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INCOME TAXES
 12 Months Ended
Dec. 31, 2024
Income Tax Disclosure [Abstract]  
INCOME TAXES

NOTE 10—INCOME TAXES

 

Prior to 2024, based on negative evidence (primarily a cumulative history of operating losses), the Company had a full valuation allowance against its net deferred tax assets. As of December 31, 2024, the Company considered all the positive and negative evidence related to the likelihood of realization of the deferred tax assets and determined, based on the weight of available evidence, it is more likely than not that some of the deferred tax assets will be realized. As of December 31, 2024 and 2023 the Company had recorded $15,933,000 and $16,215,000 of deferred tax assets before valuation allowance, respectively, which was offset by $11,400,000 and $16,086,000 of valuation allowance, respectively. The Company has recorded deferred tax liabilities of $98,000 and $129,000 as of December 31, 2024 and 2023, respectively, which have all been determined to be sources of future taxable income. The reduction of $4,686,000 of the valuation allowance is based on cumulative positive operating results over the prior three-year period and expectations about generating U.S. taxable income in the future. The remaining valuation allowance relates primarily to anticipated expirations of U.S. net operating losses prior to utilization based on our forecasts of future taxable income.

 

(a) Composition of income (loss) before income taxes is as follows (in thousands):

 

  

Year ended

December 31,

 
   2024   2023 
Domestic  $2,010   $138 

 

 

Income tax (benefit) expense consists of the following (in thousands):

 

   2024   2023 
  

Year ended

December 31,

 
   2024   2023 
Current:          
Federal  $—   $— 
State and local   123    9 
Current income tax (benefit) expense   123    9 
Deferred:          
Federal   (4,209)   — 
State and local   (226)   — 
Deferred income tax benefit   (4,435)   — 
Total income tax (benefit) expense  $(4,311)  $9 

 

(b) Effective Income Tax Rates

 

Set forth below is a reconciliation between the federal tax rate and the Company’s effective income tax rates with respect to continuing operations:

 

   2024   2023 
  

Year ended

December 31,

 
   2024   2023 
Statutory Federal rates   21%   21%
Increase (decrease) in income tax rate resulting from:          
Nondeductible/nontaxable items   0%   2%
State taxes   3%   4%
Rate change   (3)%   69%
Prior year rate change adjustment   —%   173%
Deferred true ups   (2)%   147%
Valuation allowance   (233)%   (409)%
Effective income tax rates   (214)%   7%

 

(c) Analysis of Deferred Tax Assets and (Liabilities) (in thousands):

 

   2024   2023 
  

As of

December 31,

 
   2024   2023 
Deferred tax assets (liabilities) consist of the following:          
Employee benefits and deferred compensation  $72   $61 
Deferred revenue   215    202 
Lease liability   22    47 
Intangible assets   218    311 
Other temporary differences   113    46 
Section 174 expenditures   440    290 
NOL and capital loss carryforwards   14,853    15,258 
Total deferred tax assets   15,933    16,215 
Valuation allowance   (11,400)   (16,086)
Net deferred tax asset   4,533    129 
Right-of-use asset   (19)   (41)
Fixed assets   (79)   (88)
Total deferred tax liabilities   (98)   (129)
Net deferred tax assets  $4,435   $— 

 

 

Valuation allowances relate primarily to NOL carryforwards related to the Company’s consolidated tax losses as well as state tax losses related to the Company’s OmniMetrix subsidiary and book-tax differences related to asset impairments and stock compensation expense of the Company. During the year ended December 31, 2024 and 2023, the valuation allowance decreased by $4,686,000 and $567,000, respectively.

 

(d) Summary of Tax Loss Carryforwards

 

As of December 31, 2024, the Company had various NOL carryforwards expiring as follows (in thousands):

 

Expiration  Federal   State 
2025 – 2031*   2,579    — 
2032 – 2037*   59,389    14,967 
Unlimited   4,958    1,877 
Total  $66,926   $16,844 

 

*   The utilization of a portion of these NOL carryforwards is limited due to limits on utilizing NOL carryforwards under Internal Revenue Service regulations following a change of control.

 

Under Section 382 of the Internal Revenue Code, the yearly utilization of a corporation’s NOL carryforwards may be limited following a change in ownership of greater than 50% (by value) over a three-year period. The yearly limitation is based on the value of the corporation immediately before the ownership change multiplied by the federal long-term tax-exempt rate. We are currently subject to the annual limitation under Sections 382 and 383 of the Internal Revenue Code for NOLs generated prior to 2014. As of December 31, 2024, the Company has not completed a recent 382 study and the remaining NOL carryforwards may be limited in the amount. The Company has maintained a full valuation allowance against the deferred tax assets for all NOLs which may be subject to the annual limitations under Section 382. The Company has determined that no limitation on the unreserved NOL carryforwards exists. The Company will complete a full analysis of the tax attribute carryforwards prior to any utilization of NOLs which are currently reserved.

 

Effective for tax years beginning after December 31, 2021, taxpayers are required to capitalize any expenses incurred that are considered incidental to research and experimentation (R&E) activities under IRC Section 174. While taxpayers historically had the option of deducting these expenses under IRC Section 174, the December 2017 Tax Cuts and Jobs Act mandates capitalization and amortization of R&E expenses for tax years beginning after December 31, 2021. Expenses incurred in connection with R&E activities in the US must be amortized over a 5-year period if incurred. R&E activities are broader in scope than qualified research activities considered under IRC Section 41 (relating to the research tax credit). For the year ended December 31, 2024, the Company performed an analysis based on available guidance and capitalized the required R&E costs. The Company will continue to monitor this issue for future developments.

 

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examinations by federal, foreign, and state and local jurisdictions, where applicable. There are currently no pending tax examinations. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state and local tax authorities to the extent utilized in a future period.

 

The Company is also subject to certain non-income taxes such as value added taxes, sales taxes, and property taxes. The Company has taken certain positions that management feels, although not free from doubt, should not result in a successful challenge by certain tax authorities.