WRAP TECHNOLOGIES, INC. Income Taxes Disclosure

17. INCOME TAXES

 

Until its reverse recapitalization on March 31, 2017, the Company was treated as a partnership for federal and state income tax purposes and did not incur income taxes. The Company accounts for income taxes under ASC 740. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is "more likely than not" that some component or all of the benefits of deferred tax assets will not be realized.

   

The following table summarizes income (loss) before income taxes:

 

 

The Company's income tax expense (benefit) is as follows:

 

 

The Company's effective tax rate for the years ended December 31, 2025 was 0%. For the year ended December 31, 2025, the primary drivers of the variance from the statutory rate were fair value adjustments, state taxes, and valuation allowance.

The following is a reconciliation from the Company's statutory rate to the effective tax rate reported in the financial statements:

 

 

The tax effect of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases that give rise to deferred tax assets and liabilities is as follows:

 

 

For the year ended December 31, 2025, the Company federal and state post-apportioned net operating loss carryforwards are approximately $95,684 and $51,267, respectively. There are no foreign operating loss carryforwards. The federal operating loss carryforwards have $94,981 with an indefinite carryforward period and $703 that begin to expire in 2037. The state post-apportioned operating loss carryforwards of $50,555 have a limited carryforward period and will begin to expire in 2037.

 

For the year ended December 31, 2025, the Company federal tax carryforward is $81. There are no state and foreign tax credit carryforwards. All tax credits have a limited carryforward period and will begin to expire in 2037.

 

In accordance with Section 382 and Section 383, utilization of the net operating losses ("NOL") and tax credit carryforwards may subject to limitations based on prior or future ownership changes. At this time, no Section 382 study has been completed.

 

Additionally, after weighing up all available and positive and negative evidence for the year ended December 31, 2025, the Company has recorded a valuation allowance of approximately $26,455.

The Company is subject to income tax in multiple jurisdictions, including federal, states, and city jurisdictions. The Company has federal, state, and city income tax returns that are open to examination from 2022, 2023, and 2024. In addition, the utilization of tax carryforwards from periods prior to those previously mentioned may also be audited by the taxing authorities once utilized.

 

 

The Company has not accrued any interest expense or penalties related to the unrecognized tax benefits for the year ended December 31, 2025.

 

The Company has made no income tax payments and received no income tax refunds during the year. All payments made to taxing authorities were for non-income based tax liabilities and are outside the scope of ASC 740.

 

The Company has provided a valuation allowance against the Company’s deferred tax assets, since, in the opinion of management, based upon the earnings history of the Company, it is not more likely than not that the benefits will be realized. All or a portion of the remaining valuation allowance may be reduced in future years based on an assessment of earnings sufficient to fully utilize these potential tax benefits.

 

The One Big Beautiful Bill Act (OBBBA) was enacted on July 4, 2025. The Company has evaluated whether OBBBA has a material impact on its 2025 financial statements. The only provision of OBBBA that impacts the Company’s income tax accounting under ASC 740 is the new IRC. Sec. 174A, which permanently allows taxpayers to fully expense domestic research or experimental (R&E) expenditures paid or incurred in taxable years beginning after December 31, 2024. The requirement to capitalize foreign Sec. 174 expenses over 15 years has not changed. On August 28, 2025, the IRS released procedural guidance (Rev. Proc. 2025-28) for implementing Section 174A and related elections for domestic research or experimental. Transition rules provide taxpayers with options to account for any remaining unamortized domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2025. Taxpayers may continue to amortize such unamortized amounts over the remaining five-year period; alternatively, they may elect to deduct any remaining unamortized domestic R&E expenditures either entirely in the first tax year beginning after December 31, 2024, or ratably over two taxable years (e.g., 2025 or ratably in 2025 and 2026). The Company has decided it will elect to continue to amortize previously capitalized and unamortized domestic R&E expenditures over the remaining five-year period. As of December 31, 2024, the Company has approximately $8,600 of remaining unamortized domestic R&D expenditures, representing approximately $1,900 of its gross deferred tax assets. As of December 31, 2025, the Company has approximately $4,800 of remaining unamortized domestic R&D expenditures, representing approximately $1,100 of its gross deferred tax assets.

 

The provision/(benefit) for Income Taxes for the year ended December 31, 2024, consists of the following:

 

The Company’s effective income tax rate is different from the federal statutory tax rate in 2024 predominantly due to the valuation allowance, permanent differences, and state taxes. A reconciliation of the statutory U.S. Federal Tax Rate to the Company's Effective Tax Rate is as follows:

Deferred income taxes represent the tax effect of transactions that are reported in different periods for financial and tax reporting purposes. The combined temporary differences and carryforwards of each tax paying component of the Company that give rise to a significant portion of the deferred income tax benefits and liabilities are as follows as of December 31, 2024: