TSS, Inc. Income Taxes Disclosure

Note 5–Income Taxes

The U.S. and non-U.S. components of income from continuing operations before income taxes were as follows (in $000’s):

Income taxes are recognized for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are established for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. The effects of income taxes are measured based on enacted tax laws and rates. The provision/(benefit) for income taxes from continuing operations consists of the following (in $’000):

 The significant components of our deferred tax assets and liabilities are as follows (in $000’s):

On December 31, 2025, and 2024, we had net operating losses ("NOL”) of approximately $54 million and $37 million, respectively, to offset future taxable income. A portion of the Company’s net operating loss carryforwards will begin to expire in 2029 if not utilized sooner. Despite the increase in reported pre-tax income according to U.S. GAAP, the NOL grew during 2025 primarily due to the immediate expensing of certain fixed asset additions tied to the buildout of our Georgetown, Texas facility, as allowed under the OBBBA.

Utilization of the net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the "change in ownership” provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credit carryforwards before utilization.

Our provision for income taxes reflects the establishment of a valuation allowance against deferred tax assets as of December 31, 2025 and 2024. Accounting Standards Codification Topic 740, “Income Taxes,” requires management to evaluate its deferred tax assets on a regular basis to reduce them to an amount that is realizable on a more likely than not basis. Based on our recent earnings trend and expectations of continuing taxable income, enhanced by signing the extension of our long-term AI rack integration agreement in December 2025, we have determined that it is more likely than not that we will realize the tax benefit of our deferred tax assets, with certain limited exceptions. Consequently, during 2025 the valuation allowance decreased by $8.9 million due to continuing operations. In determining our provision/(benefit) for income taxes, net deferred tax assets, liabilities and valuation allowances, we are required to make judgments and estimates related to projections of profitability, the timing and extent of the utilization of net operating loss carryforwards and applicable tax rates. Judgments and estimates related to our projections and assumptions are inherently uncertain; therefore, actual results could differ materially from the projections.

Upon adoption of ASU 2023-09, Improvements to Income Tax Disclosures, the reconciliation of taxes at the federal statutory rate to our provision for (benefit from) income taxes for the year ended December 31, 2025 was as follows (in $'000, except for percentages):

(a) State taxes in Texas comprised the majority (greater than 50%) of the tax effect in this category. 

The reconciliation of taxes at the federal statutory rate to our provision for (benefit from) income taxes for the years ended December 31, 2024 and 2023 in accordance with the guidance prior to the adoption of ASU 2023-09 was as follows: 

We have adopted the provisions of the guidance related to accounting for uncertainties in income taxes. We have analyzed our current tax reporting compliance positions for all open years, and have determined that although not necessarily material, we have identified unrecognized state tax benefits that we have added to the tabular reconciliation schedule. All of our prior federal filings from the 2022 tax year forward remain open under statutes of limitation, and operating losses generated in years prior to 2022 remain open to adjustment until the statute closes for the tax year in which the net operating losses are utilized. State filings from the 2021 tax year forward remain open under statutes of limitation. We have no federal or state income tax returns currently under examination.

As of December 31, 2025, reserves for uncertain tax positions consisted of uncertain tax positions related to state limitations on the deductibility of production costs. Activity within our reserve for uncertain tax positions as well as the penalties and interest are recorded as a component of the Company's income tax expense. Interest and penalties accrued were $26,000 for the current year. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in $’000):

On July 4, 2025, the U.S. H.R.1, an act to provide for reconciliation pursuant to title II of H. Con. Res. 14. (the “OBBBA”) was enacted. The OBBBA introduces multiple tax law and other legislative changes, including modifications to income tax provisions such as domestic research and development expenses, capital expenditures, and U.S. taxation of international earnings; the repeal or acceleration of the sunset of certain tax credits under the 2022 Inflation Reduction Act and elimination of certain penalties for violations of certain regulatory credit programs. We have recognized the effects of the OBBBA provisions in our financial results to the extent they are applicable to the year ended December 31, 2025. We will continue to evaluate the impact of these provisions on our 2026 and subsequent consolidated financial statements.