374Water Inc. Income Taxes Disclosure

Note 11 – Income Taxes

Effective January 1, 2025, the Company adopted ASU 2023-09, Income Taxes: Improvements to Income Tax Disclosures. The amendments in ASU 2023-09 enhance the transparency and decision usefulness of income tax disclosures by requiring, among other things, (i) expanded rate reconciliation disclosures with specified categories presented both in dollar amounts and as a percentage of pretax loss, and (ii) disaggregation of income taxes paid (net of refunds) by federal, state and foreign jurisdictions, including separate disclosure of material jurisdictions.  

The disclosures for the year ended December 31, 2024 were prepared in accordance with the income tax disclosure requirements of ASC 740-50 prior to the adoption of ASU 2023-09, and are presented in the format previously required.  Accordingly, the 2024 rate reconciliation and related disclosures reflect the previously required categories and disclosure objectives under the prior guidance and are not required to be reformatted under the new standard.

 Deferred income taxes are provided based on the provisions of ASC Topic 740, “Accounting for Income Taxes”, to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Significant components of the Company’s net deferred income taxes are as follows:

Pretax loss from continuing operations is disaggregated between U.S. domestic and foreign jurisdictions in accordance with ASU 2023-09 and is presented in the table below for the year ended December 31, 2025.

The provision for income taxes charged to income for the years ended December 31, 2025 and 2024, consists of the following:

No deferred tax expenses or benefits have been recorded due to a full valuation allowance as of December 31, 2025 and 2024.

The effective income tax rate reconciliation for the year ended December 31, 2025 presented below is in accordance with ASU 2023-09 and includes reconciling items required to be separately disclosed if they meet a quantitative threshold of 5% or more of the amount computed by multiplying pretax loss by the applicable U.S. federal statutory income tax rate. Reconciling items below the disclosure threshold are aggregated within “Other”.  The Company’s effective tax rate for the year ended December 31, 2025 differs from U.S. federal statutory rate primarily due to changes in valuation allowances recorded against deferred tax assets and non-deductible expenses.  The Company continues to maintain a full valuation allowance against certain deferred tax assets as realization is more likely than not based on current evidence.

A reconciliation of the U.S. statutory federal income tax rate to the effective income tax rate (benefit), prior to the adoption of ASU 2023-09 is as follows for the year ended December 31, 2024:

The Company has gross net operating loss carryforwards for federal tax purposes totaling approximately $40.0 million and $23.1 million at December 31, 2025 and 2024 respectively, which will carry forward indefinitely. The Company has gross net operating loss carryforwards for state tax purposes totaling approximately $29.7 million and $18.3 million at December 31, 2025 and 2024 respectively, which will carry forward indefinitely.

NOLs that were acquired with the acquisition of businesses are excluded from the amount of available NOLs to the extent their use is limited by the provisions of Section 382 of the Internal Revenue Code. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may result in further limitation on the amount of net operating loss carryforwards which can be utilized in future years.

In evaluating the amount of the valuation allowance against its deferred tax assets as of December 31, 2025 and 2024, the Company considered all available positive and negative evidence and concluded that it is more likely than not that a portion of its deferred tax assets would not be realized. Accordingly, the Company has recorded a valuation allowance against its net deferred tax assets due to the uncertainty surrounding the realization of such assets.

On July 4, 2025, the One Big Beautiful Bill Act (the “OBBBA”) was enacted, which extends most expiring TCJA provisions and reforms certain tax rules. The key corporate provision for the Company is the immediate expensing for domestic research and experimental expenditures. The decreased deferred tax asset for capitalized research and experimental expenses and the increased deferred tax asset for net operating losses is related to this new legislation.

The Company had no unrecognized tax benefits as of December 31, 2025 and 2024. The Company does not anticipate a significant change in total unrecognized tax benefits within the next 12 months. Tax years 2022-2024 remain open to examination by the major taxing jurisdictions to which the Company is subject.