

 

The provision for income taxes for the years ended December 31, 2025 and 2024 consists of the following (dollars in thousands):

 

		Year ended December 31,
		2025				2024
Federal:
Deferred		$	14			$	14
Total federal			14				14
State:
Current			28				31
Total state			28				31
Provision for income taxes		$	42			$	45

 

The components of deferred income tax assets and liabilities are as follows on  December 31, 2025 and 2024 (dollars in thousands):

 

		Year ended December 31,
Deferred tax assets		2025				2024
Net operating loss		$	59,524			$	49,376
163(j) limitation			2,802				2,179
Lease liabilities			3,794				4,286
Research and development			2,336				6,042
Fixed assets			422				196
Other			2,090				1,678
Total gross deferred tax assets			70,968				63,757
Valuation allowance for deferred tax assets			(68,693	)			(60,805	)
Net deferred tax assets		$	2,275			$	2,952
Deferred tax liabilities:
Right-of-use asset			(2,261	)			(2,939	)
Goodwill and intangibles			(106	)			(92	)
Total gross deferred tax liabilities			(2,367	)			(3,031	)
Net deferred tax liabilities		$	(92	)		$	(79	)

 

The items accounting for the difference between income taxes computed at the federal statutory rate and our effective tax rate after the adoption of ASU 2023-09 were as follows:

 

 

		Year Ended December 31, 2025
		(in thousands)				Percent
U.S. statutory federal rate		$	(6,598	)			21.00	%
State income tax rate, net of U.S. Federal benefit			28				(0.09	)%
Foreign tax effects – Israel			2,072				(6.59	)%
Change in valuation allowance			4,621				(14.71	)%
Nontaxable or nondeductible items
Remeasurement of the STS Earnout and Contingent Consideration			(399	)			1.27	%
Other			318				(1.01	)%
Effective tax rate		$	42				(0.13	)%

 

The items accounting for the difference between income taxes computed at the federal statutory rate and our effective tax rate were as follows for years prior to our adoption of ASU 2023-09:

 

		Year ended December 31, 2024
U.S. statutory federal rate			21.00	%
(Decrease) increase in taxes resulting from:
State income tax rate, net of U.S. Federal benefit			5.09	%
True-ups			0.00	%
Other			(3.59	)%
Valuation allowance			(22.57	)%
Effective tax rate			(0.07	)%

 

The Company files income tax returns in the United States and various state and foreign jurisdictions. No U.S. federal, state or foreign income tax audits were in process as of December 31, 2025.

 

The Company evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the goodwill, because the Company believes that it is not more likely than not that their benefits will be realized in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly. During the year ended December 31, 2025, the Company’s valuation allowance increased by $7,888,000, which was primarily driven by an increase in the Company’s deferred tax assets.

 

As of December 31, 2025, the Company had gross U.S. Federal and state net operating loss (“NOL”) carryforwards of $176,630,000 and $168,197,000, respectively. The gross U.S. NOL generated in the years ended December 31, 2025 and 2024 of $19,679,000 and $26,369,000 respectively, will be carried forward indefinitely and are subject to the annual 80 percent limitation. As of December 31, 2025, the Company had net U.S. federal and state NOL carryforwards of $37,547,000 and $9,959,000, respectively. As of December 31, 2025, the Company had gross U.S. federal NOL carryforwards of approximately $3,826,000 that were generated prior to the Tax Cuts and Jobs Act that are scheduled to begin to expire in 2034, and are not subject to the annual 80 percent limitation. The Company had gross foreign federal and state operating loss carryforwards of $53,264,000 and $52,056,000, respectively, which are carried forward indefinitely and are not subject to any limitation. The net foreign carryforwards are $11,185,000 and $833,000, respectively. The gross foreign NOL generated in the years ended December 31, 2025 and 2024 are $5,054,000 and $4,151,000 , respectively.

 

As of December 31, 2024, the Company had U.S. gross federal and state NOL carryforwards of $142,415,000 and $133,857,000, respectively. As of December 31, 2024, the Company had U.S. net federal and state NOL carryforwards of $30,336,000 and $8,164,000, respectively. As of December 31, 2024, the Company had foreign gross federal and state NOL carryforwards of $48,209,000 and $47,002,000, respectively. As of December 31, 2024, the Company had foreign net federal and state NOL carryforwards of $10,124,000 and $752,000, respectively.

 

The federal and state NOL and credit carryforwards may be subject to significant limitations under Sections 382 and 383 of the Internal Revenue Code ("Code") and similar provisions of state law. These Code sections limit the federal NOL and credit carryforwards that may be used in any year in the event of an “ownership change”. A Section 382 “ownership change” generally occurs if one or more shareholders or groups of shareholders, who own at least 5% of the Company’s stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. The Company may have previously experienced, and may in the future experience, one or more Section 382 “ownership changes”. If so, the Company may lose some or all of the tax benefits of its NOLs and tax credits. The extent of such limitations for prior years, if any, has not been determined.

 

For the years ended December 31, 2025 and 2024, the Company did not record any interest or penalties related to unrecognized tax benefits. It is the Company’s policy to record interest and penalties related to unrecognized tax benefits as part of income tax benefit.

 

The amount of cash income taxes paid, net of refunds received were as follows:

 

Amount (in thousands)		Year Ended December 31, 2025
U.S. federal taxes		$	-
State and local taxes (various)			58
Foreign taxes – Israel			-
Total income taxes paid		$	58

 

Recent Tax Legislation

 

On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was signed into law in the United States. This comprehensive tax legislation contains a broad range of tax reforms, including provisions that allow for the immediate expensing of domestic research and development expenses, restore and make permanent 100% bonus depreciation for qualifying assets, and ease limitations on the deductibility of interest expense. The legislation has multiple effective dates, with certain provisions taking effect in 2025 and others being implemented through various future years. The Company has accounted for the provisions of the OBBBA in its consolidated financial statements. The Company will continue to monitor the impact of this legislation in future periods.