NOTE 10: INCOME TAXES

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. The Company files a consolidated U.S. federal income tax return and an Arizona state return covering FatPipe, Inc. and FatPipe Technologies, Inc. The Company’s wholly owned Indian subsidiary, FatPipe Networks Private Limited, files separate income tax returns in India.

Effective for fiscal years beginning after December 15, 2024, the Company adopted ASU 2023-09, Improvements to Income Tax Disclosures. The standard requires enhanced disaggregation of information presented in the rate reconciliation and disaggregation of income taxes paid by jurisdiction. The Company has applied the new requirements prospectively in this Note.

Income (Loss) Before Income Taxes

Income (loss) before income taxes for the years ended March 31 consisted of the following:

 SCHEDULE OF INCOME BEFORE INCOME TAXES

Components of Provision (Benefit) for Income Taxes

The provision (benefit) for income taxes for the years ended March 31 consisted of the following:

 SCHEDULE OF PROVISION FOR INCOME TAX EXPENSE

The current federal provision for the fiscal year ended March 31, 2026 reflects (i) a current-year tax provision of $24,027 calculated under ASC 740 after utilization of $4,896,738 of available net operating loss carryforwards, and (ii) a $1,483,653 reduction representing the partial reversal of prior-period accrued income tax payable, recognized as a change in accounting estimate. See “Change in Accounting Estimate” below for additional information.

Effective Income Tax Rate Reconciliation

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate, presented in accordance with ASU 2023-09, is as follows. Reconciling items are presented separately if they exceed 5% of the product of pre-tax income and the statutory rate.

 SCHEDULE OF RECONCILIATION EFFECTIVE INCOME TAX RATE

The Company’s effective tax rate for FY2026 of (42.55%) differs from the U.S. federal statutory rate of 21.00% primarily because of (i) utilization of net operating loss carryforwards substantially eliminating current-year federal and state income tax, (ii) a change in accounting estimate associated with management’s refinement of prior-period income tax obligations following completion of the Company’s FY2025 tax return and the related application of available net operating loss carryforwards, (iii) utilization of general business credit carryforwards, and (iv) the foreign rate differential associated with losses generated by the Indian subsidiary.

Deferred Tax Assets and Valuation Allowance

Significant components of the Company’s deferred tax assets, with the change for the year ended March 31, 2026, are presented below.

SCHEDULE OF DEFERRED TAX ASSETS

The Company has no deferred tax liabilities as of March 31, 2026 or March 31, 2025.

Valuation Allowance Assessment

In assessing the realizability of deferred tax assets in accordance with ASC 740-10-30-17 through 30-25, the Company considers all available positive and negative evidence to determine whether it is more likely than not that some portion or all of its deferred tax assets will be realized. The weight given to potential evidence is commensurate with the extent to which it can be objectively verified.

Positive evidence

Negative evidence

Based on the weight of available evidence, the Company has concluded that it is not more likely than not that deferred tax assets in excess of $76,905 will be realized. Accordingly, a valuation allowance of $2,264,157 has been maintained at March 31, 2026 ($1,880,754 at March 31, 2025). The Company will reassess this conclusion in future periods; partial release of the valuation allowance will be considered upon completion of a fourth consecutive profitable fiscal year.

Net Operating Loss Carryforwards

At March 31, 2026, the Company had U.S. federal net operating loss carryforwards of $6,523,957 available to offset future taxable income. The composition by vintage is as follows:

 SCHEDULE OF NET OPERATING LOSS CARRYFORWARDS

Net operating losses generated in tax years prior to 2018 are not subject to the 80% taxable income limitation and have no expiration date. Net operating losses generated in tax years after 2017 are subject to the 80% taxable income limitation under IRC §172(a)(2) and have an indefinite carryforward period. During FY2026, the Company applied $3,334,752 of pre-2018 net operating losses at the 100% offset and $2,465,289 of post-2017 net operating losses subject to the 80% limitation, totaling $4,896,738 of utilization.

The Indian subsidiary has unused tax losses of approximately $2,582,089 carried forward under Indian local tax law for which no deferred tax asset has been recognized in the consolidated financial statements. See “Foreign Subsidiary Losses” below.

