INNOVATE Corp

12. Income Taxes

The Company uses the Annual Effective Tax Rate ("ETR") approach of ASC 740-270, Income Taxes - Interim Reporting, to calculate its interim tax provision

Income tax expense was $3.1 million and $1.1 million for the three months ended September 30, 2024 and 2023, respectively, and income tax expense was $3.9 million and $3.2 million for the nine months ended September 30, 2024 and 2023, respectively. The Company's income tax expense primarily relates to expense as calculated under ASC 740, Income Taxes ("ASC 740") for taxpaying entities. For the three and nine months ended September 30, 2024, the annual effective tax rate calculation for the interim tax provision included the tax expense associated with the INNOVATE U.S. consolidated group due to the Tax Cut and Jobs Act's 80% limitation on net operating losses incurred after 2017. Additionally, the tax benefits associated with losses generated by certain other businesses have been reduced by a full valuation allowance as management does not believe it is more-likely-than-not that the losses will be utilized. The annual effective tax rate calculated for the three and nine months ended September 30, 2023 interim tax provisions included an unrepeated $1.1 million tax benefit, consisting of a current tax expense of $4.4 million related to a foreign tax payment and a deferred tax benefit of $5.5 million related to the reversal of the deferred tax liability associated with the $11.3 million put option, both of which were related to the sale of New Saxon's 19.0% investment in HMN on March 6, 2023. Additionally, for the three and nine months ended September 30, 2023, the tax benefits associated with losses generated by the INNOVATE U.S. consolidated group and certain other businesses have been reduced by a full valuation allowance as management does not believe it is more-likely-than-not that the losses will be utilized.

Net Operating Losses

At December 31, 2023, the Company had gross U.S. net operating loss carryforwards available to reduce future taxable income of the U.S. consolidated group in the amount of $189.6 million. The Company expects that approximately $129.6 million of the gross U.S. net operating loss carryforwards would be available to offset taxable income in 2024 and later periods. Subsequent to the quarter, the 2023 U.S. Consolidated tax return was filed, which resulted in an additional $11.4 million of net operating losses that would be available to offset taxable income in 2024 and later periods. The amount of U.S. net operating loss carryforwards reflected in the financial statements differ from the amounts reported on the U.S. tax return due to uncertain tax positions related to tax laws and regulations that are subject to varied interpretation by the IRS.

Additionally, as of December 31, 2023, the Company had $137.8 million of gross U.S. net operating loss carryforwards from its subsidiaries that do not qualify to be included in the INNOVATE U.S. consolidated income tax return, including $92.8 million from R2 Technologies, $42.6 million from DTV America, and other entities of $2.4 million. Of the $137.8 million of gross U.S. net operating loss carryforwards, $101.7 million was generated after 2017 and will have an indefinite carryforward period; the remaining $36.1 million was generated prior to 2018 and will expire, if unused, by 2037.

Unrecognized Tax Benefits

The Company follows the provision of ASC 740 which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company is subject to challenge from various taxing authorities relative to certain tax planning strategies, including certain intercompany transactions as well as regulatory taxes.

The Company didnot have any unrecognized tax benefits as of September 30, 2024 and 2023 related to uncertain tax positions that would impact the effective income tax rate if recognized. The Company has reduced the net operating loss carryforward by $58.7 million for uncertain tax positions based on our interpretation of tax laws and regulations that are subject to varied interpretation by the IRS.

Examinations

The Company conducts business globally, and as a result, INNOVATE or one or more of its subsidiaries files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. Tax years 2002-2023 remain open for examination.

The Company is currently under examination in various domestic and foreign tax jurisdictions. The open tax years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the applicability of income tax credits for the relevant tax period. Given the nature of tax audits, there is a risk that disputes may arise.