15. Income Taxes

The Company’s provision for income taxes consists of federal, state, and international income taxes, which differ from amounts computed by applying the U.S. federal statutory rate to pre-tax income (loss) primarily due to changes in the valuation allowance against the Company’s deferred tax assets, state taxes, and other permanent differences. For the year ended March 31, 2026, the Company recorded a total income tax benefit of $0.1M on a pre-tax book loss of approximately $7.2M, an effective tax rate of approximately 1.8%. For the year ended March 31, 2025, the Company recorded a total income tax expense of $0.6M on a pre-tax book loss of approximately $2.3M, an effective tax rate of approximately (24.7)%; in both years the effective rate differed from the 21% federal statutory rate primarily because of the valuation allowance.

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted, permitting taxpayers to deduct domestic research and experimentation expenditures in the year incurred rather than capitalizing and amortizing them, and allowing amended prior-year returns to accelerate this deduction. Under this provision, the Company amended prior-year federal returns during the quarter ended September 30, 2025 and expects a federal cash refund of approximately $0.2M, which is reflected as a current federal tax benefit for the year ended March 31, 2026. The related $0.4M reduction in the Company’s gross deferred tax assets did not affect net deferred tax assets or income tax expense, as these deferred tax assets were already fully offset by a valuation allowance.

The components of income tax expense (benefit) consist of the following:

 Schedule of Components of Income Tax Expense Benefit 

A reconciliation of income tax expense (benefit) computed at the U.S. federal statutory income tax rate to the Company’s actual income tax expense (benefit), in dollars and as a percentage of pre-tax income (loss), is as follows:

Schedule of Reconciliation of Income Tax Rate 

ZRCN Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2026 AND 2025

The Company’s effective tax rate differs from the U.S. federal statutory rate in both years primarily because the Company maintains a full valuation allowance against its deferred tax assets, which offsets substantially all of the statutory tax benefit generated by its pre-tax losses. In the year ended March 31, 2026, the effective rate was also affected by a discrete federal tax benefit from the Company’s election under the One Big Beautiful Bill Act to currently deduct research and experimentation expenditures (see above) and by foreign taxes on the Company’s Mexico operations, for which no U.S. tax benefit is currently recognized.

Deferred Taxes and Valuation Allowance

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities are as follows:

 Schedule of Deferred Tax Assets and Liabilities 

The Company’s federal net operating loss carryforward generated in the current year, and the related valuation allowance, are excluded from the table above and are instead reflected net within unrecognized tax benefits (see Unrecognized Tax Benefits below), as realization of that carryforward is uncertain pending a formal Section 382 study.

Management has concluded that it is not more likely than not that the Company’s deferred tax assets will be realized, based on a history of cumulative losses and the absence of objectively verifiable evidence of future taxable income. Accordingly, the Company has maintained a full valuation allowance against its net deferred tax assets, and net deferred tax assets were $0 as of both March 31, 2026 and March 31, 2025. The valuation allowance was approximately $0.1M and $1.3M as of March 31, 2026 and March 31, 2025, respectively.

Net Operating Loss and Tax Credit Carryforwards

The Company had the following carryforwards available to offset future taxable income as of the dates indicated:

The Company has unrecognized tax benefits as of March 31, 2026 and 2025 of $0.6 million and $0.6 million, respectively.

Schedule of Unrecognized tax Benefits  

ZRCN Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2026 AND 2025

Unrecognized tax benefits relate entirely to federal net operating losses acquired via the acquisition of Harmony Energy Technologies Corporation, for which realization is uncertain absent a completed Section 382 limitation study; this acquired position, and the resulting uncertainty, was unchanged during the year ended March 31, 2026. If recognized, these amounts would affect the Company’s effective tax rate. Interest and penalties associated with uncertain tax positions are recognized as a component of income tax expense and are excluded from the table above; the Company had accrued approximately $0 and $12,000 of such interest and penalties as of March 31, 2026 and March 31, 2025, respectively.

Tax Jurisdictions and Open Years

The Company files a consolidated U.S. federal income tax return, a combined California franchise tax return, and a Chinese income tax return; its Chinese operations are limited and the related tax provision is de minimis. Affiliates of the Company file income tax returns in Mexico and the United Kingdom. As of March 31, 2026, the Company’s federal returns for tax years ended March 31, 2022 and later, and its California returns for tax years ended March 31, 2021 and later, remain open to examination. There were no ongoing federal or state income tax examinations as of the date of this report.