v3.25.2
Income Taxes
 3 Months Ended
Mar. 31, 2025
Income Tax Disclosure [Abstract]  
Income Taxes
 
11.
INCOME TAXES
 
United States of America
 
The Coronavirus Aid, Relief and Economy Security (CARES) Act (“the CARES Act, H.R. 748”) was signed into law on March 27, 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for NOL deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements as of March 31, 2025 and December 31, 2024 due to the recent enactment.
 
Hong Kong
 
Two-tier Profits Tax Rates
 
The two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance 2018 (the “Ordinance”) of Hong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for the first HKD 2 million (approximately $257,868) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected entities” is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business. Since Benchwick is wholly owned and under the control of Northann, it is a connected entity. Under the Ordinance, it is an entity’s election to nominate the entity that will be subject to the two-tier profits tax rates on its profits tax return. The election is irrevocable. The Company elected Benchwick to be subject to the two-tier profits tax rates.
 
The provision for current income and deferred taxes of Benchwick has been calculated by applying the new tax rate of 8.25%.
 
PRC
 
In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries that are not entitled to any tax holiday were subject to income tax at a rate of 25% for the three months ended March 31, 2025 and 2024. According to PRC tax regulations, the PRC net operating loss can generally carry forward for no longer than five years starting from the year subsequent to the year in which the loss was incurred. Carry back of losses is not permitted. If not utilized, the PRC net operating loss will expire in 2026.
 
The income tax expense was $
nil
and $nil for the three months ended March 31, 2025 and 2024, respectively, related primarily to the Company’s subsidiaries located outside of the U.S. The income before provision for income taxes for the three months ended March 31, 2025 and 2024 was as follows:
 
 
 
 
The income tax provision consists of the following components:
 
 
 
For the three months ended
March 31,
2025
 
 
 
 
 
 
For the three months ended
March 31,
2024
 
 
 
Current:
 
 
-
 
 
 
-
 
Federal
 
$
-
 
 
$
-
 
State
 
 
-
 
 
 
-
 
Foreign
 
 
-
 
 
 
-
 
Total current
 
$
-
 
 
$
-
 
 
 
 
 
 
 
 
 
 
Deferred:
 
 
-
 
 
 
-
 
Federal
 
$
-
 
 
$
-
 
State
 
 
-
 
 
 
-
 
Foreign
 
 
-
 
 
 
-
 
Total deferred
 
$
-
 
 
$
-
 
Total income tax expense
 
$
-
 
 
$
-
 
 
A reconciliation between the Company’s actual provision for income taxes and the provision at the United States statutory rate is as follow:
 
 
 
For the three months ended
March 31,
202
5
 
 
 
 
 
 
For the three months ended
March 31,
202
4
 
 
 
(Loss) i
ncome before income tax expense
 
 
 
$
(
2,630,728
)
 
 
$
60,035
 
Computed tax benefit with statutory tax rate
 
 
29.84
%
 
 
29.84
%
Income tax expense computed at statutory income tax rate
 
 
(785,009
)
 
 
 
 
17,914
 
Impact of different tax rates in other jurisdictions
 
 
711,098
 
 
 
(58,145
)
Tax effect of non-deductible expenses
 
 
73,911
 
 
 
 
 
40,231
 
Total income tax expense
 
$
-
 
 
 
$
-
 
 
The effective tax rate were nil% and nil% for the three months ended March 31, 2025 and 2024, respectively.
 
Uncertain tax positions
 
The Company did not have any uncertain tax positions during the three months ended March 31, 2025 and 2024.
 
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 examination by the respective jurisdictions, where applicable. The statute of limitations for the tax returns varies by jurisdictions.
 
 
 
 
The amounts of uncertain tax liabilities listed above are based on the recognition and measurement criteria of ASC Topic 740, and the balance is presented as current liability in the consolidated financial statements as of December 31, 2023. The Company anticipated that the settlements with the taxing authority are remitted within one year.
 
Our policy is to include interest and penalty charges related to uncertain tax liabilities as necessary in the provision for income taxes. The Company has a liability for accrued interest of $nil and $nil as of March 31, 2025 and 2024, respectively.
 
The statute of limitations for the Internal Revenue Services to assess the income tax returns on a taxpayer expires three years from the due date of the profits tax return or the date on which it was filed, whichever is later.
 
In accordance with the Hong Kong profits tax regulations, a tax assessment by the IRD may be initiated within six years after the relevant year of assessment, but extendable to 10 years in the case of potential willful underpayment or evasion.
 
In accordance with PRC Tax Administration Law on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five years to assess underpaid tax plus penalties and interest for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the PRC entities remain subject to examination by the tax authorities based on the above.