Annual report [Section 13 and 15(d), not S-K Item 405]

Income Taxes

v3.25.0.1
Income Taxes
 12 Months Ended
Dec. 31, 2024
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Income tax expense reported in the consolidated income statements is comprised of the following:
December 31,
2024 2023
Current expense:
Federal $ —  $ — 
State, net of state tax credits 62,142  101,232 
Total current expense
 62,142  101,232 
Deferred expense (benefit):
Federal —  8,545,086 
State —  2,377,093 
Total deferred expense (benefit) —  10,922,179 
Total income tax expense
 $ 62,142  $ 11,023,411 
The following are the components of the Company’s deferred tax assets (liabilities) for federal and state income taxes reported in the consolidated balance sheets:
December 31,
2024 2023
Deferred income tax assets:
Accrued expenses $ 1,607,324  $ 424,865 
Deferred revenue 3,909,556  4,269,104 
Lease liability 5,710,136  6,697,111 
Goodwill - component 2 55,368  63,328 
Asset basis difference related to property and equipment 560,818  — 
Nonqualified stock options 322,376  378,208 
Net operating loss carryforwards 3,095,071  3,337,155 
Tax credits 35,850  35,850 
Intangibles 3,921,752  3,932,350 
Restricted stock compensation 90,471  65,886 
Total deferred income tax assets 19,308,722  19,203,857 
Deferred income tax liabilities:
Lease right-of-use asset (5,392,996) (5,852,353)
Deferred franchise costs (75,284) (108,148)
Goodwill - component 1 (807,823) (673,278)
Asset basis difference related to property and equipment —  (1,853,103)
Total deferred income tax liabilities (6,276,103) (8,486,882)
Valuation allowance (13,032,619) (10,774,128)
Net deferred tax liabilities
 $ —  $ (57,153)

A valuation allowance of $13.0 million and $10.8 million was recorded against the deferred tax asset balance of The Joint Corp., without its VIEs, as of December 31, 2024 and 2023, respectively. As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets in each reporting jurisdiction. A significant piece of objective evidence evaluated was the cumulative loss incurred in each jurisdiction over the three-year period ended December 31, 2024. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth, in evaluating the need for a valuation allowance. As a result, management has determined that it is more likely than not that The Joint Corp. will not realize its deferred tax assets as of December 31, 2024, and has recorded a valuation allowance after consideration of any recorded deferred tax liabilities.

Additionally, deferred tax assets attributable to its VIEs of $1.1 million and $1.1 million were classified as discontinued operations as of December 31, 2024 and 2023, respectively. These deferred tax assets related to deferred revenue. See Note 3, Acquisitions and Divestitures for more information on discontinued operations.

The Joint Corp, without the VIEs, has federal gross net operating loss carryforwards of $12.5 million and $13.4 million as of December 31, 2024 and 2023, respectively. Federal tax effected of these net operating losses were $2.6 million and $2.8 million as of December 31, 2024 and 2023, respectively. $8.2 million of the federal net operating loss is subject to a 20-year carryforward, with a portion beginning to expire in 2036. $4.3 million of the federal net operating loss has an indefinite carryforward period.

The Joint Corp., without the VIEs, has various state net operating loss carryforwards. The determination of the state net operating loss carryforwards is dependent upon apportionment percentages and state laws that can change from year to year and impact the amount of such carryforwards. If such net operating loss carryforwards are not utilized, they will begin to expire in 2025.

The Joint Corp. has research and development credits of $14,229 that will begin to expire in 2031 and $21,621 California AMT credits that do not expire.
The following is a reconciliation of the statutory federal income tax rate applied to pre-tax accounting net (loss) income, compared to the income tax expense in the consolidated income statements:
  For the Years Ended December 31,
  2024 2023
  Amount Percent Amount Percent
Expected federal tax expense $ (309,702) 21.0  % $ 53,341  21.0  %
Meals and entertainment 30,460  (2.1) % 31,055  12.2  %
State tax provision (benefit), net of federal benefit 62,142  (4.2) % 69,794  27.5  %
Section 162(m) limitation on compensation 85,992  (5.8) % —  —  %
Other permanent differences
 26,576  (1.8) % 15,664  6.2  %
Change in VA 9,521  (0.6) % 10,692,253  4,209.5  %
Stock compensation
 (119,263) 8.1  % (2,030) (0.8) %
Change in tax rate
 123,722  (8.4) % 171,007  67.3  %
Return to provision (25,025) 1.7  % (146,638) (57.7) %
Uncertain tax position - net impact 212,687  (14.4) % 138,585  54.6  %
Other adjustments
 (34,968) 2.4  % 380  0.1  %
Expense $ 62,142  (4.2) % $ 11,023,411  4,339.9  %

Changes in the Company’s income tax expense relate primarily to state income taxes (net of federal tax and permanent differences), changes in tax rates, stock compensation, the officer’s compensation limit under Section 162(m), change in valuation allowance and uncertain tax positions during the year ended December 31, 2024, as compared to the year ended December 31, 2023. For the years ended December 31, 2024 and December 31, 2023, effective tax rates were (4.2)% and 4,339.9%, respectively. The difference between the statutory federal income tax rate and the Company’s effective tax rate was primarily due to the uncertain tax position net impact for the year ended December 31, 2024. The difference between the statutory federal income tax rate and the Company’s effective tax rate was primarily due to the valuation allowance, change in tax rate and uncertain tax position for the year ended December 31, 2023.
For the years ended December 31, 2024 and December 31, 2023, the Company had gross uncertain tax positions attributable to the VIEs, recorded as discontinued operations, of $0.9 million and $1.2 million, respectively.
December 31,
2024 2023
Beginning balances
 $ 1,175,766  $ 1,314,351 
Increases related to tax positions taken during a prior year —  — 
Decreases related to tax positions taken during a prior year —  — 
Increases related to tax positions taken during a current year —  — 
Decreases related to settlements with taxing authorities —  — 
Decreases related to expiration of the statute of limitations (227,584) (138,585)
Ending balances
 $ 948,182  $ 1,175,766 
At December 31, 2024 and December 31, 2023, there were $22,078 and $19,433, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate.
Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses. Accrued interest and penalties was $201,746 and $142,213 for the years ended December 31, 2024 and December 31, 2023 and recorded as other liabilities.
With exceptions due to the generation and utilization of net operating losses or credits, as of December 31, 2024, the Company is no longer subject to federal and state examinations by taxing authorities for tax years before 2021 and 2020, respectively.