Rallybio CorpRLYB
Rallybio Corp Income Taxes Disclosure
INCOME TAXES
During each of the years ended December 31, 2024 and 2023, the Company did not record any income tax expense or benefits.
The Company’s effective income tax rates are different from the federal statutory tax rates in 2024 and 2023 predominantly due to the valuation allowance, tax credits, and state taxes. A reconciliation of the effect of applying the federal statutory rate to the net loss and effective income tax rate are as follows:
| 2024 | 2023 | ||||||||||
| U.S. federal statutory income tax rate | 21.0 | % | 21.0 | % | |||||||
| State income taxes, net of federal income tax benefit | 5.4 | % | 7.8 | % | |||||||
| Tax credits | 10.7 | % | 9.9 | % | |||||||
| Other | (2.9) | % | (1.1) | % | |||||||
| Valuation allowance | (34.2) | % | (37.6) | % | |||||||
| Effective income tax rate | 0.0 | % | 0.0 | % | |||||||
Deferred income taxes represent the tax effect of transactions that are reported in different periods for financial and tax reporting purposes. The combined temporary differences and carryforwards of each tax paying component of the Company that give rise to a significant portion of the deferred income tax benefits and liabilities are as follows at December 31, 2024 and 2023:
| (in thousands) | 2024 | 2023 | |||||||||
| Net operating loss carryforwards | $ | 45,973 | $ | 37,230 | |||||||
| Intangible amortization | 1,341 | 2,167 | |||||||||
| Section 174 capitalization | 22,479 | 17,530 | |||||||||
| Research and development tax credits | 24,047 | 17,729 | |||||||||
| Share-based compensation | 2,654 | 2,706 | |||||||||
| Other | 1,476 | 917 | |||||||||
| Gross deferred tax assets | 97,970 | 78,279 | |||||||||
| Valuation allowance | (97,970) | (78,279) | |||||||||
| Net deferred tax assets | $ | — | $ | — | |||||||
At December 31, 2024, the Company has approximately $167.4 million of federal net operating loss carryforwards, which do not expire, and approximately $165.9 million of state net operating loss carryforwards, which begin expiring in 2038.
At December 31, 2024, the Company has approximately $23.4 million of federal research and development tax credit carryforwards, which begin expiring in 2039, and approximately $0.8 million of state research and development tax credit carryforwards, which begin expiring in 2040.
The Company has provided a valuation allowance against the Company’s deferred tax assets, since, in the opinion of management, based upon the history of losses by the Company and insufficient future federal and state taxable income; it is more likely than not that the benefits will not be realized. All or a portion of the remaining valuation allowance may be reduced in future years based on an assessment of earnings sufficient to fully utilize these potential tax benefits.
Effective January 1, 2022, a provision of the Tax Cuts and Jobs Act ("TCJA") changed the treatment of research and experimental ("R&E") expenditures under Section 174 of the Internal Revenue Code ("Code"). Previous to the TCJA being effective, businesses have had the option of deducting Section 174 expenses in the year incurred or capitalizing and amortizing the costs over five years. The new TCJA provision, however, eliminates this option and will require Section 174 expenses associated with research conducted in the U.S to be capitalized and amortized over a five-year period. For expenses associated with research outside of the United States, Section 174 expenses will be capitalized and amortized over a 15-year period.
Utilization of the U.S. federal and state net operating loss carryforwards and research and development tax credit carryforwards may be subject to an annual limitation under Section 382 and Section 383 of the Code, and corresponding provisions of state law, due to ownership changes that may 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 of the Code, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 5% over a three-year period.
The Company completed a Section 382 study and concluded that we underwent an ownership change as defined by the Code during the year ended December 31, 2021. We do not currently believe that the annual limitation will result in the expiration of any net operating losses or research and development tax credit carryforwards before utilization. Additional ownership changes which may have occurred after December 31, 2021 and any future ownership changes may limit our ability to utilize remaining tax attributes. Any carryforwards that will expire prior to utilization as a result of such additional limitations will be removed from deferred tax assets, with a corresponding reduction of 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.
ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely that not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company has no material uncertain tax positions that qualify for either recognition or disclosure in consolidated financial statements.
It is the Company’s policy to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2024 and 2023, the Company has accrued no interest and penalties related to uncertain tax positions. The Company does not have any outstanding U.S. federal income tax or material state and local tax matters for periods through December 31, 2024. There are no federal or state and local income tax returns currently under examination. As of December 31, 2024, the statute remains open for years 2018 through 2024. These years are still considered open due to the Company generating net operating losses, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service or other authorities if they have or will be used in a future period.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.