Capital Loss Carryforwards

At March 31, 2026, the Company had a capital loss carryforward of $1,505,901 (deferred tax asset of $316,239), which is available only to offset future capital gains. Under IRC §1212(a), capital loss carryforwards have a five-year carryforward period.

A full valuation allowance has been recorded against the deferred tax asset associated with the capital loss carryforward, reflecting management’s assessment that it is not more likely than not that sufficient capital gains will be generated within the carryforward period to absorb the loss.

Income Taxes Paid (ASU 2023-09)

Income taxes paid, net of refunds received, disaggregated by jurisdiction in accordance with ASU 2023-09, is as follows:

SCHEDULE OF  INCOME TAXES PAID

No individual jurisdiction within “State” exceeds 5% of total income taxes paid; accordingly, separate disaggregation by individual state is not required.

Foreign Subsidiary Losses

FatPipe India Private Limited has generated tax losses in the current and prior fiscal years that are available for carryforward under Indian local tax law. At March 31, 2026, the Indian subsidiary had unused tax losses of approximately $2,582,089. The comparable amount at March 31, 2025 was $1,352,277.

No deferred tax asset has been recognized in respect of these unused tax losses, as management has determined it is not more likely than not that sufficient future taxable income will be available in India against which the losses can be utilized within the applicable local-law carryforward period. The cumulative unrecognized deferred tax asset at the applicable Indian statutory rate of 25.17% is approximately $649,912 at March 31, 2026.

Change in Accounting Estimate

During the fiscal year ended March 31, 2026, in connection with the preparation and filing of the Company’s FY2025 federal and state income tax returns, management refined its estimate of the income tax obligation associated with prior fiscal years. The previously recorded accrued income tax payable balance of $2,967,305 at March 31, 2025 was based on a flat-rate estimation methodology that did not give effect to the Company’s available net operating loss carryforwards. Upon completion of the FY2025 tax filings and the related ASC 740 computation, management determined that, after application of available net operating loss carryforwards, no material federal or state income tax was due for FY2025.

Considering the magnitude of the adjustment relative to FY2026 consolidated pre-tax income, and forecasting uncertainty regarding future U.S. taxable income, management elected to recognize the reversal of the prior over-accrual ratably over fiscal years 2026 and 2027 rather than in a single period. During FY2026, the Company reversed $1,483,653 (approximately 50%) of the $2,967,305 prior balance. The remaining $1,483,652 has been retained as accrued income tax payable at March 31, 2026 and is expected to be released in FY2027 as part of the ongoing tax provision process.

In accordance with ASC 250-10-45-17 and ASC 740-10-45-25, the refinement has been accounted for as a change in accounting estimate and recognized in the period of change. The effect of the change for the fiscal year ended March 31, 2026 was an increase in income tax benefit of $1,483,653, an increase in net income of $1,483,653, and an increase in basic and diluted earnings per share of $0.11 in accordance with the disclosure requirements of ASC 250-10-50-4.

Uncertain Tax Positions

The Company evaluates uncertain tax positions in accordance with ASC 740-10-25 and the related measurement, recognition, and disclosure provisions of ASC 740-10-50-15. As of March 31, 2026 and March 31, 2025, the Company has not identified any tax positions for which it is not more likely than not that the position would be sustained upon examination by the relevant taxing authorities. Accordingly, no liability for unrecognized tax benefits has been recorded, and there are no related accruals for interest or penalties.

The Company’s U.S. federal and state income tax returns generally remain subject to examination for the three most recent tax years under the applicable statutes of limitation, which corresponds to fiscal years ended March 31, 2024 through March 31, 2026. Tax returns of the Indian subsidiary remain subject to examination by Indian tax authorities for assessment years 2024-25 through 2026-27 in accordance with applicable Indian tax law.

Recently Adopted Accounting Pronouncements — ASU 2023-09

In December 2023, the Financial Accounting Standards Board issued ASU 2023-09, Improvements to Income Tax Disclosures, which requires public business entities to disclose specific categories within the rate reconciliation, additional information for reconciling items meeting a quantitative threshold, and disaggregation of income taxes paid by jurisdiction. The Company adopted ASU 2023-09 effective for the fiscal year beginning April 1, 2025 on a prospective basis. Adoption of the standard did not have a material effect on the Company’s consolidated financial position, results of operations, or cash flows; the impact is limited to the additional disclosures presented in this Note.