TRANSACT TECHNOLOGIES INC Income Taxes Disclosure

11. Income taxes

On July 4, 2025, the U.S. President signed into law the One Big Beautiful Bill Act (the “OBBBA”), which introduces significant federal tax law changes. For example, the OBBBA includes numerous changes to U.S. corporate income tax law, including but not limited to: (i) a permanent 100% bonus depreciation for qualified property, (ii) immediate expensing of domestic research and experimental expenditures, (iii) modifications to the limitation on business interest expense deductions, (iv) increased expensing limits under Section 179 of the Internal Revenue Code (the “Code”), (v) changes to certain international tax provisions, (vi) and expanded limitations on the deductibility of executive compensation under Section 162(m) of the Code.

Most provisions are effective for tax years beginning after December 31, 2024, with certain transition rules and exceptions. The Company has evaluated the impact of OBBBA and reflected the changes in its 2025 Consolidated Financial Statements. The effects of the OBBBA, including remeasurement of deferred tax assets and liabilities and changes to current and future tax expense, are reflected in the period of enactment. Given TransAct’s current tax positions (including a full valuation allowance against its net deferred tax assets), this law did not have a material impact on our Consolidated Financial Statements.

The components of our loss before income taxes are as follows:

The components of the income tax expense are as follows:

Total income tax expense in 2025 from continuing operations was $0, $53 thousand and $103 thousand for federal, state and local, and foreign components, respectively.

During the fiscal year ended December 31, 2025, we adopted ASU 2023-09 to enhance income tax disclosures regarding income taxes paid and further rate reconciliation disclosures. We paid the following amount of income taxes (net of refunds received) disaggregated by federal, state and foreign jurisdictions:

Our effective tax rates were (14.4%) and (176.4%) for 2025 and 2024, 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, 2025, we have $3.5 million of federal net operating loss carryforwards, $221 thousand of tax-effected state net operating loss carryforwards,  $1.2 million in R&D credit carryforwards, and no state tax credit carryforwards.  These items have a full valuation allowance against them as of December 31, 2025.  Federal net operating losses can be carried forward indefinitely, however these indefinite-lived NOLs are generally limited to offsetting 80% of taxable income in any given year. The Federal R&D credit carryforwards typically have a 20-year carryforward period.

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, 2025 and 2024, we had $8.7 million and $8.1 million, 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. The company’s deferred tax assets generated by net operating losses have an unlimited life and R&D credit carryforwards have a twenty-year life. 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 over the three preceding fiscal years (2022 through 2024) combined with a near term outlook of future taxable losses (a taxable loss was generated in 2025 as well).  The need for this valuation allowance will be assessed on a quarterly 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.

		2025								2024
(Dollars in thousands)		$					%			$					%
Loss before income taxes		$	(1,084	)						$	(3,568	)
U.S. Federal Statutory Tax Rate			(228	)			21.0	%			(749	)			21.0	%
Current State and Local Income Taxes, net of Federal Income Tax Effect			57				(5.3	%)			(36	)			1.0	%
Foreign Tax Effects
United Kingdom – statutory rate differences			(1	)			–				17				(0.5	%)
Macau – change in valuation allowance			68				(6.3	%)			–				–
Effect of changes in Tax Laws or Rates Enacted in the Current Period			–				–				–				–
Effect of Cross-Border Tax Laws			–				–				–				–
Tax Credits			(313	)			28.9	%			(313	)			8.8	%
Nontaxable or Nondeductible Items
Share based payment awards			36				(3.3	%)			27				(0.8	%)
Stock Option cancellations			56				(5.2	%)			74				(2.1	%)
Meals and entertainment			12				(1.1	%)			–				–
Changes in Valuation Allowance			450				(41.5	%)			7,384				(206.9	%)
Other Adjustments
Resolution of uncertain tax positions			(16	)			1.5	%			–				–
Net operating losses			31				(2.8	%)			–				–
Research and development credit carryforward			–				–				(99	)			2.7	%
Other			4				(0.3	%)			(10	)			0.4	%
Effective Tax Rate		$	156				(14.4	%)		$	6,295				(176.4	%)

We had $187 and $203 thousand of total gross unrecognized tax benefits at December 31, 2025 and 2024, 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 2021.  However, our federal tax returns for the years 2022 through 2025 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.