Snail, Inc. Income Taxes Disclosure

NOTE 13 – INCOME TAXES

 

The components of income (loss) before provision for income taxes for the years ended December 31, 2025 and 2024 are as follows:

 SCHEDULE OF INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES

		2025				2024
United States		$	(16,830,890	)		$	2,233,247
Foreign			282,058				225,952
Total		$	(16,548,832	)		$	2,459,199

 

The income tax provision for the years ended December 31, 2025 and 2024 are as follows:

 SCHEDULE OF INCOME TAX PROVISION

		2025				2024
Current:
U.S. Federal		$	(161,692	)		$	872,061
U.S. State			33,032				417,447
Foreign			—				(87,783	)
Total current income taxes			(128,660	)			1,201,725
Deferred:
U.S. Federal			9,177,267				(194,622	)
U.S. State			1,640,293				(374,979	)
Total deferred income tax benefit			10,817,560				(569,601	)
Income tax provision		$	10,688,900			$	632,124

 

 

Snail Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

The Company implemented FASB ASU 2023-09 on a prospective basis, as such, we have presented two separate rate reconciliation tables, one under the FASB ASU 2023-09 requirements and a second carried forward from the year ended December 31, 2024. The provision for income taxes differs from the amounts computed by applying the federal statutory tax rate of 21.0% to earnings before income taxes for the year ended December 31, 2025, after adoption of ASU 2023-09, is as follows:

 SCHEDULE OF EFFECTIVE INCOME TAX RATE RECONCILIATION

		Amount				%
		2025
		Amount				%
U.S. Federal statutory income tax rate			(3,475,255	)			21.00	%
State and local income taxes, net of federal income tax effect			1,359,706				(8.22	)%
Effect of cross border tax laws			58,688				(0.35	)%
Change in valuation allowance			13,040,854				(78.80	)%
Nontaxable or nondeductible items
Warrant revaluation			(186,354	)			1.13	%
Other			24,956				(0.15	)%
Worldwide changes in unrecognized tax benefits			(83,739	)			0.51	%
Return to provision
GILTI
FDII
Foreign withholding tax
R&D credit true-up
Rate change
Penalties
Other
Other			8,661				(0.05	)%
Foreign tax effects
Poland
Change in valuation allowance			333,584				(2.02	)%
Foreign R&D relief			(333,584	)			2.02	%
Other			(59,232	)			0.36	%
Other foreign jurisdictions			615				0.00	%
Total			10,688,900				(64.59	)%

 

The state and local income taxes which comprise the majority of the state and local income taxes, net of federal effect category is California.

 

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

 

 

The Company recognized an income tax expense of $10,688,900 and $632,124 for the years ended December 31, 2025 and 2024, respectively; and reflects a tax rate of (64.59)(64.6)% and 25.7225.7%, respectively. The negative effective tax rate in 2025 is primarily due to the Company recording a full valuation allowance against its net deferred tax assets since it is more likely than not that the net deferred tax assets will not be realized. As of December 31, 2024, the Company’s effective tax rate differed from the federal statutory rate of 21% primarily due to foreign research and development deduction, permanent differences, changes in valuation allowance and change in warrant revaluation.

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities consisted of the following as of December 31, 2025 and 2024:

 SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES

		2025				2024
Deferred tax assets (noncurrent):
Net operating losses		$	8,448,643			$	6,414,780
Deferred revenue			5,092,174				3,792,971
Research and development credit			1,334,061				945,554
Book lease liability (ASC 842)			1,031,883				337,056
Fixed assets and intangibles			337,981				314,109
Section 174 capitalized research and experimental expenditures			4,569,252				4,641,794
Stock based compensation			1,435				242
Other			1,024,371				907,859
Total deferred tax assets			21,839,800				17,354,365
Deferred tax liabilities (noncurrent):
Book ROU assets (ASC 842)			(1,030,286	)			(287,017	)
Basis difference in subsidiary			(798,276	)			(820,883	)
Total deferred tax liabilities:			(1,828,562	)			(1,107,900	)
Long-term deferred tax asset, net			20,011,238				16,246,465
Valuation allowance			(20,011,238	)			(5,429,353	)
Net deferred tax asset		$	—			$	10,817,112

 

 

Snail Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

The cash paid for income taxes (net of refunds) during the years as of December 31, 2025 and 2024 are as follows:

 SCHEDULE OF CASH PAID FOR INCOME TAXES

		2025				2024
Federal		$	(2,917,724	)			—
States and local			57,894				—
Total cash paid for income taxes (net of refunds)		$	(2,859,830	)			—
Total cash paid for income taxes (prior to ASU 2023-09)						$	(1,100,302	)

 

Included in these consolidated financial statements are two entities that are not consolidated in the U.S. tax return filing due to one entity being less than 80% ownership by Snail Games USA Inc.

