urban-gro, Inc. Income Taxes Disclosure

NOTE 16 – INCOME TAXES

 

The Company accounts for income taxes in accordance with the asset and liability method prescribed in ASC 740, “Accounting for Income Taxes.” The Company has adopted the provisions of ASC 740-10-25, which provides recognition criteria and a related measurement model for uncertain tax positions taken or expected to be taken in income tax returns. ASC 740-10-25 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company had no tax positions relating to open income tax returns that were considered to be uncertain.

 

The Company has experienced cumulative losses for both book and tax purposes since inception. The potential future recovery of any tax assets that the Company may be entitled to due to these accumulated losses is uncertain and any tax assets that that the Company may be entitled to have been fully reserved based on management’s current estimates. Management intends to continue maintaining a full valuation allowance on the Company’s deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

 

The income tax benefit for the years ended December 31, 2024 and 2023 are as follows (in thousands):

 

		Years ended
		December 31, 2024				December 31, 2023
Current
Federal			-			$	-
State			0				50
Foreign			-				-
			0				50
Deferred
Federal			(30	)			44
State			-				-
Foreign			-				-
			(30	)			44
Total income tax expense (benefit)		$	(30	)		$	94

A reconciliation between the expected income tax provision at the federal statutory tax rate and the reported income tax provision for the periods ended are approximately as follows:

 

		Years ended
		December 31, 2024				December 31, 2023
Statutory Federal income tax rate			21.0	%			21.0	%
State income taxes, net of federal benefit			3.8	%			2.8	%
Research and development tax credits			0.0	%			0.0	%
Change in valuation allowance			(22.0	)%			(18.4	)%
Change in Tax Rate			(1.9	)%			0.0	%
Permanent differences			0.0	%			(1.7	)%
Goodwill Impairment			0.0	%			(4.4	)%
Other			(0.8	)%			0.4	%
			0.0	%			(0.4	)%

 

The tax effects of significant items comprising the Company’s deferred taxes as of December 31, 2024 and 2023 are as follows (in thousands):

 

		Years ended
		December 31, 2024				December 31, 2023
Deferred tax assets:
Federal, state and foreign NOL carryover		$	14,980			$	9,532
Lease Liabilities		$	369			$	461
Bad Debts and Other Reserves		$	766			$	73
Fixed Assets		$	113			$	7
Investments		$	23			$	485
Share-based Compensation		$	532			$	-
Interest Expense		$	283			$	46
Other		$	195			$	194
Total deferred tax assets			17,261				10,798
Valuation Allowance			(17,829	)			(9,786	)
Net deferred tax assets			(568	)			1,012
Deferred tax liabilities:
Goodwill		$	689			$	(66	)
Intangible Assets		$	223			$	(539	)
ROU Assets		$	(359	)		$	(451	)
Net deferred tax asset (liability)		$	(15	)		$	(44	)

 

At December 31, 2024, the Company had $58.0 million of Federal net operating loss which are set to expire beginning in 2037. The Internal Revenue Code contains provisions that may limit the net operating loss carryovers available to be used in any year if certain events occur, including significant changes in ownership interest.

 

Below is a table showing the gross net operating loss carryovers available at December 31, 2024 and their respective expiration:

 

		Amount				Expire
Federal Net Operating Losses with expiration			1,945				2037
Federal Net Operating Losses with indefinite life			56,027				indefinite
Total Federal Net Operating Losses			57,972
Various State Net Operating Losses			41,180				2037-2043
Canada Net Operating Losses			1,925				2042
Netherlands Net Operating Losses			2,246				indefinite

 

In assessing the realizability of its deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets 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. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As the Company evaluate the reversal of deferred tax liabilities, projections of future taxable income over the periods in which the deferred tax assets are deductible, and after consideration of the history of operating losses, the Company does not believe it is more likely than not that it will realize the benefits of net deferred tax assets and, accordingly, has established a valuation allowance on the net deferred tax assets. The valuation allowance increased by $8.0 million during 2024.

As of December 31, 2024 and 2023, the company has not recorded any unrecognized tax benefits related to uncertain tax positions. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change in the next twelve months.

 

The Company monitors proposed and issued tax law, regulations, and cases to determine the potential impact of uncertain income tax positions. At December 31, 2024, the Company had not identified any potential subsequent events that would have a material impact on unrecognized income tax benefits within the next twelve months.

 

Federal and State tax returns are open for examination for the tax years beginning December 31, 2017 for three years and four years from the date of utilization of any net loss carryforwards.

 

Realization of operating loss carryforwards to offset future operating income for tax purposes are subject to various limitations including change of ownership and current year taxable income percentage limitations. The Company has no credit carryforwards for tax purposes.

 

The Company’s primary filing jurisdictions are the United States, Canada, and the Netherlands. Due to the Company’s net operating loss carryforwards, the Company’s income tax returns remain subject to examination by federal, foreign and most state taxing authorities for all tax years.