Note 7. Income Taxes

Effective January 1, 2024, Southland Holdings, LLC and subsidiary filing group elected to join the Southland Holdings, Inc. and Subsidiaries filing group to have all domestic corporate entities included within one consolidated federal income tax return for the 2024 calendar year.

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The federal statutory tax rate is 21%. Southland’s effective tax rate was 0.6% and 26.0% for the three months ended June 30, 2025 and 2024, respectively. The primary differences between the statutory rate and the effective rate for the three months ended June 30, 2025 and 2024 were due to state income taxes, federal tax credits, valuation allowances recorded against certain subsidiaries’ net deferred tax assets, and income earned in a foreign jurisdiction with different income tax rates from the domestic rate; however, that foreign income is included within U.S. taxable income through Section 951A Global Intangible Low-Taxed Income (“GILTI”). The effective tax rate was 2.9% and 25.9% for the six months ended June 30, 2025 and 2024, respectively. The primary difference between the statutory rate and the effective rate for the six months ended June 30, 2025 and 2024 were due to state income taxes, federal tax credits, valuation allowances recorded against certain subsidiaries’ net deferred tax assets, and income earned in a foreign jurisdiction with different income tax rates from the domestic rate; however, that foreign income is included within U.S. taxable income through GILTI.

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The Company is in a net deferred tax asset position for both U.S. federal and state income tax as of June 30, 2025. The Company is forecasting that the net deferred tax assets, including net operating losses, are more-likely-than-not to be fully utilized due to the reversal of the existing deferred tax assets and liabilities along with incorporating management’s pre-tax income forecast over the coming years. Therefore, a valuation allowance is not deemed necessary for the net deferred tax assets related to U.S. federal and state income tax as of June 30, 2025, with the exception of the net deferred tax assets related to separate state filings for certain subsidiaries and the deferred tax asset related to foreign tax credits generated on other subsidiaries. As of June 30, 2025, the Company maintains a valuation allowance of approximately $2.9 million related to these net deferred tax assets on certain U.S. subsidiaries as they are determined to not be more-likely-than-not to be utilized.

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As a result of financial losses incurred within the Canadian operations at certain subsidiaries, the Company maintains a valuation allowance against the net deferred tax assets as they are determined to not be more-likely-than-not to be utilized. As of June 30, 2025, the Company has a valuation allowance in the amount of $7.8 million related to the net deferred tax assets on certain Canadian subsidiaries.

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The Company maintains a valuation allowance related to the net deferred tax assets recorded from United Kingdom operations from historic losses incurred that are determined to not be more-likely-than-not to be utilized. As of June 30, 2025, the valuation allowance related to United Kingdom operations is $16.6 million.

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On July 4, 2025, the President signed into law the One Big Beautiful Bill Act (the “Tax Act”). The Tax Act introduces multiple tax laws and other legislative changes, including modifications to income tax provisions such as domestic research and development expenses, capital expenditures, adjustments to business interest expense limitation calculation, and U.S. taxation of international earnings. We are currently evaluating the impact of these provisions on our consolidated financial statements.  However, we expect the Tax Act to decrease the period of time it would take for the Company to utilize its current net deferred tax assets due to the favorable changes to the business interest expense limitation calculation and removal of the requirement to capitalize R&D expenditures.

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