Sky Quarry Inc. Income Taxes Disclosure

15.INCOME TAXES  

 

As of December 31, 2025, the Company had U.S. federal net operating loss carryforwards.

 

The Company considered all positive and negative evidence. Given the caution of Subtopic 30-21 regarding the difficulty in forming a conclusion that a valuation allowance is not needed in the case of cumulative losses, it is the Company’s conclusion that it is more likely than not that the Company’s existing deferred tax assets in the U.S. will not be realized and that a valuation allowance is necessary as of December 31, 2025. Accordingly, the Company has recorded a full valuation allowance in the U.S. The Company has evaluated all the negative and positive evidence as of December 31, 2025, and concludes that due to the Company being in a 3-year cumulative loss position, it is more likely than not that the net Canadian deferred tax assets will be not realized. As such, the Company has recorded and maintained a full valuation allowance in Canada.

 

The Company has not performed a Section 382 study to determine whether it has experienced a change in ownership and, if so, whether the tax attributes (net operating losses or credits) were impaired. Under Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s ability to utilize net operating loss or other tax attributes, such as research tax credits, in any taxable year may be limited if the Company has experienced an “ownership change.” Generally, a Section 382 ownership change occurs if there is a cumulative increase of more than 50 percentage points in the stock ownership of one or more stockholders or groups of stockholders who own at least 5% of a corporation’s stock within a specified testing period. Similar rules may apply under state tax laws.

 

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024, with early adoption permitted. The Company has evaluated the impact of this guidance on its financial statements.

 

The components of loss before provision for income taxes are as follows for the year ended December 31, 2025:

 

United States		$(11,747,554)
Foreign		(451,539)
Consolidated loss		$(12,199,093)

 

The provision (benefit) for income taxes consisted of the following components for the year ended December 31, 2025:

 

Benefit from income taxes at US Statutory Rate	$2,561,809	21.0%
State and local income taxes*	(186,268)	(1.5)%
Foreign tax effects Canada	(94,823)	(0.8)%
Change in valuation allowance	(2,244,304)	(18.4)%
Change in effective tax rate	(1,960)	-
Other	(34,454)	(0.3)%
	$-	-

*The states and local jurisdictions that contribute to the majority (greater than 50%) of the tax effect in this category include California and Utah.

 

As of December 31, 2025 and 2024, the Company does not have any unrecognized tax benefits. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2025 and 2024, the Company had no accrued interest or penalties related to uncertain tax positions.

 

Significant components of the Company’s deferred tax assets and liabilities for federal, state and foreign income taxes are as follows as of December 31, 2025:

 

Deferred tax assets:
Accruals, reserves, and other		$9,698
Depreciation and amortization		8,799
Stock compensation		511,136
Lease liability		8,685
Charitable contributions		239
Net operating loss carryover		8,638,818
Less: valuation allowance		(7,649,058)
Net deferred tax assets		989,760
Deferred tax liabilities:
Fixed assets		(981,330)
Right of use asset		(8,430)
Net deferred tax liabilities		(989,760)
Net deferred tax assets		$-

 

 

The amounts of cash income taxes paid by the Company for federal, state and foreign income taxes are as follows as of December 31, 2025:

 

Federal	$-
State and local	1,868
Foreign:
Canada	-
Income taxes, net of amounts refunded	$1,868

 

The amount of cash income taxes paid by the Company during the years ended December 31, 2025 and 2024 was $0 and $85, respectively.

 

As of December 31, 2025, the Company had U.S. federal net operating loss carryforwards of $30,957,490, which may be available to offset future federal income and do not expire. As of December 31, 2025, the Company had stated net operating losses of $19,877,874, which may be available to offset future state income tax that do not expire. $13,567,855 of these losses are in Utah. As of December 31, 2025, the Company had Canada net operating losses of $2,937,972 which may be available to offset future Canadian income tax and begin to expire in 2040.

 

The Company considered all positive and negative evidence. Given the caution of Subtopic 30-21 regarding the difficulty in forming a conclusion that a valuation allowance is not needed in the case of cumulative losses, it is the Company’s conclusion that it is more likely than not that the Company’s existing deferred tax assets in the U.S. will not be realized and that a valuation allowance is necessary as of December 31, 2025. Accordingly, the Company has maintained a full valuation allowance of in the U.S. The Company has evaluated all the negative and positive evidence at December 31, 2025, and concludes that due to the Company being in a 3-year cumulative loss position, it is more likely than not that the net Canadian deferred tax assets will be not realized. As such, the Company has recorded and maintained a full valuation allowance in Canada. As of December 31, 2025, the deferred tax liabilities of $989,760 are related to the acquisition of Foreland assets. As of December 31, 2025, the Company had a history of operating losses, the Company has concluded that it more than likely than not that the benefit of its deferred tax assets will not be fully realized. Accordingly, the Company has a valuation allowance for deferred tax assets as of December 31, 2025 and 2024, of $7,649,058 and $4,240,746 respectively.

 

The Company has not performed a Section 382 study to determine whether it had experienced a change in ownership and, if so, whether the tax attributes (net operating losses or credits) were impaired. Under Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s ability to utilize net operating loss or other tax attributes, such as research tax credits, in any taxable year may be limited if the Company has experienced an “ownership change.” Generally, a Section 382 ownership change occurs if there is a cumulative increase of more than 50 percentage points in the stock ownership of one or more stockholders or groups of stockholders who own at least 5% of a corporation’s stock within a specified testing period. Similar rules may apply under state tax laws.

 

The Company files tax returns in the United States, Canada, and state jurisdictions. The Company is not currently under examination by any taxing jurisdiction as of December 31, 2025.

 

 

The components of loss before provision for income taxes are as follows for the years ended December 31, 2024:

 

United States		$(14,549,757)
Foreign		(178,754)
Consolidated loss		$(14,728,511)

 

The provision (benefit) for income taxes consisted of the following components for the years ended December 31, 2024:

 

Benefit from income taxes at federal statutory rates	$3,092,987	21.0%
State taxes, net of federal benefits	98,412	0.7%
Foreign rate differential	3,575	0.0%
Change in valuation allowance	(3,162,588)	(21.5)%
Change in effective tax rate	491	-
Other	(32,877)	(0.2)%
	$-	-

 

As of December 31, 2025 and 2024, the Company does not have any unrecognized tax benefits. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2025 and 2024, the Company had no accrued interest or penalties related to uncertain tax positions.

 

Significant components of the Company’s deferred tax assets and liabilities for federal, state and foreign income taxes are as follows as of December 31, 2024:

 

Deferred tax assets:
Accruals, reserves, and other		$11,068
Depreciation and amortization		9,780
Stock compensation		356,337
Lease liability		266,519
Charitable contributions		241
Net operating loss carryover		5,078,741
Less: valuation allowance		(4,240,746)
Net deferred tax assets		1,481,940
Deferred tax liabilities:
Fixed assets		(1,212,589)
Right of use asset		(269,351)
Net deferred tax liabilities		(1,481,940)
Net deferred tax assets	-	$-