NOTE 10: INCOME TAXES

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to reverse.

The Company also follows the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes, which prescribes a recognition threshold and measurement attribute for uncertain tax positions. The Company recognizes tax benefits only when management determines that it is more likely than not that the position will be sustained upon examination by the applicable taxing authorities. As of June 30, 2026 and December 31, 2025, the Company had no uncertain tax positions requiring recognition or disclosure in the accompanying condensed financial statements, and no interest or penalties relating to uncertain tax positions were recognized during the periods presented.

Income Taxes

For the six months ended June 30, 2026, the Company reported income before income taxes of $2,140,754 and recognized income tax expense of $553,639. For the comparable period in 2025, the Company reported a pre-tax loss of $611,865 and recognized no income tax expense or benefit. Income before income taxes for the six months ended June 30, 2026 is stated after interest of $22,880 and penalties of $16,790 relating to unpaid federal and Florida income taxes for the 2023 tax year, both of which are recorded within interest expense. Interest is calculated at the federal underpayment rate of 6% for the second quarter and at the Florida floating rate of 11%. Penalties are calculated under IRC Section 6651(a)(2) at 0.5% per month on the unpaid federal balance; Florida penalties are not accruing, the statutory maximum having been reached in a prior period..

During the six months ended June 30, 2026, the Company made income tax payments of $90,000, which were applied against the Company's income tax liability for the 2025 tax year and do not reduce the 2023 underpayment described above. After giving effect to current income tax expense of $173,053 for the period, the Company's income tax liability increased from $726,538 at December 31, 2025 to $809,590 as of June 30, 2026. 

Deferred Tax Assets

As of December 31, 2025, the Company had approximately $1.5 million of U.S. federal net operating loss carryforwards available to offset future taxable income. The Company generated taxable income of $2,140,754 during the six months ended June 30, 2026, before utilization of net operating loss carryforwards. Utilization is limited under IRC Section 172(a)(2) to 80% of taxable income determined without regard to the deduction, being $797,008. The Company therefore utilized its federal net operating loss carryforwards in full during the period and recognized deferred income tax expense of $380,163 representing the reversal of the related deferred tax asset. No federal net operating loss carryforwards remained available as of June 30, 2026. The Company's net deferred tax asset was $25,822 as of June 30, 2026 and $406,408 as of December 31, 2025, and relates principally to the allowance for expected credit losses.

In assessing the realizability of deferred tax assets, management considers all available positive and negative evidence, including historical operating results, projected future taxable income, and the reversal of existing taxable temporary differences. Based on the Company's recent operating performance, the taxable income generated during the period and expectations of future taxable income, management concluded that it is more likely than not that the deferred tax assets will be realized. Accordingly, management concluded that no valuation allowance was required against the Company's deferred tax assets as of June 30, 2026.

Income Tax Provision

The Company's provision for income taxes is determined using the estimated annual effective tax rate method prescribed by ASC 740-270 and is adjusted for discrete tax items recognized in the period in which they occur. Net settlement income of $3,000,990 arising from the ELF Brand litigation has been determined to be a significant unusual and infrequently occurring item. It is excluded from the estimated annual effective tax rate and its tax effect of $760,601 is recognized discretely in the period in which it arose. Excluding this item, the Company estimates a full-year 2026 ordinary pre-tax loss and an estimated annual effective tax rate applicable to ordinary income of 24.06%.

For the three months ended June 30, 2026, the Company recognized an income tax benefit of $96,621, reflecting the tax benefit of the ordinary loss for the period and the effect of utilizing the Company's net operating loss carryforwards. For the six months ended June 30, 2026, the Company recognized income tax expense of $553,639. No income tax expense or benefit was recognized during the corresponding periods in 2025.

The Company's effective income tax rate for the six months ended June 30, 2026 was approximately 25.86%, compared to 0.0% for the comparable period in 2025. The effective tax rate exceeded the U.S. federal statutory rate of 21.0% primarily due to state income taxes and permanent differences arising from non-deductible penalties and interest on unpaid income taxes.

The following table reconciles the U.S. federal statutory income tax rate to the Company’s effective income tax rate for the six months ended June 30, 2026 and 2025: