Unusual Machines, Inc. Income Taxes Disclosure

Note 14 – Income Taxes

 

The components of income (loss) before income tax expense (benefit) consist of the following as of December 31, 2025 and 2024:

Schedule of income (loss) before income tax expense (benefit)
		December 31,				December 31,
		2025				2024
US		$	(19,149,289	)		$	(31,150,444	)
Foreign			(80,580	)			(843,384	)
Pretax income (loss) from operations		$	(19,229,869	)		$	(31,993,828	)

 

The components of income tax expense (benefit) as of December 31, 2025 and 2024 are:

Schedule of income (loss) income tax expense (benefit)
		December 31,				December 31,
		2025				2024
Current:
Federal		$	–			$	–
Foreign			–				–
State and local			–				–
Current income tax expense (benefit)			–				–
Deferred:
Federal			(828	)			(11,069	)
Foreign			(39,458	)			–
State and local			4,034				(2,290	)
Deferred income tax expense (benefit)			(36,252	)			(13,360	)
Total income tax expense (benefit)		$	(36,252	)		$	(13,360	)

 

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2025 and 2024 are:

Schedule of deferred tax assets and liabilities
		December 31,				December 31,
		2025				2024
Deferred tax assets:
Net operating losses and credit carryforwards		$	6,860,442			$	3,268,472
Stock compensation			266,916				54,821
Inventory			–				248,599
Accruals and reserves			13,685				7,336
Deferred interest carryforward			–				24,669
Lease liability			654,327				83,636
Other			16,083				–
Total deferred tax assets			7,811,453				3,687,532
Deferred tax liabilities:
Intangible assets			(653,892	)			(564,061	)
Property and equipment			(197,750	)			–
Right of use asset			(648,451	)			(81,995	)
Other			(10,216	)			74
Valuation allowance			(5,815,224	)			(3,135,343	)
Deferred income tax expense (benefit)			(7,958,225	)			(3,781,325	)
Net deferred tax liability		$	(146,772	)		$	(93,793	)

 

A reconciliation of the provision for income taxes to the amount computed by applying the 21% statutory U.S. federal income tax rate to income before income taxes after the adoption of ASU 2023-09 is as follows:

Schedule of reconciliation of provision for income taxes
		December 31,							December 31,
		2025							2024
U.S. federal statutory tax rate			21.0%			$	(4,038,272	)		21.0%			$	(6,718,704	)
State and local income taxes, net of federal income tax effect			(0.02)%				4,033			0.1%				(305,016	)
Foreign tax effects:
Other foreign jurisdictions			0.06%				(11,838	)		(0.2)%				57,730
Effect of changes in tax laws or rates enacted in the current period			0.00%				–			0.00%				–
Effect of cross-border tax laws:
U.S. taxation of foreign earnings			0.00%				–			0.00%				–
Tax credits:
Research and development credits			0.00%				–			0.00%				–
Changes in valuation allowance			(11.38)%				2,187,556			(4.4)%				1,708,109
Nontaxable or nondeductible items:
162m limitation			(10.09)%				1,940,642			0.00%				–
Other			0.40%				(76,147	)		(16.4)%				5,244,520
Changes in unrecognized tax benefits			0.00%				–			0.00%				–
Other			0.22%				(42,226	)		0.00%				–
Effective rate			0.19%			$	(36,252	)		0.0%			$	(13,360	)

 

The Company adopted ASU 2023-09 on a prospective basis for the year ended December 31, 2025 and have included the following table as a result of the adoption, which presents income taxes paid (net of refunds received) for the year ended December 31, 2025:

Schedule of income taxes paid net of refunds received
		December 31,
		2025
U.S. federal		$	–
U.S. state and local			–
Foreign			–
Total		$	–

 

As of December 31, 2025, the Company has U.S. federal and state net operating loss carryforwards of approximately $23.5 million and foreign net operating loss carryforwards of approximately $4.9 million of which $4.6 million will never be utilized. The U.S. federal net losses can be carried forward indefinitely and are generally deductible against 80% of taxable income on an annual basis.

 

In assessing the realizability of deferred tax assets, a determination is made as to whether it is more likely than not that some portion or all 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 has provided a full valuation allowance on its federal, foreign, and state deferred tax assets.

 

The Company is subject to income taxes in the United States; Puerto Rico; and various state 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 is not currently under examination by any taxing authorities. The 2022 through 2025 tax years are open to examination by the tax authorities.

 

ASC 740 provides detailed guidance for the consolidated financial statement recognition, measurement, and disclosure of uncertain tax positions recognized in the consolidated financial statements. Tax positions must meet a more-likely-than-not recognition threshold before a benefit is recognized in the consolidated financial statements. As of December 31, 2025, the Company has no uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense in the accompanying consolidated statements of operations. No interest and penalties related to uncertain tax positions were accrued as of December 31, 2025 associated with uncertain tax positions.