Income Tax Expense

9 Months Ended

Sep. 30, 2025

Income Tax Expense [Abstract]

Income tax expense

17. Income tax expense

The United States

Sonic CA is incorporated in the State of California and had elected to be taxed as an “S Corporation” under the provisions of the Internal Revenue Code and comparable state income tax law. As an S Corporation, the Company is not subject to federal corporate income tax at the corporate level; instead, its income, deductions, and credits were passed through to its stockholders and reported on their individual tax returns. However, under California law, S Corporations are subject to a 1.5% franchise tax on net income. Effective January 1, 2025 Sonic CA converted from an S Corporation to C Corporation and is now subject to federal corporate income tax at a rate of 21%, as well as California state corporate income tax at a rate of 8.84%. In addition, since Sonic CA has a branch establishment in South Carolina, it is also subject to South Carolina state corporate income tax at a rate of 5%.

During the nine months ended September 30, 2025, the Company paid 2025 estimate federal and state corporate income tax amounting to $775,000 and $402,543, respectively.

The current portions of the income tax expense included in the unaudited condensed consolidated statements of operations and comprehensive income as determined in accordance with ASC 740 are as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2025			2024			2025			2024
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Current tax
Federal	$	(59,365	)	$	—		$	281,556		$	—
State and local		(19,422	)		(1,781	)		108,601			24,747
Deferred tax		10,479			2,368			(627,016	)		(3,221	)
Income tax (benefit) expense	$	(68,308	)	$	587		$	(236,859	)	$	21,526

A reconciliation of the difference between the expected income tax expense, computed at federal income tax rate of 21% for the three and nine months ended September 30, 2025 and state income tax rate of 1.5% for the three and nine months ended September 30, 2024, and the Company’s reported income tax expense is shown in the following table:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2025			2024			2025			2024
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
(Loss) income before income tax expense	$	(510,774	)	$	(11,540	)	$	803,190		$	1,849,386
Statutory federal/state corporate income tax rates		21	%		1.5	%		21	%		1.5	%
Income tax computed at statutory state income tax rates	$	(107,262	)	$	(173	)	$	168,670		$	27,741
Tax effect on non-deductible expense		(23,893	)		760			224,454			1,885
Tax effect on non-taxable income		—			—			(170,341	)		—
Tax effect on deferred tax assets recognition relating to conversion of S Corporation to C Corporation		82,269			—			(568,243	)		—
Tax effect on deductible passed through entity tax payment		—			—			—			(8,100	)
Tax effect on state and local income taxes		(19,422	)		—			108,601			—
Income tax (benefit) expense	$	(68,308	)	$	587		$	(236,859	)	$	21,526

The following table reconciles the statutory tax rate to the Company’s effective tax rate for the three and nine months ended September 30, 2025 and 2024:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2025			2024			2025			2024
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Federal/California state corporate income tax rates		21.0	%		1.5	%		21.0	%		1.5	%
Tax effect on non-deductible expense		4.7	%		(6.6	)%		27.9	%		0.1	%
Tax effect on non-taxable income		—	%		—	%		(21.2	)%		—	%
Tax effect on deferred tax assets adjustment related to conversion of S Corporation to C Corporation		(16.1	)%		—	%		(70.7	)%		—	%
Tax effect on deductible passed through entity tax payment		—	%		—	%		—	%		(0.4	)%
Tax effect on state and local income taxes		3.8	%		—	%		13.5	%		—	%
Effective tax rate		13.4	%		(5.1	)%		(29.5	)%		1.2	%

Deferred tax

The Company measures deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities at the applicable tax rates. Components of the Company’s deferred tax assets and liabilities are as follows:

	As of
	September 30, 2025			December 31, 2024
	(Unaudited)			(Audited)
Deferred tax assets:
Accrued vacation	$	51,313		$	2,140
Allowance for expected credit losses		147,284			8,449
Depreciation		—			7,353
Inventory valuation allowance		120,193			—
Operating lease liabilities		5,024,923			—
Capitalized costs		153,360
Total deferred tax assets	$	5,497,073		$	17,942
Deferred tax liabilities:
Operating lease right-of-use assets	$	(4,719,602	)	$	—
Depreciation		(132,513	)		—
Total deferred tax liabilities	$	(4,852,115	)	$	—
Deferred tax assets, net	$	644,958		$	17,942

The movement of deferred tax assets, net is as follow:

	As of
	September 30, 2025		December 31, 2024
	(Unaudited)		(Audited)
Balance at beginning of the period/year	$	17,942	$	17,826
Additions		627,016		116
Balance at end of the period/year	$	644,958	$	17,942

Under the California Revenue and Taxation Code, the Franchise Tax Board (“FTB”) generally has four years from the later of the original due date or the actual filing date of a return to assess additional taxes, penalties, or fees. As of September 30, 2025 and December 31, 2024, the Company’s California state income tax returns for the 2023 and 2024 tax years remain within the statutory period for potential examination. As of that date, the Company was not subject to any ongoing tax audits or investigations by the FTB. At the federal level, pursuant to Internal Revenue Code, the Internal Revenue Service typically has three years from the later of the return’s due date or actual filing date to assess additional tax. This period may be extended to six years under certain circumstances, such as when a return omits more than 25% of gross income. There is no statute of limitations in cases involving fraud or failure to file a return. As Sonic CA elected to be taxed as an S Corporation through December 31, 2024, any potential federal income tax examinations for that period would primarily pertain to stockholder-level tax implications. As of September 30, 2025 and December 31, 2024, the Company were not subject to any federal tax audits or investigations.