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Income Taxes
 12 Months Ended
Jun. 30, 2022
Income Taxes  
Income Taxes

8. Income Taxes

 

For financial reporting purposes, income (loss) before income taxes includes the following components:

 

 

 

Year Ended June 30,

 

 

 

2022

 

 

2021

 

Pretax income (loss):

 

 

 

 

 

 

United States

 

$(5,129,955)

 

$(5,265,803)

Foreign

 

 

2,450,681

 

 

 

3,014,467

 

Loss before income taxes

 

$(2,679,274)

 

$(2,251,336)

 

The components of the provision for income taxes are as follows:

 

 

 

Year Ended June 30,

 

 

 

2022

 

 

2021

 

Current:

 

 

 

 

 

 

Federal tax

 

$-

 

 

$-

 

State

 

 

3,829

 

 

 

18,563

 

Foreign

 

 

314,063

 

 

 

403,352

 

Total current

 

 

317,892

 

 

 

421,915

 

 

 

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

 

 

Federal tax

 

 

4,000

 

 

 

510,069

 

State

 

 

-

 

 

 

1,931

 

Foreign

 

 

541,015

 

 

 

-

 

Total deferred

 

 

545,015

 

 

 

512,000

 

 

 

 

 

 

 

 

 

 

Total income tax provision

 

$862,907

 

 

$933,915

 

The reconciliation of income tax computed at the U.S. federal statutory rates to the total income tax provision is as follows:

 

 

 

Year Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

U.S. federal statutory tax rate

 

 

21.0%

 

 

21.0%

 

 

 

 

 

 

 

 

 

Income tax provision reconciliation:

 

 

 

 

 

 

 

 

Tax at statutory rate:

 

$(562,648)

 

$(472,782)

Net foreign income subject to lower tax rate

 

 

(297,049)

 

 

(169,276)

State income taxes, net of federal benefit

 

 

(159,950)

 

 

(196,719)

Valuation allowance

 

 

(1,255,273)

 

 

(1,400,450)

NOL expiration and adjustments

 

 

2,550,645

 

 

 

3,516,695

 

GILTI

 

 

138,611

 

 

 

310,431

 

Federal research and development and other credits

 

 

(121,990)

 

 

(74,288)

Stock-based compensation

 

 

20,472

 

 

 

(265,485)

Other permanent differences

 

 

11,387

 

 

 

(67,893)

Other, net

 

 

538,702

 

 

 

(246,318)

 

 

$862,907

 

 

$933,915

 

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law, which, among other things, is intended to provide emergency assistance to qualifying businesses and individuals.  The CARES Act also suspends the limitation on the deduction of NOLs arising in taxable years beginning before January 1, 2021, permits a five-year carryback of NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021, and generally modifies the limitation on the deduction for net interest expense to 50% of adjusted taxable income for taxable years beginning in 2019 and 2020.  During fiscal 2020, as a result of the CARES Act, the Company was able to accelerate the recovery of an income tax receivable related to previously paid alternative minimum tax. The receivable amount of approximately $107,000 as of June 30, 2020 was collected in July 2020.  In addition, the Company elected to utilize the payroll tax deferral under the CARES Act, resulting in cash savings of approximately $325,000, accrued as of June 30, 2021.  Half of this amount was remitted on December 31, 2021, with the remainder deferred until December 31, 2022.

 

Income Tax Law of the People’s Republic of China

The Company’s Chinese subsidiaries, LPOI and LPOIZ, are governed by the Income Tax Law of the People’s Republic of China concerning the privately run and foreign invested enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.  For both the years ended June 30, 2022 and 2021, the tax rate for LPOIZ was 15%, in accordance with an incentive program for technology companies.  Historically, no deferred tax provision was recorded for LPOIZ.  However, during the year ended June 30, 2022, as a result of audits performed by the Chinese taxing authorities, and the Chinese subsidiaries’ statutory audits, it was determined that a net deferred tax liability was required. Accordingly, an approximately $541,000 net deferred tax liability related to LPOIZ was recorded in the Company’s Consolidated Financial Statements as of and for the year ended June 30, 2022.

