Terns Pharmaceuticals, Inc. Income Taxes Disclosure
The following table presents domestic and foreign components of income (loss) before income taxes:
|
|
Year Ended December 31, |
|
|||||
(in thousands) |
|
2025 |
|
|
2024 |
|
||
U.S. |
|
$ |
(96,467 |
) |
|
$ |
(89,010 |
) |
Foreign |
|
|
841 |
|
|
|
417 |
|
Total loss before income tax |
|
$ |
(95,626 |
) |
|
$ |
(88,593 |
) |
The following table presents the provision for income taxes:
|
|
Year Ended December 31, |
|
|||||
(in thousands) |
|
2025 |
|
|
2024 |
|
||
Current |
|
|
|
|
|
|
||
Federal |
|
$ |
— |
|
|
$ |
— |
|
State |
|
|
6 |
|
|
|
31 |
|
Foreign |
|
|
225 |
|
|
|
523 |
|
Total current |
|
$ |
231 |
|
|
$ |
554 |
|
Deferred |
|
|
|
|
|
|
||
Foreign |
|
$ |
350 |
|
|
$ |
(294 |
) |
Total deferred |
|
$ |
350 |
|
|
$ |
(294 |
) |
Total income tax expense |
|
$ |
581 |
|
|
$ |
260 |
|
The following table presents the required disclosures from the adoption of ASU 2023-09 on a prospective basis and reconciles the U.S. federal statutory income tax amount and rate to the Company’s actual effective amount and rate as follows:
|
|
Year Ended December 31, 2025 |
|
|||||
($ in thousands) |
|
Amount |
|
|
Percent |
|
||
U.S. federal statutory tax |
|
$ |
(20,082 |
) |
|
|
21.00 |
% |
State income taxes, net of federal tax benefit |
|
|
5 |
|
|
|
(0.01 |
) |
Foreign tax effects |
|
|
|
|
|
|
||
Other |
|
|
277 |
|
|
|
(0.29 |
) |
Effect of cross-border tax laws |
|
|
|
|
|
|
||
Other |
|
|
(143 |
) |
|
|
0.15 |
|
Tax credits |
|
|
|
|
|
|
||
Research and development credit |
|
|
(3,431 |
) |
|
|
3.59 |
|
Orphan drug credit |
|
|
(6,475 |
) |
|
|
6.77 |
|
Change in valuation allowance |
|
|
31,806 |
|
|
|
(33.26 |
) |
Nontaxable or nondeductible items |
|
|
|
|
|
|
||
Non-deductible officer's compensation |
|
|
3,334 |
|
|
|
(3.48 |
) |
Stock-based compensation |
|
|
(7,862 |
) |
|
|
8.22 |
|
Other |
|
|
57 |
|
|
|
(0.06 |
) |
Changes in unrecognized tax benefits |
|
|
3,095 |
|
|
|
(3.24 |
) |
Effective tax |
|
$ |
581 |
|
|
|
(0.61 |
)% |
Income taxes paid for the year ended December 31, 2025 was $0.2 million, consisting primarily of foreign taxes in China.
The following table presents the required disclosures prior to the adoption of ASU 2023-09 and reconciles the U.S. federal statutory income tax rate to the Company’s actual effective rate as follows:
|
|
Year Ended December 31, 2024 |
|
|
Tax benefit at U.S. statutory rate |
|
|
21.00 |
% |
State income taxes, net of federal tax benefit |
|
|
(0.03 |
) |
Foreign income taxed at non-U.S. rates |
|
|
(0.02 |
) |
Other permanent items |
|
|
(0.12 |
) |
Deferred tax asset write-off |
|
|
(3.47 |
) |
Stock-based compensation |
|
|
(2.01 |
) |
Research and development credit |
|
|
2.56 |
|
Unrecognized tax benefit |
|
|
2.43 |
|
162(m) limitation |
|
|
(0.33 |
) |
Global intangible low-taxed income |
|
|
(0.48 |
) |
Increase in valuation allowance |
|
|
(19.86 |
) |
Other |
|
|
0.04 |
|
Effective tax rate |
|
|
(0.29 |
)% |
The difference between the provision for income taxes and the income tax determined by applying the statutory federal income tax rate of 21% was primarily due to the change in valuation allowance.
