Rein Therapeutics, Inc. Income Taxes Disclosure

16. Income Taxes

On October 31, 2023, the Company acquired, in accordance with the terms of the Lung Acquisition Agreement, the stock of Lung. In accordance with ASC 805-740-25-3, recognition of deferred tax assets and liabilities is required for substantially all temporary differences and acquired tax carryforwards and credits. The Company has computed estimated temporary differences and acquired tax carryforwards and credits as of the transaction date. The Company will not have tax basis in intangible assets recorded as part of the purchase. For accounting purposes, the intangible assets will not be amortized and subject to impairment review and testing. Though the tax effects may be delayed indefinitely, ASC 740-10-55-63 states that “deferred tax liabilities may not be eliminated or reduced because a reporting entity may be able to delay the settlement of those liabilities by delaying the events that would cause taxable temporary differences to reverse.” As such, the Company has recorded a deferred tax liability for the portion of the liability that cannot be offset with indefinite lived deferred tax assets.

The Company reported an income tax benefit of $1,544 for the year ended December 31, 2024. The reported amount of income tax expense for the years differs from the amount that would result from applying domestic federal statutory tax rates to pretax losses primarily because of changes in valuation allowance and indefinite lived intangibles.

As of December 31, 2024, the Company had net operating loss carryforwards for federal and state purposes of $77,313 and $18,789, respectively. $2,863 of the U.S. federal tax operating loss carryforwards will begin to expire in 2036. Approximately $74,450 of the U.S. federal tax operating losses can be carried forward indefinitely. Of this amount, $44,420 of federal net operating losses came over from the Lung Acquisition, of which $2,863 will begin to expire in 2036 and the remaining $41,557 can be carried forward indefinitely. The state tax operating loss carryforwards expire beginning in 2043. As of December 31, 2024, the Company also had available research and development tax credit carryforwards for federal income tax purposes of $2,425, which begin to expire in 2035. As of December 31, 2024, the Company also had available orphan drug credit carryforwards of $5,800 for federal income tax purposes, which begin to expire in 2039. Of this amount, $2,222 of research and development credit carryforwards and $5,644 of orphan drug credit carryforwards came over from the Lung Acquisition.

On December 22, 2017, the Tax Cuts and Jobs Act, or the TCJA, was signed into law. Under the TCJA provisions, effective with tax years beginning on or after January 1, 2022, taxpayers can no longer immediately expense research and development expenditures. Taxpayers are now required to capitalize and amortize these costs over 5 years for research conducted within the United States or 15 years for research conducted abroad. As a result, the Company capitalized $14,220 of research and development expenses for the year ended December 31, 2024 for tax purposes.

Utilization of the net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes that 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. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. As of December 31, 2023, the Company has wound down its original business operations and entered into a merger in the year, which resulted in a significant shift in ownership. The Company expects to have all prior year net operating losses and tax credits of its legacy business to be completely limited going forward due to the lack of continuation in its legacy business. As such, all prior year net operating losses and tax credits have been written down to zero as of December 31, 2023 and December 31, 2024, respectively. The remaining net operating losses and tax credits as of December 31, 2024 relate to post-merger activity in the year, as well as acquired attributes as part of the merger in the year. A study has been completed on the Target ownership shifts through December 31, 2023, and multiple ownership changes were determined. As a result, the Company has written down the $1,673 portion of the Target net operating losses expected to expire unutilized and include the $44,420 of remaining net operating losses and $7,638 of federal tax credits as part of its available attributes. As of December 31, 2024, the total federal net operating losses are $77,313 and federal research and development tax credits are $8,226, which could be subject to future limitations under these rules.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s cumulative net losses and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. The Company maintained a full valuation allowance on its net deferred tax assets as of December 31, 2024. Management reevaluates the positive and negative evidence at each reporting period. The decrease in the valuation allowance as of December 31, 2023 of $58,935 related primarily to the deferred tax liability recognized as a result of the transaction as well as the reduction in prior year deferred tax assets due to Section 382 limitations. The increase in the valuation allowance for deferred tax assets during the year ended December 31, 2024 of $11,948 related primarily to an increase in net operating loss carryforwards. Changes in the valuation allowance were as follows:

The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2024 or 2023.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from 2020 to the present. Earlier years may be examined to the extent that tax credit or net operating loss carryforwards are used in future periods. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. As of December 31, 2024 and 2023, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s consolidated statements of operations and comprehensive loss.