TUCOWS INC /PA/ Income Taxes Disclosure

9. Income Taxes:

 

Income (loss) Before Taxes by Jurisdiction

 

Income (loss) before taxes by tax jurisdiction for the years ended  December 31, 2025,  December 31, 2024 and  December 31, 2023, consisted of the following (Dollar amounts in thousands of U.S. dollars):

 

		Year ended December 31,
		2025				2024				2023
United States		$	(97,552	)		$	(119,526	)		$	(121,527	)
Canada			27,555				16,511				17,567
Other			2,687				1,141				890
		$	(67,310	)			(101,874	)			(103,070	)

 

Income Tax Expense (Recovery) by Jurisdiction

 

Income tax expense (recovery) by tax jurisdiction for the years ended  December 31, 2025,  December 31, 2024 and  December 31, 2023, consisted of the following (Dollar amounts in thousands of U.S. dollars):

 

		Year ended December 31,
		2025				2024				2023
Current income tax expense (recovery):
Federal		$	952			$	649			$	829
State			224				485				336
Canada			6,528				5,196				4,377
Other			1,094				802				625
			8,798				7,132				6,167
Deferred income tax expense (recovery):
Federal			(8	)			1,443				(8,368	)
State			21				168				(4,006	)
Canada			147				(323	)			(172	)
Other			(449	)			(434	)			(494	)
			(289	)			854				(13,040	)
Income tax expense (recovery)		$	8,509			$	7,986			$	(6,873	)

 

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate of 21% to income before income taxes for the years ended  December 31, 2025,  December 31, 2024 and  December 31, 2023, as a result of the following (Dollar amounts in thousands of U.S. dollars): 

 

		Year ended December 31,
		2025								2024								2023
		Amount				Percent				Amount				Percent				Amount				Percent
Income (loss) for the year before income taxes		$	(67,310	)						$	(101,874	)						$	(103,070	)
U.S. federal statutory tax rate			(14,135	)			21.0	%			(21,394	)			21.0	%			(21,644	)			21.0	%
State and local income taxes, net of federal income tax effect(1)			287				(0.4	%)			251				(0.2	%)			(837	)			0.8	%
Foreign tax effects			-				0.0	%			-				0.0	%			-				0.0	%
Canada			6,580				(9.8	%)			5,678				(5.6	%)			5,033				(4.9	%)
Other foreign jurisdiction			557				(0.8	%)			257				(0.3	%)			99				(0.1	%)
Effect of changes in tax laws or rates enacted in the current period			-				0.0	%			-				0.0	%			-				0.0	%
Effect of cross-border tax laws			(1,752	)			2.6	%			(1,301	)			1.3	%			(1,558	)			1.5	%
Tax credits			-				0.0	%			-				0.0	%			-				0.0	%
Changes in valuation allowances			13,924				(20.7	%)			19,558				(19.2	%)			8,632				(8.4	%)
Nontaxable or nondeductible items			-				0.0	%			-				0.0	%			-				0.0	%
Changes in unrecognized tax benefits			573				(0.9	%)			-				0.0	%			-				0.0	%
Other adjustments			2,475				(3.7	%)			4,937				(4.8	%)			3,402				(3.3	%)
Effective tax rate		$	8,509				(12.7	%)		$	7,986				(7.8	%)		$	(6,873	)			7.0	%

 

(1) In 2025, state and local taxes in North Carolina made up the majority of the tax effect in this category.

 

Our effective tax rate is impacted by an increase in valuation allowances on net operating losses and interest expense limitations that we are not expected to realize in future years, and the tax owing on foreign earnings.

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2025, and  December 31, 2024 are presented below (Dollar amounts in thousands of U.S. dollars):

 

		December 31, 2025				December 31, 2024
Deferred tax assets:
Net operating losses		$	74,093			$	71,429
Foreign tax credits			12,534				12,534
Share based compensation			7,035				6,093
Contract liabilities			5,129				5,086
Interest expense limitation			16,022				10,723
Limited life intangible assets			3,226				629
Fixed assets			-				-
Accruals, including foreign exchange and other			1,568				1,442
Total deferred tax assets			119,607				107,936
Valuation allowance			(68,144	)			(51,653	)
Total deferred tax assets, net		$	51,463			$	56,283
Deferred tax liabilities:
Investment in partnership		$	(28,853	)		$	(33,436	)
Prepaid registry fees and expenses			(19,115	)			(20,640	)
Indefinite life intangible assets			(2,962	)			(2,965	)
Fixed assets			(3,495	)			(2,205	)
Limited life intangible assets			-				-
Foreign branch deferred tax liabilities			-				-
Total deferred tax liabilities		$	(54,425	)		$	(59,246	)
Net deferred tax liabilities		$	(2,962	)		$	(2,963	)

 

In assessing the need for a valuation allowance, historical and future levels of income, expectations, and risks associated with estimates of future taxable income and tax planning strategies are considered. In 2025, we believe that it is more likely than not that the tax benefit from deferred tax assets will not be realized. As of December 31, 2025, a valuation allowance of $68.1 million is recorded against net deferred tax assets. The increase in the valuation allowance was primarily attributable to an increase in deferred tax assets resulting from net operating losses and interest expense limitations.

 

As of December 31, 2025, the Company had net federal and state operating loss carryforwards of approximately $306.7 million and interest expense carryforwards of $66.1 million. The majority of the net operating loss and interest expense carryforwards can be carried forward indefinitely. 

 

As of December 31, 2025, the Company had foreign tax credit carryforwards of $12.5 million. Foreign tax credits will start to expire beginning in the year ending December 31, 2027 if not otherwise utilized.

 

The Company had $0.1 million total gross unrecognized tax benefits as of December 31, 2025 and nil total gross unrecognized tax benefits as of December 31, 2024.

 

The Company recognizes interest and penalties related to income tax matters within the provision for income taxes. As of December 31, 2025, the Company recorded $0.8 million of interest in income taxes, primarily due to Internal Revenue Code Sec. 453A interest on deferred tax liability for U.S. tax purposes. No other material interest and penalties were recognized as of December 31, 2025.

 

Income Taxes Paid by Jurisdiction

 

		Year ended December 31,
		2025				2024				2023
United States		$	739			$	735			$	580
State			170				(234	)			(903	)
Canada			4,004				6,158				4,797
Denmark			518				679				(86	)
Germany			93				315				541
Other foreign			127				-				-
		$	5,651				7,653				4,929