TREACE MEDICAL CONCEPTS, INC. Income Taxes Disclosure

10. Income Taxes

The Company has not recorded an income tax provision for the years ended December 31, 2025, 2024 and 2023 due to its operating losses. All losses before income taxes were generated in the United States.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. Due to the Company's history of net losses, the deferred tax assets have been fully offset by a full valuation allowance of $56.7 million and $44.1 million as of December 31, 2025 and 2024, respectively. The Company's changes in the deferred tax asset valuation allowance for the years ended December 31, 2025 and 2024, were $12.5 million and $8.9 million, respectively.

The Company had unused federal and state net operating loss carryforwards of approximately $153.8 million and $117.9 million, respectively, as of December 31, 2025, and federal and state net operating loss carryforwards of approximately $121.8 million and $59.8 million, respectively, as of December 31, 2024. The net operating loss carryforwards begin to expire in 2034. The Company's research and development tax credit carryforwards were $2.3 million and $1.6 million as of December 31, 2025 and 2024, respectively, and begin to expire in 2037.

The federal and state net operating loss carryforwards and credits may be subject to significant limitations under Section 382 and Section 383 of the Internal Revenue Code and similar provisions under state law. The Tax Reform Act contains provisions that limit the federal net operating loss carryforwards that may be used in any given year in the event of special occurrences, including significant ownership changes. A Section 382 "ownership change" generally occurs if one or more stockholders or groups of stockholders, who own at least 5% of the Company's stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. The Company may have previously experienced, and may in the future experience, one or more Section 382 "ownership changes," including in connection with the Company's initial public offering. If so, the Company may lose some or all of the tax benefits of its carryforwards and credits.

Management has reviewed and evaluated the relevant technical merits of each of its tax positions in accordance with accounting principles generally accepted in the United States of America for accounting for uncertainty in income taxes and determined that there are no uncertain tax positions that would have a material impact on the financial statements of the Company. The Company is generally not subject to U.S. Federal and state income tax examinations by tax authorities for tax years before 2021.