8. Income Taxes

Income (loss) before provision for income taxes consisted of the following for the years ended March 31, 2024 and 2023 (in thousands):

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Current income tax provision is the amount of income taxes reported or expected to be reported on the Company’s income tax return. The provision for current income taxes was $14,000 and $7,000 for the years ended March 31, 2024 and 2023, respectively. The current income taxes were related to state income taxes. The Company did not have current federal income taxes for the fiscal years ended March 31, 2024 and 2023.

Actual income tax expense differed from the amount computed by applying statutory corporate income tax rates to loss from operations before income taxes. A reconciliation of income tax expense to the federal statutory rate follows (in thousands):

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The Company’s deferred tax assets and liabilities consisted of the following at March 31, 2024 and 2023 (in thousands):

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As previously discussed, the Company emerged from bankruptcy on December 7, 2023 and effected a financial and organizational restructuring in accordance with the Plan. The Company's non-recurring restructuring activities resulted in a significant change in the components of the Company's deferred tax assets and liabilities as of March 31, 2024.  

Elements of the Plan provided that certain secured and unsecured debt that the Company held was exchanged for 18,540,877 shares of common stock of Capstone Green Energy Holdings, Inc., par value $0.001 per share (the “New Common Stock”) and 10,449,863 Series A Redeemable Preferred Units (the “Preferred Units”). Absent an exception, a debtor recognizes cancellation of indebtedness income ("CODI") upon discharge of its outstanding indebtedness equal to the excess of the adjusted issue price of the cancelled debt over the amount of consideration received in satisfaction of such debt. The Internal Revenue Code ("IRC") of 1986, as amended, provides that a debtor in a Chapter 11 bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is

determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. As a result of the market value of equity upon emergence from bankruptcy, the estimated amount of CODI is approximately $35.3 million, which reduced some of the value of the Company's NOL carryover prior to reorganization. Any remaining tax attributes after attribute reduction remained with Capstone Green Energy Corporation, the Reorganized Private Co, and are no longer a part of Capstone Green Energy Holdings, Inc.'s (the successor) tax attributes.

Due to the uncertainty surrounding the timing of realizing the benefits of favorable tax attributes in future income tax returns, the Company has placed a valuation allowance against its net deferred income tax assets. The change in valuation allowance for fiscal years ended March 31, 2024 and 2023 was $153.1 million and $3.5 million, respectively. The decrease was primarily attributable to the impact of the Plan reorganization.

The Company’s NOL for federal and state income tax purposes at March 31, 2024 were as follows (in thousands):

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IRC Section 382 (“Section 382”) limits the use of NOL and tax credit carryforwards when changes occur in the capital stock ownership of the Company. Any annual limitation may result in the expiration of NOL and credits before utilization. Should the Company have an ownership change, utilization of the NOL and carryforwards could be significantly reduced. The Company is not expected to utilize NOL and tax credit carryforwards in the near term, and this does not have a material impact on the Company’s financial statements due to the full valuation allowance.  

ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting interim periods, disclosure and transition. Based on management's evaluation, the total amount of unrecognized tax benefits related to research and development credits as of March 31, 2024 and 2023 was zero and $1.9 million, respectively. There were no interest or penalties related to unrecognized tax benefits as of March 31, 2024 or March 31, 2023. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2024 and March 31, 2023 was zero and $1.9 million, respectively. However, this impact would be offset by an equal increase in the deferred tax valuation allowance as the Company has recorded a full valuation allowance against its deferred tax assets due to the uncertainty of future realization. The fully reserved recognized federal and state deferred tax assets related to research and development credits balance as of March 31, 2024 and 2023 was zero and $5.0 million, and zero and $5.7 million, respectively.

As part of the reorganization, the research and development credits remained with Capstone Green Energy Corporation, the Reorganized Private Co. As such, there are no remaining unrecognized tax benefits as of March 31, 2024.

A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows (in thousands):

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The Company does not expect a material change to its unrecognized tax benefits over the next twelve months.

The Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. When applicable, the Company accounts for interest and penalties generated by tax contingencies as interest and other expense, net in the Consolidated Statement of Operations.