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Income Taxes

6 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

A summary of our total income tax expense and effective income tax rate for the three and six months ended December 31, 2018 and 2017 is as follows:

		Three Months Ended December 31,								Six Months Ended December 31,
		2018				2017				2018				2017
Income (loss) before income taxes		$	(7,127	)		$	229,842			$	(768,978	)		$	505,522
Income tax benefit		$	(23,403	)		$	(193,508	)		$	(202,363	)		$	(135,524	)
Effective income tax rate			328	%			-84	%			26	%			-27	%

The difference between our effective tax rates in the periods presented above and the federal statutory rate is due to the mix of taxable income and losses generated in our various tax jurisdictions, which include the United States (“U.S.”), the People’s Republic of China, and the Republic of Latvia. For the three and six months ended December 31, 2018, we recorded a net income tax benefit, representing a tax benefit on losses in the U.S. jurisdiction, offset by tax expense on income generated in China. Income tax benefit for the six months ended December 31, 2017 was primarily related to income taxes from our non-U.S. operations. During the three months ended December 31, 2017, the statutory tax rate applicable to one of our Chinese subsidiaries, LightPath Optical Instrumentation (Zhenjiang) Co., Ltd. (“LPOIZ”), was lowered from 25% to 15% in accordance with an incentive program for technology companies. The lower rate applied to LPOIZ’s 2017 tax year, beginning on January 1, 2017. Accordingly, we recorded a tax benefit during the three months ended December 31, 2017 related to this retroactive rate change.

We record net deferred tax assets to the extent we believe it is more likely than not that some portion or all of these 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. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of December 31, 2018 and June 30, 2018, we have provided for a valuation allowance against our net deferred tax assets to reduce the net deferred tax assets to the amount we estimate is more-likely-than-not to be realized. Our net deferred tax asset consists primarily of U.S. net operating loss (“NOL”) carryforward benefits, and federal and state tax credits with indefinite carryover periods.

Tax Cuts and Jobs Act

In December 2017, Congress passed, and the President signed into law, the Tax Cuts and Jobs Act (the “2017 Act”), which changed existing U.S. tax law and included various provisions that affect companies in the United States. Among other things, the 2017 Act: (i) changed U.S. corporate tax rates, (ii) generally reduced a company’s ability to utilize accumulated net operating losses, and (iii) required the calculation of a one-time transition tax on certain foreign earnings and profits (“foreign E&P”) that had not been previously repatriated.

During the quarter ended December 31, 2018, we completed our accounting of the income tax impact from the enactment of the 2017 Act and there were no material changes from the estimates reported in our Annual Report on Form 10-K for the year ended June 30, 2018

. The 2017 Act provides for a one-time transition tax on our post-1986 foreign E&P that have not been previously repatriated. We determined that our foreign E&P was approximately $6.9 million and anticipate that we will not owe any one-time transition tax due to the utilization of U.S. NOL carryforward benefits against these earnings. We have also completed our evaluation of the income tax impacts of the Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income provisions of the 2017 Act, and our tax expense includes the impact of these provisions as a period cost in our effective tax rate.

We also reasonably estimated the tax treatment of our foreign E&P as of June 30, 2018 as a result of the 2017 Act. The 2017 Act provides for a one-time transition tax on our post-1986 foreign E&P that have not been previously repatriated. We provisionally determined that our foreign E&P was approximately $6.9 million and anticipate that we will not owe any one-time transition tax due to the utilization of U.S. NOL carryforward benefits against these earnings. However, we are still refining our calculations, including estimated foreign E&P layers for fiscal 2018, which could impact these amounts.

Income Tax Law of the People’s Republic of China

Our Chinese subsidiaries, LightPath Optical Instrumentation (Shanghai) Co., Ltd. (“LPOI”) and LPOIZ, are governed by the Income Tax Law of the People’s Republic of China. As of December 31, 2018, LPOI and LPOIZ were subject to statutory income tax rates of 25% and 15%, respectively.

We currently intend to permanently invest earnings generated from our foreign Chinese operations and, therefore, have not previously provided for future Chinese withholding taxes on such related earnings. However, if in the future we change such intention, the Company would provide for and pay additional foreign taxes, if any, at that time.

Law of Corporate Income Tax of Latvia

Our Latvian subsidiary, ISP Optics Latvia, SIA (“ISP Latvia”), is governed by the Law of Corporate Income Tax of Latvia. As of December 31, 2017, ISP Latvia was subject to a statutory income tax rate of 15%. Effective January 1, 2018, the Republic of Latvia enacted tax reform with the following key provisions: (i) corporations are no longer subject to income tax, but are instead subject to a distribution tax on distributed profits (or deemed distributions, as defined) and (ii) the tax rate was changed to 20%; however, distribution amounts are first divided by 0.8 to arrive at the taxable amount of profit, resulting in an effective tax rate of 25%. As a transitional measure, distributions made from earnings prior to January 1, 2018, distributed prior to December 31, 2019, are not subject to tax. As such, any distributions of profits from ISP Latvia to ISP Optics Corporation (“ISP”), its U.S. parent company, will be from earnings prior to January 1, 2018 and, therefore, will not be subject to tax. We currently do not intend to distribute any current earnings generated after January 1, 2018. If, in the future, we change such intention, we will accrue distribution taxes, if any, as profits are generated.