INCOME TAXES

3 Months Ended

Mar. 31, 2026

NOTE 12. INCOME TAXES

The effective tax rate for the three months ended March 31, 2026, and 2025 varied from the expected statutory rate due to the Company continuing to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of March 31, 2026, primarily because of the recent operating losses.

The Company incurred operating losses in recent years and it continues to be in a three-year cumulative loss position at March 31, 2026. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it determined to fully reserve its deferred tax assets at March 31, 2026. The Company expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity.

As of March 31, 2026 and December 31, 2025, the Company had the following estimated Federal net operating loss carry-forwards available to offset future taxable income:

	Amount
Tax years generated:
2017 and before	$	48,890,000
2018 and after		119,515,000

Federal net operating loss carry-forwards available	$	168,405,000

Such tax net operating loss carry-forwards expire between 2026 and 2037 relative to Federal net operating loss carry-forwards generated in tax years 2017 and prior. Federal net operating loss carry-forwards generated in tax years 2018 and after cannot be carried back to prior years and have an indefinite life since the enactment of the Tax Cuts and Jobs Act of 2017. The Tax Cuts and Jobs Act of 2017 further provides for an annual limitation on usage equivalent to 80% of taxable income. In addition, the Company had research and development tax credit carry-forwards totaling $1,685,000 available as of March 31, 2026, which expire between 2026 and 2037.

The Company’s 2022 federal tax return was recently examined by the Internal Revenue Service resulting in no proposed adjustments.

- Definition

The entire disclosure for income tax.

+ References

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+ Details

KUSTOM ENTERTAINMENT, INC. 10-Q