XBiotech Inc. Income Taxes Disclosure

9. Income Taxes

 

The components of income before income taxes are as follows (in thousands):

 

			Years Ended December 31,
		2024				2023
United States		$	(26,313	)		$	(27,144	)
Foreign			(12,250	)			2,831
Total		$	(38,563	)		$	(24,313	)

 

The components of the provision for income taxes are as follows for the years ended December 31, 2024, and 2023 (in thousands):

 

Current		2024				2023
United States		$	(49	)		$	130
Foreign			17				173
Total			(32	)			303
Deferred
United States			-				-
Foreign			-				(59	)
Total			-				(59	)
Total income tax expense (benefit)		$	(32	)		$	244

 

 

The provision for income taxes differs from the amount computed by applying the Canada statutory rate to pre-tax income as follows for the years ended December 31, 2024, and 2023:

 

		2024				2023
Income tax benefit computed at federal tax rate			27.0	%			27.0	%
Foreign operations			(3.4	)%			(5.4	)%
Change in valuation allowance			(22.8	)%			(26.1	)%
Tax credits generated			7.0	%			8.6	%
Prior year adjustments			3.0	%			(2.3	)%
Changes in uncertain tax positions			(0.1	)%			(0.4	)%
Foreign exchange gain and loss			(3.9	)%			2.1	%
Stock compensation			(1.1	)%			(2.4	)%
Non-deductible compensation			(5.8	)%			(6.8	)%
Foreign Liquidation			0.0	%			4.5	%
Other			0.2	%			0.3	%
Total			0.1	%			(1.0	) %

 

The effective tax rate for the periods ended December 31, 2024 and December 31, 2023 varied from the Canadian statutory rate primarily due to losses in jurisdictions for which a valuation allowance is recorded and a benefit may not be recognized.

 

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:

 

		2024				2023
Net operating loss carryforwards		$	2,799			$	1,288
Research and other credits			9,150				5,851
Stock based compensation			1,760				2,530
Capitalized research expenses			12,654				7,800
Share issuance costs			-				39
Accrued liabilities			414				696
Deferred tax assets before valuation allowance			26,777				18,204
Valuation allowance			(26,382	)			(17,576	)
Deferred tax assets			395				628
Depreciation			323				535
Prepaid assets			72				93
Deferred tax liability			395				628
Net deferred tax asset (liability)		$	-			$	-

 

For the year ended December 31, 2024, the Company has a USA federal net operating loss carryforward of $3.2M which will carryforward indefinitely. The Company has $9.4 million of USA federal research and development tax credits carryforwards which are presented in the financial statements net of $1.7 million of related uncertain tax positions, which will begin to expire in 2037. In addition, the Company has $1.8 million of Texas research and development tax credits carryforwards which are presented in the financial statements net of $0.4M of related uncertain tax positions, which will begin to expire in 2042. The Company has a Canada net operating loss carryforward of $1.6 million, which will begin to expire in 2044. This amount excludes the $0.3 million expected to be carried back to the 2023 tax year. Also, after weighing all available and positive and negative evidence the Company determined a full valuation allowance for all jurisdictions was necessary.

 

For the year ended December 31, 2024, the Company has not recorded any outside basis difference deferreds given its intention to indefinitely reinvest earnings from its foreign operations. In addition, given the Company's estimated outside tax basis in its USA investment is in excess of book basis, therefore there is no unrecognized deferred tax liability.

 

The Company is subject to income tax in multiple jurisdictions, including Canada, USA, and the state of Texas. The Company has Canadian, USA, and Texas income tax returns that are open to examination for the 2021, 2021, and 2020 tax years, respectively. In addition, the utilization of tax carryforwards, from years prior to those previously mentioned may also be audited by the taxing authorities once utilized. As a result, the Company continuously monitors its current and prior filing positions in order to determine if any unrecognized tax positions need to be recorded. The analysis involves considerable judgement and is based on the best information available. A reconciliation of the beginning and ending amount of unrecognized tax benefits as of December 31, 2024 and 2023 are as follows (in thousands):

 

		2024				2023
Balance as of January 1		$	2,973			$	2,864
Additions based on tax positions related to the current year			660				389
Additions for tax positions of prior years			106				260
Reductions for tax positions of prior years			-				(4	)
Settlements & statute of limitations			(305	)			(536	)
Balance at December 31		$	3,434			$	2,973

 

The Company recognized interest and penalties related to unrecognized tax benefits of $98 thousand and $93 thousand as a component of income tax expense for the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024 and December 31, 2023, there are both $1.7 million, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. In addition, it is reasonably possible that approximately $0.1 million of the unrecognized tax benefits may be recognized in the next 12 months as a result of a lapse of the statute of limitations. No other positions are expected to significantly decrease within the next 12 months.