Valion Bio, Inc. Income Taxes Disclosure
The provision for income taxes differs from the amount which would result by applying the federal statutory income tax rate to pre-tax loss for the years ended December 31, 2024 and 2023.
A reconciliation of the provision computed at the federal statutory rate to the provision for income taxes included in the accompanying statements of operations for the Company is as follows.
|
|
For the Years Ended |
|
|||||
|
|
December 31, 2024 |
|
|
December 31, |
|
||
Income tax provision at statutory rate |
|
|
21 |
% |
|
|
21 |
% |
State income taxes, net of federal benefit |
|
|
(4 |
)% |
|
|
(15 |
)% |
Research and development credits |
|
|
— |
% |
|
|
(1 |
)% |
Change in valuation allowance |
|
|
(17 |
)% |
|
|
(5 |
)% |
Effective income tax rate |
|
|
— |
% |
|
|
— |
% |
For the year ended December 31, 2024 the Company’s effective tax rate is below the federal statutory income tax rate of 21% due to the Company's position to establish a full valuation allowance on its deferred tax assets. For the year ended December 31, 2023, the Company’s effective tax rate is below the federal statutory income tax rate of 21% primarily due to state income taxes, net of federal benefit and the Company’s position to establish a full valuation allowance on its deferred tax assets.
The tax effects of temporary differences and carryforwards that give rise to significant portions of the net deferred tax assets are presented below (in thousands):
|
|
For the Years Ended |
|
|||||
|
|
December 31, 2024 |
|
|
December 31, |
|
||
Deferred tax assets: |
|
|
|
|
|
|
||
Net operating loss carryforwards |
|
$ |
7,627 |
|
|
$ |
6,759 |
|
Research and development credits |
|
|
204 |
|
|
|
186 |
|
Research and development costs |
|
|
489 |
|
|
|
465 |
|
Lease liability |
|
|
— |
|
|
|
103 |
|
Other temporary differences |
|
|
195 |
|
|
|
158 |
|
Total deferred tax assets |
|
|
8,515 |
|
|
|
7,671 |
|
Valuation allowance |
|
|
(8,515 |
) |
|
|
(7,574 |
) |
Deferred tax assets recognized |
|
|
— |
|
|
|
97 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
||
Right-of-use assets |
|
|
— |
|
|
|
(97 |
) |
Total deferred tax liabilities |
|
|
— |
|
|
|
(97 |
) |
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
The Company has recorded a valuation allowance for its deferred tax assets that it does not believe will be realizable at a more likely than not level based on analysis of all available sources of taxable income. The valuation allowance increased by $0.9 million and $354 thousand for the years ended December 31, 2024 and 2023, respectively, due to current and previous year losses and credits claimed.
At December 31, 2024 and 2023, the Company had federal net operating loss carryforwards of approximately $35.5 million and $30.4 million, respectively, which will begin to expire in 2036. Approximately $35.1 million of federal net operating losses can be carried forward indefinitely. At December 31, 2024 and 2023, the Company had state net operating loss carryforwards for California of approximately $2.6 million and $5.1 million, respectively, which will begin to expire in 2031. The Company also had federal and state research and development credit carryforwards of approximately $26 thousand and $336 thousand, respectively, at December 31, 2024. The federal credits start to expire in 2044. The California credits carryforward indefinitely.
Federal and state tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an “ownership change” for tax purposes, as defined in Section 382 of the Internal Revenue code. Accordingly, the Company’s ability to utilize these carryforwards may be limited as a result of such ownership changes. Such a limitation could result in limitation in the use of net operating losses in future years and possibly a reduction of the net operating losses available. The Company performed a 382 study in 2024 to determine if any ownership changes have occurred during 2024 which resulted in some tax attributes expiring prior to being able to be utilized due to Section 382 limitations. The Company had $33.7 million of federal net operating losses incurred prior to the ownership change in 2024. Of this amount, the Company estimated that $70 thousand of these tax attributes can be used each year due to the annual Section 382 limitations.
A reconciliation of the beginning and ending amount of gross unrecognized tax positions is as follows (in thousands):
|
|
For the Years Ended |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
Unrecognized tax benefits, beginning of year |
|
$ |
98 |
|
|
$ |
115 |
|
Additions related to current year tax positions |
|
|
10 |
|
|
|
(17 |
) |
Deferred tax assets |
|
$ |
108 |
|
|
$ |
98 |
|
During the year ended December 31, 2024 the amount of unrecognized tax benefits increased by $10 thousand due to current year research and development credits generated during the year offset by a reduction in research and development credits available for use due to application of the Section 382 limitations. During the year ended December 31, 2023 the amount of unrecognized tax benefits decreased by $17 thousand due to additional research and development credits generated during the year offset by a reduction in research and development credits available for use due to application of the Section 382 limitations. As of December 31, 2024 and 2023, the total amount of unrecognized tax benefits was $108 thousand and $98 thousand, respectively. The reversal of the uncertain tax benefits would not affect the Company’s effective tax rate to the extent that it continues to maintain a full valuation allowance against its deferred tax assets.
The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes line item in the statements of operations. As of December 31, 2024, and 2023, the Company had not accrued any interest or penalties related to uncertain tax positions. The Company does not anticipate any material change in its unrecognized tax benefits over the next twelve months. The unrecognized tax benefits may change during the next year for items that arise in the ordinary course of business.
The Company files tax returns in U.S. Federal and state jurisdictions. The tax periods from 2017 to 2024 remain open to examination in all jurisdictions. In addition, any tax losses that were generated in prior years and carried forward may also be subject to examination by the respective authorities. The Company is not currently under examination by income tax authorities for federal or state purposes.
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About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.