Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Note 4: Income Taxes

ProKidney is considered to be an exempted Cayman Islands company and is presently not subject to income taxes or income tax filing requirements in the Cayman Islands or the United States.

The Company’s subsidiary, PKLP, is organized as a limited partnership and is classified as a partnership for U.S. income tax purposes, and as such, only records a provision for federal and state income taxes on its subsidiaries organized as C corporations or which have elected to be treated as corporations for U.S. federal income tax purposes.

The Company’s subsidiaries, ProKidney-US and ProKidney Acquisition Company, are treated as a C corporation, and therefore a provision for federal and state taxes has been recorded.

The Company’s subsidiary, ProKidney-KY, has been granted, by the Government in Council of the Cayman Islands, tax concessions under an undertaking certificate exempting it from any tax levied on profits, income, gains or appreciations in relation to its operations or in the nature of estate duty or inheritance tax for a period of twenty years from January 20, 2016. ProKidney-KY elected to be treated as an entity disregarded from its owner for U.S. tax purposes, and as a result, it has not recorded an income tax provision.

The provision for income tax expense consisted of the following for the years ended December 31, 2023, 2022 and 2021 (in thousands):

	December 31, 2023		December 31, 2022		December 31, 2021
Current:
Federal	$	5,918	$	896	$	72
State		78		–		(34	)
Total current income tax expense		5,996		896		38
Deferred:
Federal		–		–		–
State		–		–		–
Total deferred income tax expense (benefit)		–		–		–
Income tax expense	$	5,996	$	896	$	38

The difference between the statutory rate for U.S statutory rate of 21% and the effective income tax rate was as follows:

	December 31, 2023			December 31, 2022			December 31, 2021
Current:
Income taxes at statutory rate		21.0	%		21.0	%		21.0	%
State taxes, net of federal benefit	–			–			–
Non-taxed income		(17.3	)		(18.4	)		(21.4	)
Federal Credits		1.3			0.8			1.8
Share-based compensation		(2.2	)		(2.4	)		–
Change in valuation allowance		(7.3	)		(1.4	)		(1.3	)
Other		(0.1	)		(0.2	)		(0.2	)
Effective income tax rate		(4.6	)%		(0.6	)%		0.1	%

Components of the Company’s deferred tax assets and liabilities included in the consolidated balance sheet consisted of the following (in thousands):

	December 31, 2023			December 31, 2022
Deferred tax assets:
Accrued compensation	$	1,302		$	678
Federal credit carryforwards		–			227
Leases		34			10
Share-based compensation		3,163			637
Research and experimental costs capitalized		9,556			3,504
Net operating loss carryforwards		294			–
Start-up costs		32			35
Deferred tax assets before valuation allowance		14,381			5,091
Valuation allowance		(12,888	)		(3,332	)
Total deferred tax assets	$	1,493		$	1,759
Deferred tax liabilities:
Intangible assets	$	–		$	45
Fixed assets		1,481			1,708
Prepaid expenses		12			6
Total deferred income tax liabilities		1,493			1,759
Net deferred tax asset	$	–		$	–

As discussed in Note 6, the Company is party to a tax receivable agreement with a related party which provides for the payment by the Company to holders of PKLP prior to the Closing (“Closing ProKidney Unitholders”) of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes (or, in some circumstances, the Company is deemed to realize) as a result of certain transactions. As no transactions have occurred which would trigger a liability under this agreement, the Company has not recognized any liability related to this agreement as of December 31, 2023.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled

reversal of deferred tax liabilities, available taxes in the carryback periods, projected future taxable income and tax planning strategies in making this assessment. Accordingly, management has concluded that it is not more likely than not that it will recognize the deferred tax assets, and the Company has provided a valuation allowance of $12,888,000 and $3,332,000, respectively for December 31, 2023 and 2022, to offset the net deferred tax assets.

The Company has net operating loss carryforwards of $1,278,000 that for federal purposes have an indefinite life and for state income tax purposes begin to expire in 2038.

A reconciliation of the beginning and ending amount of total unrecognized tax benefits for the years ended December 31, 2023 and 2022 consisted of the following (in thousands):

	December 31, 2023		December 31, 2022
Unrecognized tax benefits (gross):
Benefits at the beginning of the year	$	311	$	180
Increase related to prior year tax positions		28		9
Decrease related to prior year tax positions		–		–
Increase related to current year tax positions		229		122
Benefits at the end of the year	$	568	$	311

There were no net unrecognized tax benefits as of December 31, 2023 which, if recognized, would affect our effective tax rate. We expect none of the gross unrecognized tax benefits will decrease within the next year.

Tax years 2020 through 2023 remain subject to examination by federal and state authorities.