 

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted, introducing several changes to U.S. tax law. Among other provisions, the OBBBA permits taxpayers to immediately expense domestic research and experimental (“R&E”) expenditures beginning in 2025 and allows an election to accelerate the amortization of any remaining unamortized domestic R&E costs over a one- or two-year period.

 

The Company elected to immediately expense domestic R&E expenditures incurred in 2025 and to accelerate the amortization of its remaining unamortized domestic R&E costs over a one-year period beginning in 2025. As a result, the enactment of the OBBBA reduced the Company’s U.S. current income tax expense for the year ended December 31, 2025. The legislation did not result in a net impact to the Company’s U.S. deferred tax balances, as the related deferred tax assets continue to be fully offset by a valuation allowance established in the second quarter of 2025.

 

The Company maintained a total valuation allowance of $20,011,238 and $5,429,353 as of December 31, 2025 and 2024, respectively. The non-includable entities had a valuation allowance of $4,044,251 and $4,024,497 as of December 31, 2025 and 2024. The Company’s consolidated tax filing group had a domestic valuation allowance of $14,899,697 and $673,049 as of December 31, 2025 and 2024, respectively. The Company had a foreign valuation allowance of $1,067,290 and $731,807 as of December 31, 2025 and 2024, respectively.

 

The Company has established a full valuation allowance for its net deferred tax assets since it is not more likely than not to be realized. Management considered all available evidence, both positive and negative, including but not limited to the Company’s historical operating results, income or loss in recent periods, cumulative losses in recent years, forecasted earnings, future taxable income, and significant risk and uncertainty related to forecasts, and concluded the deferred tax assets are not more likely than not to be realized. Overall, the Company’s valuation allowance had a net increase of $14,581,885 during 2025, and $285,551 during 2024.

 

As of December 31, 2025, the non-includable entities have U.S. federal NOL carryforwards of $2,884,392 which begin to expire in 2037 and $11,538,117 with an indefinite carryforward period. As of December 31, 2025, the non-includable entities have $14,434,371 of California net operating loss carryforwards, which begin to expire in 2037. The Company’s consolidated group federal NOL carryforwards are $19,286,436 with an indefinite carryforward period. The Company’s consolidated group state NOL carryforwards are $5,620,429 and begin to expire in 2039. As of December 31, 2025, the Company did not have any foreign NOL carryforwards.

 

As of December 31, 2025, the Company has foreign tax credit carryforwards of $192,180 which begin to expire in 2027 and has foreign R&D credit carryforwards of $1,065,391 which begin to expire in 2027. The Company has California R&D credit carryforwards of $340,088 with an indefinite carryforward period.

 

Under Section 382/383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which generally occurs if the percentage of the corporation’s stock owned by 5% stockholders increases by more than 50% over a three year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. The annual limitation may result in the expiration of net operating losses and credits before utilization. The Company has not performed a Section 382 analysis through December 31, 2025. Subsequent ownership changes may affect the limitation in future years. The Company will evaluate performing a Section 382 analysis in future periods.

 

The Company and its subsidiaries currently file tax returns in the United States (federal and states) and Poland. The statute of limitations for its consolidated federal income tax returns is open for tax years ended December 31, 2022 and after. The statute of limitations for its consolidated state income tax returns is open for tax years ended December 31, 2019 and after. Net operating loss carryforwards generated in early years remains subject to examination by taxing authorities when utilized. The statute of limitations for its Polish tax returns is open for tax years ended December 31, 2019 and after. The Internal Revenue Service completed its examination of the Company’s 2022 federal income tax return during 2025 with no adjustments.

 

Management intends to permanently reinvest any future foreign earnings to support operations and business growth of its affiliated company in Poland. As such, no deferred tax liability was recorded on the unremitted earnings of the foreign subsidiary as of December 31, 2025 and 2024. As of December 31, 2025, the Company had $1,663,858 of unremitted earnings that will be indefinitely reinvested in its Poland subsidiary.

 

The following table reflects changes in gross unrecognized tax benefits for the years ended December 31, 2025 and 2024:

 SCHEDULE OF UNRECOGNIZED TAX BENEFITS

		2025				2024
Unrecognized tax benefits at beginning of year		$	512,355			$	487,608
Gross Increases – current year positions			—				—
Gross Increases – prior year positions			166,847				219,128
Gross Decreases – prior year positions			(28,816	)			(33,831	)
Gross Decreases – expiration of statute of limitations			(54,923	)			(160,550	)
Gross Decreases – settlements			—				—
Unrecognized tax benefits at end of year		$	595,463			$	512,355

 

As of December 31, 2025 and 2024, the Company had $403,281 and $265,251, respectively, of unrecognized tax benefits that if recognized would impact the Company’s effective tax rate. The Company accrued and recognized interest and penalties related to unrecognized tax benefits in operating expense. As of December 31, 2025 and 2024, the Company had accrued $207,844 and $143,020 of interest and penalties, respectively.

 

 

Snail Inc. and Subsidiaries

Notes to Consolidated Financial Statements