v3.25.4
Income Taxes
 12 Months Ended
Dec. 31, 2025
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The provision for income taxes consists of the following (in thousands):
 Years Ended December 31,
 20252024
Current:
Federal$— $— 
State330 239 
Deferred:
Federal— — 
Provision for income taxes$330 $239 
Applying the updated requirements in ASU 2023-09 on a prospective basis, the principal reconciling items from the U.S. statutory income tax rate to the effective tax rate (provision for income taxes as a percentage of income before income taxes) are as follows (dollars in thousands):
 Year Ended December 31,
 2025
$%
Tax (benefit) provision at federal statutory rates$(15,155)21.0 %
State income tax (benefit) provision, net of federal effects (1)
261 (0.4)%
Nontaxable or nondeductible items:
Income attributable to noncontrolling interests
51 (0.1)%
Stock based compensation expense458 (0.6)%
Permanent impact of employee retention credit claims(1,185)1.6 %
Other non-deductible items(92)0.1 %
Change in deferred tax asset valuation allowance16,390 (22.7)%
Other adjustments
$(398)0.6 %
Provision for income taxes$330 (0.5)%
(1) Texas makes up over 50% of the state income tax in this category.
For the year ended December 31, 2024, prior to the adoption of ASU 2023-09, the principal reconciling items from the U.S. statutory income tax rate to the effective tax rate are as follows (in thousands):
Year Ended December 31,
2024
Tax (benefit) provision at federal statutory rates$(639)
Income attributable to noncontrolling interests257 
State income tax (benefit) provision, net of federal effects475 
Change in deferred tax asset valuation allowance155 
Stock based compensation expense496 
Permanent impact of employee retention credit claims(585)
Other non-deductible items80 
Provision for income taxes$239 

The effective tax rate for fiscal year 2025 differs from the statutory tax rate primarily due to state income taxes, changes in the deferred tax asset valuation allowance and other permanent tax differences. The Company is impacted by the Texas Margin Tax (“TMT”), which effectively imposes tax on modified gross revenues for communities within the State of Texas and accounts for the majority of the Company’s current state tax expense. The fiscal year 2025 other permanent tax differences include $0.5 million of Section 162(m) of the Internal Revenue Code of 1986, as amended compensation limitation. The valuation allowance recorded as of fiscal year 2025 was $119.1 million, reflecting an increase of $18.1 million from the previous year due to current year activity. Of the current year increase, $1.7 million pertains to state tax assets.
The effective tax rate for fiscal year 2024 differs from the statutory tax rate primarily due to state income taxes, changes in the deferred tax asset valuation allowance and other permanent tax differences. The Company is impacted by the TMT, which effectively imposes tax on modified gross revenues for communities within the State of Texas and accounts for the majority of the Company’s current state tax expense. The fiscal year 2024 other permanent tax differences include $0.4 million Section 162(m) of the Internal Revenue Code of 1986, as amended compensation limitation. The valuation allowance recorded as of December 31, 2024 was $101.0 million, which had increased from the prior year by $0.2 million due to current year activity.
A summary of the Company’s deferred tax assets and liabilities, are as follows (in thousands):
December 31,
20252024
Deferred tax assets:
Net operating loss carryforward$101,078 $89,623 
Compensation costs3,368 4,148 
Depreciation and amortization12,031 3,271 
Other2,711 3,963 
Total deferred tax assets119,188 101,005 
Deferred tax asset valuation allowance(119,076)(100,994)
Total deferred tax assets, net112 11 
Deferred tax liabilities:
Operating lease right-of-use assets(112)(11)
Total deferred tax liabilities(112)(11)
Deferred taxes, net$— $— 
A valuation allowance has been recorded to reduce the Company’s net deferred tax assets to the amount that is more likely than not to be realized. A significant component of objective evidence evaluated was the cumulative losses before income taxes incurred by the Company over the past several fiscal years. Such objective evidence severely limits the ability to consider other subjective evidence such as the Company’s ability to generate sufficient taxable income in future periods to fully recover
the deferred tax assets. However, in the event that the Company were to determine that it would be more likely than not that the Company would realize the benefit of deferred tax assets in the future in excess of their net recorded amounts, adjustments to deferred tax assets would increase net income in the period of such a determination.
As of December 31, 2025, the Company has gross federal and state net operating loss (“NOL”) carryforwards of $434.0 million and $313.8 million and related net deferred tax assets of $91.1 million and $13.9 million, respectively.
The Company filed for an employee retention credit (“ERC”) with the Internal Revenue Service (“IRS”) during the fourth quarter of 2023. See “Note 3–Summary of Significant Accounting Policies” for a discussion of employee retention credits. Of the $10.7 million ERC received during 2025, $5.6 million reduced the federal NOL recorded. The remaining $5.1 million was recognized in taxable income during 2025 consistent with the IRS guidance released March 20, 2025. The previously recorded reduction to the federal NOL was $8.5 million as of 2024 and a 2025 true up of approximately $2.8 million increased the federal NOL to net to the $5.6 million federal NOL reduction noted above.
The federal and state NOL carryforwards in the income tax returns filed included unrecognized tax benefits. The deferred tax assets recognized for those NOLs are presented net of the unrecognized benefits. If not used, the federal NOL generated prior to fiscal year 2018 will expire during fiscal years 2033 to 2037 and non-conforming state NOLs will expire during fiscal years 2026 to 2045. Federal NOLs generated subsequent to fiscal 2017 currently have no expiration due to changes to tax laws enacted with the Tax Cuts and Jobs Act of 2017 ("TCJA"). Some state jurisdictions conform to the unlimited net operating loss carryforward provisions as modified by the TCJA. However, some jurisdictions do not conform to the above-mentioned provisions.
In general, utilization of the net operating loss carryforwards are subject to a substantial annual limitation due to ownership changes that occur or that could occur in the future, as required by Section 382 of the Code. These ownership changes limit the amount of NOL carryforwards that can be utilized annually to offset taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. There is no current or projected utilization of the NOL carryforwards in the near future. The Company maintains a valuation allowance in all jurisdictions where the NOL carryovers are present. The Company has estimated that $60.3 million of gross U.S. federal NOL carryforwards from 2015 to 2017 would expire unused due to the Section 382 limitation.
A summary of the Company’s unrecognized tax benefits activity and related information for the years ended December 31, 2025 and 2024 is presented below (in thousands):
Years Ended December 31,
 20252024
Beginning balance, January 1$3,602 $3,193 
Gross increases – tax positions in prior period415 409 
Ending balance, December 31$4,017 $3,602 
As of December 31, 2025, the Company has unrecognized tax benefits of $4.0 million for an uncertain tax position associated with a change in accounting method. The unrecognized tax benefits as of December 31, 2025 are timing-related uncertainties that if recognized would not impact the effective tax rate of the Company. The Company files income tax returns in the U.S. federal jurisdiction and U.S. state jurisdictions. As of December 31, 2025, the Company is generally no longer subject to U.S. federal tax examinations for tax years prior to 2022 and state tax examinations for tax years prior to 2021 with limited exceptions for net operating losses from 2013 forward.