TRANSACT TECHNOLOGIES INC Income Taxes Disclosure

11. Income taxes

The components of the income tax expense are as follows:

Our effective tax rates were (176.4%) and 19.6% for 2024 and 2023, respectively. Our 2024 tax rate was impacted by an income tax charge of $7.3 million related to the write down of our U.S. net deferred income tax asset as more fully described below.

At December 31, 2024, we have $276 thousand of federal net operating loss carryforwards which can be carried over indefinitely, $135 thousand of state net operating loss carryforwards which expire in various years,  $903 thousand of R&D credit carryforwards which can be carried forward for 20 years, and no state tax credit carryforwards.  All of these items have a full valuation allowance against them as of December 31, 2024.  Foreign income before taxes was $79 thousand and $322 thousand in  2024 and 2023, respectively.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements.  Our deferred tax assets and liabilities were comprised of the following:

As of December 31, 2024 and 2023, we had $8.1 million and $719 thousand, respectively, of valuation allowance against our deferred income tax assets. The following table summarizes the activity recorded in the valuation allowance on the deferred tax assets:

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized.  In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, income from tax planning strategies, as well as all available positive and negative evidence.  Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including any potential tax planning strategies.  Negative evidence includes items such as cumulative losses and projections of future losses.  Upon changes in facts and circumstances, management may conclude that deferred tax assets for which no valuation allowance is currently recorded may not be realized, resulting in a charge to establish a valuation allowance.  Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released.  Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.

In 2024, TransAct recognized a $7.3 million discrete income tax charge for a valuation allowance on the full value of the net deferred tax assets in the United States. After weighing all available positive and negative evidence, as described above, management determined that it was no longer more likely than not that TransAct will realize the tax benefit of these deferred tax assets. This was mainly driven by  a cumulative taxable loss experienced over the previous three fiscal years (2022 through 2024) combined with a near term outlook of future taxable losses.  The need for this valuation allowance will be assessed on a continuous basis in future periods and, as a result, a portion, or all of the allowance, may be reversed based on changes in facts and circumstances.

We had $203 and $197 thousand of total gross unrecognized tax benefits at December 31, 2024 and 2023, respectively that, if recognized, would favorably affect the effective income tax rate in any future periods.  We are not aware of any events that could occur within the next twelve months that could cause a significant change in the total amount of unrecognized tax benefits.  A tabular reconciliation of the gross amounts of unrecognized tax benefits at the beginning and end of the year is as follows:

We recognize interest and penalties related to uncertain tax positions in the income tax provision.

We are subject to U.S. federal income tax as well as income tax of certain state and foreign jurisdictions.  We have substantially concluded all U.S. federal income tax, state and local, and foreign tax matters through 2019.  However, our federal tax returns for the years 2021 through 2024 remain open to examination. Various state and foreign tax jurisdiction tax years remain open to examination as well, though we believe that any additional assessment would be immaterial to the Consolidated Financial Statements.