On July 4, 2025, the One Big Beautiful Bill Act (Act) was signed into law. The Act makes permanent key elements of the Tax Cuts and Jobs Act, including 100% bonus depreciation, expensing of domestic research cost, and making modifications to the international tax framework. The Act includes multiple effective dates, with certain provisions effective in 2025 and others phased in through 2027. The Company continues to evaluate the impact of the Act's provisions that will take effect in future years.
Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
As of December 31, |
|
|||||
(in thousands) |
|
2025 |
|
|
2024 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
||
Accruals and reserves |
|
$ |
1,565 |
|
|
$ |
1,821 |
|
Intangibles |
|
|
4,053 |
|
|
|
9,626 |
|
Stock-based compensation |
|
|
3,411 |
|
|
|
4,783 |
|
Net operating loss |
|
|
62,538 |
|
|
|
28,004 |
|
Research and development and Orphan drug credits |
|
|
18,061 |
|
|
|
8,919 |
|
Lease liability |
|
|
193 |
|
|
|
271 |
|
Capitalized research and development |
|
|
22,500 |
|
|
|
25,315 |
|
Other |
|
|
103 |
|
|
|
101 |
|
Valuation allowance |
|
|
(112,244 |
) |
|
|
(78,220 |
) |
Total deferred tax assets |
|
$ |
180 |
|
|
$ |
620 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
||
Fixed assets |
|
$ |
(4 |
) |
|
$ |
(12 |
) |
Operating lease assets |
|
|
(176 |
) |
|
|
(258 |
) |
Total deferred tax liabilities |
|
$ |
(180 |
) |
|
$ |
(270 |
) |
Net deferred tax assets |
|
$ |
— |
|
|
$ |
350 |
|
As of December 31, 2025, the Company recorded a full valuation allowance against its net deferred tax assets as it believes the deferred tax assets were not realizable on a more likely than not basis. This is based upon the weight of available evidence, including historical operating performance, and that a net loss will be expected to occur in the foreseeable future.
As of December 31, 2025, the Company had federal and state net operating loss carryforwards of approximately $297.3 million and $3.3 million, respectively. The federal net operating loss has an indefinite carryforward while the state net operating loss will begin to expire in . As of December 31, 2024, the Company had federal and state net operating loss carryforwards of approximately $132.8 million and $3.2 million, respectively.
As of December 31, 2025 and 2024, the Company had federal Research & Development (R&D) credit carryforwards of approximately $12.9 million and $9.5 million, respectively, which will begin to expire in . As of December 31, 2025 and 2024, the Company had California R&D credit carryforwards of approximately $8.7 million and $4.7 million, respectively, which do not expire.
Utilization of net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. The Company does not expect any previous ownership changes, as defined under Section 382 and 383 of the Internal Revenue Code, to result in a limitation that will materially reduce the total amount of net operating loss carryforwards and credits that can be utilized.
As of December 31, 2025, the Company has provided U.S. income taxes on all its foreign earnings. The Company continues to permanently reinvest the cash held offshore to support its working capital needs, as of the end of the year. Any withholding taxes from the foreign jurisdictions in the event of a cash distribution would have been immaterial.
As of December 31, 2025 and 2024, the total amount of unrecognized tax benefits was $9.6 million and $5.5 million, respectively, $0.9 million and $1.0 million of which would affect income tax expense, if recognized, before consideration of any valuation allowance. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months.
A reconciliation of the beginning and ending unrecognized tax benefit are as follows:
|
|
Year Ended December 31, |
|
|||||
(in thousands) |
|
2025 |
|
|
2024 |
|
||
Unrecognized tax benefit at beginning of year |
|
$ |
5,542 |
|
|
$ |
7,506 |
|
Increases related to prior year tax positions |
|
|
653 |
|
|
|
84 |
|
Increases related to current year tax positions |
|
|
3,708 |
|
|
|
1,490 |
|
Decreases related to prior year tax positions |
|
|
(306 |
) |
|
|
(3,538 |
) |
Unrecognized tax benefit at end of year |
|
$ |
9,597 |
|
|
$ |
5,542 |
|
The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of December 31, 2025 and 2024, the total amount of gross interest and penalties accrued was $0.8 million and $0.5 million, respectively.
The Company is subject to income taxes in the U.S. federal, state and various foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company’s tax years remain open for examination by all tax authorities since inception as well as carryover attributes beginning December 31, 2019, remain open to adjustment by the U.S. and foreign authorities.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 30, 2026 | Showing above |
| 2024 | Mar 20, 2025 | |
| 2023 | Mar 14, 2024 | |
| 2022 | Mar 27, 2023 | |
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.