NOTE 11. INCOME TAXES

The Company’s income (loss) before income tax (benefit) provision includes the following components for the years ended December 31:

The Company is subject to taxation in the U.S., Canada, and Massachusetts. The (benefit) provision for income taxes for the years ended December 31 are summarized below:

A reconciliation of the expected income tax (benefit) provision at the federal statutory rate of 21% for the years ended December 31, 2025, and the income tax (benefit) provision reported in the financial statements is as follows:

*State taxes in Massachusetts made up the majority (greater than 50 percent) of the tax effect in this category.

As previously disclosed for the periods ended December 31, 2024 and 2023, prior to the adoption of ASU 2023-09, the effective income tax rate differs from the statutory federal income tax rate as follows: 

Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred tax liabilities are as follows as of December 31:

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The reduction in the valuation allowance is approximately $567,000 and $809,000 in 2025 and 2024, respectively.

As of December 31, 2025, the Company had net operating loss carryforwards for federal income tax purposes of approximately $25,820,000. Of the total amount approximately $902,000 were generated after January 1, 2018, and therefore will not expire but can only be used to offset 80 percent of future taxable income. The remaining amount of approximately $24,918,000 expires beginning in the year 2026. As of December 31, 2025, the Company had net operating loss carryforwards for state income tax purposes of approximately $8,098,000 which expire beginning in the year 2031. As of December 31, 2025, the Company also had Canada net operating loss carryforwards of $1,613,000 which expire beginning in the year 2040.

Utilization of the net operating losses may be subject to substantial annual limitation due to federal and state ownership change limitation provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating losses and credits before their utilization. The Company has not performed an analysis to determine the limitation of the net operating loss carryforwards.

A valuation allowance of 100% has been established in respect of the deferred income tax assets due to the uncertainty of the Company’s utilization of such deferred tax assets for the U.S. federal and state on each of the Company’s consolidated balance sheets at December 31, 2025 and 2024.

The One Big Beautiful Bill Act of 2025 (the “2025 Tax Act”) was signed into law on July 4, 2025. The 2025 Tax Act, among other things, extends certain provisions of 2017 U.S. federal tax legislation relating to federal bonus depreciation and immediate expensing for domestic research and development expenditures. These provisions did not have a material effect on the Company's consolidated financial statements for the year ended December 31, 2025.

The evaluation of uncertainty in a tax position is a two-step process. The first step involves recognition. The Company determines whether it's more likely than not that a tax position will be sustained upon tax examination including any resolution of any related appeals or litigation, based on only the technical merits of the position. The technical merits of a tax position are derived from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the consolidated financial statements. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the consolidated financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate resolution with a taxing authority. Uncertain tax positions are reviewed on an ongoing basis and are adjusted after considering facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitation.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits at the beginning and end of the years ended December 31, 2025 and 2024:

The amount of unrecognized tax benefits that would impact the Company’s effective tax rate, if recognized, is $563,440 (including estimated penalties and interest).

The income tax provision at December 31, 2025 reflects a full accounting of tax filings under ASC subtopic 740-10. The Company is subject to U.S. federal and Massachusetts state tax. With limited exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by the tax authorities for years before 2022. Generally, the tax years remain open for examination by the federal and Massachusetts authorities under a three-year statute of limitation. In addition, the Company's tax years starting 2006 and 2011 are subject to limited examination by the United States and Massachusetts authorities, respectively, due to the carryforward of unutilized net operating losses. ShipTime is subject to taxation in Canada and Ontario. The foreign subsidy is generally subject to examination for 4 years following the year in which the tax obligation originated. ShipTime is not currently under examination by the local tax authority. The Company recognizes interest and penalties related with income taxes, as estimated or incurred, as part of the income tax provision.

As of December 31, 2025 and 2024 the Company accrued $13,818 and $37,102 of interest and penalties related to foreign income taxes. The Company does not believe its unrecognized tax benefits will change significantly during the next twelve months.