Kartoon Studios, Inc. Income Taxes Disclosure

Note 18: Income Taxes

 

For financial reporting purposes, Loss Before Income Tax Benefit (Expense) includes the following components (in thousands):

Schedule of loss before income tax benefit expense
		Year Ended December 31,
		2025				2024
United States		$	(19,217	)		$	(14,812	)
Foreign			(5,616	)			(6,172	)
Loss Before Income Tax Benefit		$	(24,833	)		$	(20,984	)

 

The significant components of Income Tax Benefit (Expense) are as follows (in thousands):

Schedule of components of income tax benefit
		Year Ended December 31,
		2025				2024
Current:
Federal		$	–			$	–
State			–				(12	)
Foreign			–				62
Current expense			–				50
Deferred:
Federal			21				(7	)
State			46				–
Foreign			68				–
Deferred benefit			135				(7	)
Income Tax Benefit		$	135			$	43

 

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred Tax Liability, net consists of the following components (in thousands):

Schedule of deferred tax liability
		As of December 31,
		2025				2024
Deferred Tax Assets:
Net Operating Loss Carryover		$	47,937			$	52,747
Capital Loss Carryover			2,127				–
Lease Liability			1,564				1,811
Stock Compensation			523				765
Investments			3,774				–
Marketable Securities			1,647				24
Other			1,598				3,300
Total Gross Deferred Tax Assets			55,396				58,647
Less: Valuation Allowance			(51,547	)			(54,046	)
Deferred Tax Assets, net			3,849				4,601
Deferred Tax Liabilities:
Right-of-Use Assets			(1,449	)			(1,663	)
Intangible Assets			(3,618	)			(4,239	)
Other			(7	)			–
Total Gross Deferred Tax Liabilities			(5,074	)			(5,902	)
Deferred Tax Liability, net		$	(1,225	)		$	(1,301	)

 

The income tax provision differs from the amount of income tax determined by applying the U.S. federal tax rate to pretax income from continuing operations due to the following (in thousands):

Schedule of income tax provision
		Year Ended December 31, 2025
		Dollars				Percentages
U.S. Federal Statutory Tax Rate		$	(5,215	)			21.0	%
State and Local Income Taxes, Net of Federal Income Tax Effect (1)			(46	)			0.2	%
Foreign Tax Effects
Canada
Statutory tax rate difference between Canada and U.S.			(186	)			0.7	%
Changes in valuation allowances			607				(2.4	)%
Other			197				(0.8	)%
Provincial tax			494				(2.0	)%
Changes in Valuation Allowances			(1,402	)			5.6	%
Nontaxable or Nondeductible Items
Other			600				(2.4	)%
Other Adjustments
Intercompany Transactions			4,071				(16.4	)%
Adjustments to Deferred Items			754				(3.0	)%
Other			(9	)			0.0	%
Effective Tax Rate		$	(135	)			0.5	%

 

(1)	State taxes in California and New Jersey made up the majority (greater than 50 percent) of the tax effect in this category.

 

As previously disclosed for the years ended December 31, 2024, prior to the adoption of ASU 2023-09, the table below is a reconciliation of the components that caused the Company’s (provision) benefit for income taxes to differ from amounts computed by applying the U.S. federal statutory rate:

		Year Ended December 31, 2024
Income Tax Benefit Computed at the Statutory Federal Rate		$	4,406
State Income Taxes, Net of Federal Tax Effect			716
Stock Compensation			(895	)
Goodwill Impairment			–
Warrants			(207	)
Other			(165	)
Non-U.S. operations			368
Valuation Allowance			(4,180	)
Income Tax Benefit		$	43

 

On July 4, 2025, the President signed H.R. 1 the One Big Beautiful Bill Act into law. The legislation includes several changes to federal tax law that generally allow for more favorable deductibility of certain business expenses beginning in 2025, including the restoration of immediate expensing of domestic research and development expenditures, reinstatement of 100% bonus depreciation, and more favorable rules for determining the limitation on business interest expense. These changes were reflected in the income tax provision for the period ended December 31, 2025, as enactment occurred before the balance sheet date. The Company determined, there was no material impact to our income tax expense or effective tax rate, due to the full valuation allowance against the net deferred tax asset.

 

At December 31, 2025, the Company had Federal, state, and foreign net operating loss carry forwards of approximately $118.4 million, $114.2 million, and $56.1 million, respectively, that may be offset against future taxable income, and will begin to expire in 2026 (Federal) and in 2028 (state and Canada), if not utilized. No tax benefit related specifically to operating loss has been reported in the December 31, 2025 financial statements since the potential tax benefit from net operating loss carryforward is offset by a valuation allowance of the same amount. At December 31, 2025, the Company had gross realized capital loss carryforwards of $8.7 million, which expire beginning in 2027 if not utilized. A full valuation allowance has been recorded against this amount.

  

For the years ended December 31, 2025 and 2024, the Company reflects a deferred tax liability in the amount of $1.2 million and $1.3 million, respectively, due to the future tax liability from assets with indefinite lives known as a “naked credit.” The future tax liability created by this indefinite lived asset can be offset by up to 80% of net operating loss carryforwards created after 2017. The remaining portion of the future tax liability from indefinite lived assets cannot be used to offset definite lived deferred tax assets.

 

The Company did not record foreign withholding taxes on undistributed earnings of its foreign subsidiaries based on its intention to permanently reinvest those earnings at December 31, 2025 or 2024, except for Frederator, wholly owned by WOW. During 2025, management reevaluated and determined that it will no longer assert permanent reinvestment with respect to Frederator. As of December 31, 2025, Frederator has a cumulative deficit in earnings and profits. Accordingly, the change in assertion does not expect to generate a deferred tax liability or applicable withholding taxes.

 

Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may be limited as to use in future years.

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized.

 

ASC 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the consolidated financial statements.

 

The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of December 31, 2025, the Company had no accrued interest or penalties related to uncertain tax positions.

 

The Company files income tax returns in the U.S. federal jurisdiction and in the states of California, Florida, Massachusetts, New Jersey, New York, as well as Canada. To the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses were generated and carried forward to make adjustments up to the amount of the net operating losses. The Company is currently subject to U.S. federal, state and local and foreign tax examinations by tax authorities. The Company is no longer subject to audits by U.S. federal, state, local or foreign authorities for years prior to 2021.

 

Kartoon Studios, Inc. and its wholly-owned U.S. subsidiaries are subject to U.S. income taxes and file a consolidated and separate tax returns in the U.S. The Beacon Communications Group, Ltd., Ameba Inc. and Wow Unlimited Media Inc. are subject to Canadian income taxes on a stand-alone basis and file separate tax returns in Canada.