 

Historically, the Company considered unremitted earnings held by its foreign subsidiaries to be permanently reinvested.  However, during fiscal year 2020, the Company began declaring intercompany dividends to remit a portion of the historical earnings of its foreign subsidiaries to the U.S. parent company.  It is still the Company’s intent to reinvest a significant portion of the more recent earnings generated by its foreign subsidiaries, however the Company also plans to repatriate a portion of the historical earnings of its subsidiaries.  Based on its previous intent, the Company had not historically provided for future Chinese withholding taxes on the related earnings.  However, during fiscal year 2020 the Company began to accrue for these taxes on the portion of historical earnings that it intends to repatriate.

 

During the years ended June 30, 2022 and 2021, the Company declared and paid intercompany dividends of $2.8 million and $4 million, respectively, from LPOIZ, payable to the Company as its parent company.  Accordingly, the Company paid Chinese withholding taxes of $280,000 and $400,000 associated with these dividends during fiscal years 2022 and 2021, respectively. Income tax expense associated with these dividends was $208,000 and $500,000 for fiscal year 2022 and 2021, respectively.  As of June 30, 2022 and 2021, accrued and unpaid withholding taxes were $40,000 and $100,000, respectively. Other than these withholding taxes, these intercompany dividends have no impact on the Consolidated Financial Statements.

 

Law of Corporate Income Tax of Latvia

The Company’s Latvian subsidiary, ISP Latvia, is governed by the Law of Corporate Income Tax of Latvia.  Until 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 if declared prior to December 31, 2019.  ISP Latvia has declared an intercompany dividend to be paid to ISP, its U.S. parent company, for the full amount of earnings accumulated prior to January 1, 2018.  Distributions of this dividend will be from earnings prior to January 1, 2018 and, therefore, will not be subject to tax. The Company currently does not intend to distribute any current earnings generated after January 1, 2018.  If, in the future, the Company changes such intention, distribution taxes, if any, will be accrued as profits are generated.

 

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows at June 30:

 

 

 

Year Ended June 30,

 

 

 

2022

 

 

2021

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryforwards

 

$12,197,277

 

 

$13,585,000

 

Stock-based compensation

 

 

536,000

 

 

 

563,000

 

R&D and other credits

 

 

2,279,000

 

 

 

2,177,000

 

Capitalized R&D expenses

 

 

371,000

 

 

 

564,000

 

Inventories

 

 

263,973

 

 

 

253,000

 

Accrued expenses and other

 

 

267,000

 

 

 

347,000

 

Gross deferred tax  assets

 

 

15,914,250

 

 

 

17,489,000

 

Valuation allowance for deferred tax assets

 

 

(14,388,277)

 

 

(15,644,000)

Total deferred tax  assets

 

 

1,525,973

 

 

 

1,845,000

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Depreciation and other

 

 

(763,988)

 

 

(255,000)

Intangible assets

 

 

(1,160,000)

 

 

(1,443,000)

Total deferred tax liabilities

 

 

(1,923,988)

 

 

(1,698,000)

Net deferred tax assets (liabilities)

 

$(398,015)

 

$147,000

 

 

In assessing the potential future recognition of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not 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, projected future taxable income, and tax planning strategies in making this assessment.  In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately $53 million prior to the expiration of federal NOL carry-forwards from 2023 through 2037.  Based on the level of historical taxable income, management has provided for a valuation adjustment against the deferred tax assets of approximately $14.4 million at June 30, 2022, a decrease of approximately $1.2 million as compared to June 30, 2021.  The decrease in the valuation allowance for deferred tax assets as compared to the prior year is primarily the result of the various movements in the current year deferred items.  The net deferred tax asset of $143,000 results from federal and state tax credits with indefinite carryover periods.  State income tax expense disclosed on the effective tax rate reconciliation above includes state deferred taxes that are offset by a full valuation allowance.

 

At June 30, 2022, in addition to net operating loss carry forwards, the Company also has research and development and other credit carry forwards of approximately $2.0 million, which will expire from 2023 through 2041. A portion of the NOL carry forwards may be subject to certain limitations of the Internal Revenue Code Sections 382 and 383, which would restrict the annual utilization in future periods due principally to changes in ownership in prior periods.