Stoke Therapeutics, Inc. Income Taxes Disclosure
11. Income taxes
A reconciliation of the expected income tax expense (benefit) computed using the federal statutory income tax rate the Company’s effective income tax rate is as follows:
|
|
Year ended December 31, |
|
|
|||||
|
|
2024 |
|
|
2023 |
|
|
||
Expected income tax benefit at the federal statutory rate |
|
|
21.0 |
|
% |
|
21.0 |
|
% |
State income taxes, net of federal benefit |
|
|
9.0 |
|
|
|
7.7 |
|
|
Non-deductible items |
|
|
(1.0 |
) |
|
|
(1.1 |
) |
|
Research and development credit, net |
|
|
3.5 |
|
|
|
3.5 |
|
|
Other |
|
|
(1.3 |
) |
|
|
2.4 |
|
|
Change in valuation allowance |
|
|
(31.2 |
) |
|
|
(33.5 |
) |
|
Total |
|
|
0.0 |
|
% |
|
0.0 |
|
% |
The principal components of the Company’s deferred tax assets and liabilities consist of the following:
|
|
As of December 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
||
Federal and state net operating loss carryforwards |
|
$ |
70,105 |
|
|
$ |
52,643 |
|
Research and development tax credits |
|
|
21,942 |
|
|
|
17,444 |
|
Research and development capitalized expenses |
|
|
46,109 |
|
|
|
32,290 |
|
Accrued compensation and stock-based compensation |
|
|
22,073 |
|
|
|
17,912 |
|
Deferred revenue/other |
|
|
5,330 |
|
|
|
13,017 |
|
Gross deferred tax assets |
|
|
165,559 |
|
|
|
133,306 |
|
Less: valuation allowance |
|
|
(165,559 |
) |
|
|
(133,306 |
) |
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
In accordance with ASC 740, Accounting for Income Taxes, management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and has determined that it is more likely than not that the Company will not recognize the net benefits of federal and state deferred tax assets. A full valuation allowance of $165.6 million and $133.3 million was established at December 31, 2024 and 2023, respectively. The change in the valuation allowance was an increase of $32.3 million and $35.4 million in 2024 and 2023, respectively.
As of December 31, 2024, and 2023, the Company had federal NOL carryforwards of $242.1 million and $189.5 million, respectively, which may be available to reduce future taxable income. Federal NOLs generated prior to December 31, 2018 expire at various dates beginning in 2035 and NOLs generated after December 31, 2018 carryforward indefinitely. As of December 31, 2024, and 2023, the Company had state NOLs of $261.5 million and $199.4 million, respectively, which may be available to reduce future taxable income. The state NOLs expire at various dates beginning in 2035.
As of December 31, 2024 and 2023, the Company had federal research and development tax credit (“R&D Credit”) carryforwards of $15.3 million and $12.8 million, respectively, and state R&D Credit carryforwards of $8.4 million and $5.9 million, respectively. Both federal and state R&D Credit carryforwards may be available to reduce future tax liabilities and expire at various dates beginning in 2034.
The Internal Revenue Code of 1986, as amended (“IRC”), provides for a limitation of the annual use of NOLs, R&D Credits, and other tax attributes following certain ownership changes that could limit the Company's ability to utilize NOL and R&D Credit carryforwards. Under IRC Sections 382 and 383 an ownership change is generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period. The Company has experienced ownership changes in the past and based on the existing Section 382 limitations, $0.9 million and $0.02 million of existing Federal NOLs and R&D credits, respectively, will not be utilizable. The Company may experience additional ownership changes in the future because of subsequent shifts in its stock ownership. As a result, its ability to use its pre-change NOLs to offset taxable income, if any, is subject to limitations, which could potentially result in increased future tax liability. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
The Company applies ASC 740 related to accounting for uncertainty in income taxes. The Company’s reserves related to income taxes are based on a determination of whether, and how much of, a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. At December 31, 2024, and 2023 the Company had no unrecognized tax benefits. Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying consolidated statements of operations and comprehensive loss.
The Company files U.S. federal and state income tax returns with varying statute of limitations. As of the year ended December 31, 2024, there is no examination by U.S. tax authorities. Due to the Company’s net operating loss carryforwards, federal income tax returns from incorporation are still subject to examination. The Company files in several state tax jurisdictions and is subject to examination in years ranging from incorporation to 2024.
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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.