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Income Taxes | 12 Months Ended
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Jun. 30, 2023
Income Tax Disclosure [Abstract] |
Income Taxes |
8. |  | Income Taxes
The provision (benefit) for income taxes consists of the following components:
Schedule of Components of Income Tax Expense |  |  |  |  |  |  |  |
|  | Years Ended June 30, |
|  | 2023 |  |  | 2022 |
|  | (In thousands) |
Current: |  |  |  |  |  |  |  |
Federal |  | $ | – |  |  | $ | – |
State |  |  | 294 |  |  |  | 11 |
Foreign |  |  | 308 |  |  |  | 254 |
Total Current taxes |  | $ | 602 |  |  | $ | 265 |
Deferred: |  |  |  |  |  |  |  |
Federal |  |  | 146 |  |  |  | (1,805 | )
State |  |  | – |  |  |  | (292 | )
Foreign |  |  | – |  |  |  | – |
Provision (benefit) for income taxes |  | $ | 748 |  |  | $ | (1,832 | )
The following table presents U.S. and foreign income (loss) before income taxes:
Schedule of Income before Income Tax, Domestic and Foreign |  |  |  |  |  |  |  |
|  | Years Ended June 30, |
|  | 2023 |  |  | 2022 |
|  | (In thousands) |
United States |  | $ | (9,168 | ) |  | $ | (7,829 | )
Foreign |  |  | 936 |  |  |  | 635 |
Loss before income taxes |  | $ | (8,232 | ) |  | $ | (7,194 | )
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:
Schedule of Deferred Tax Assets and Liabilities |  |  |  |  |  |  |  |
|  | Years Ended June 30, |
|  | 2023 |  |  | 2022 |
|  | (In thousands) |
Deferred tax assets: |  |  |  |  |  |  |  |
Tax losses and credits |  | $ | 9,882 |  |  | $ | 15,310 |
Reserves not currently deductible |  |  | 2,054 |  |  |  | 1,881 |
Capitalized research and development expenses* |  |  | 6,975 |  |  |  | – |
Deferred compensation |  |  | 1,301 |  |  |  | 1,858 |
Inventory capitalization |  |  | 2,390 |  |  |  | 1,508 |
Lease liabilities |  |  | 2,848 |  |  |  | 2,260 |
Depreciation and amortization |  |  | – |  |  |  | 130 |
Identified intangibles |  |  | 446 |  |  |  | – |
Other |  |  | 263 |  |  |  | 333 |
Gross deferred tax assets |  |  | 26,159 |  |  |  | 23,280 |
Valuation allowance |  |  | (22,532 | ) |  |  | (20,173 | )
Deferred tax assets, net |  |  | 3,627 |  |  |  | 3,107 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
State taxes |  |  | (518 | ) |  |  | (404 | )
Right-of-use assets |  |  | (2,676 | ) |  |  | (2,240 | )
Identified intangibles |  |  | – |  |  |  | (463 | )
Depreciation and amortization |  |  | (579 | ) |  |  | – |
Deferred tax liabilities |  |  | (3,773 | ) |  |  | (3,107 | )
Net deferred tax assets (liabilities) |  | $ | (146 | ) |  | $ | – |
* | As required by the 2017 Tax Cuts and Jobs Act (the “2017 Act”), research and experimental (“R&E”) expenses under Internal Revenue Code Section 174 are required to be capitalized beginning in our fiscal year ended June 30, 2023. R&E expenses are required to be amortized over five years for domestic expenses and 15 years for foreign expenses.
Our net deferred tax liability of $146,000 at June 30, 2023 represents the excess of our indefinite-lived deferred tax liabilities over our indefinite-lived deferred tax assets, and is recorded in other non-current liabilities on the accompanying consolidated balance sheet at June 30, 2023. Realization of deferred tax assets is dependent upon the generation of future taxable income. As required by ASC 740, we have evaluated the positive and negative evidence bearing upon our ability to realize the deferred tax assets as of June 30, 2023. We have determined that it was more likely than not that Lantronix would not realize the deferred tax assets due to our cumulative losses and uncertainty of generating future taxable income. As a result of the acquisition of the TN Companies during the fiscal year ended June 30, 2022, we recorded U.S. deferred tax liabilities in the purchase accounting related to non-tax-deductible intangible assets recognized in our consolidated financial statements. The acquired deferred tax liabilities are a source of income to support recognition of our existing deferred tax assets. Pursuant to ASC 805, the impact on our existing deferred tax assets and liabilities caused by an acquisition should be recorded in the consolidated financial statements outside of acquisition accounting. Accordingly, we recorded an income tax benefit during the fiscal year ended June 30, 2022 of $2,036,000 for the partial release of the valuation allowance as a result of such purchase accounting considerations. The following table presents a reconciliation of the provision (benefit) for income taxes to taxes computed at the U.S. federal statutory rate:
Schedule of Effective Income Tax Reconciliation |  |  |  |  |  |  |  |
|  | Years Ended June 30, |
|  | 2023 |  |  | 2022 |
|  | (In thousands) |
Statutory federal provision (benefit) for income taxes |  | $ | (1,729 | ) |  | $ | (1,510 | )
Increase (decrease) resulting from: |  |  |  |  |  |  |  |
Stock options |  |  | (283 | ) |  |  | (588 | )
Other permanent differences |  |  | 30 |  |  |  | (54 | )
Change in valuation allowance |  |  | 2,222 |  |  |  | (1,829 | )
Global intangible low-tax income inclusion |  |  | 2 |  |  |  | 4 |
Foreign tax rate variances |  |  | 112 |  |  |  | 120 |
Acquisition costs |  |  | – |  |  |  | 395 |
Other |  |  | 394 |  |  |  | 1,630 |
Provision (benefit) for income taxes |  | $ | 748 |  |  | $ | (1,832 | )
Due to the “change of ownership” provision of the Tax Reform Act of 1986, utilization of our net operating loss (“NOL”) carryforwards and tax credit carryforwards may be subject to an annual limitation against taxable income in future periods. Due to the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax liabilities. The following table presents our NOL carryforwards:
Summary of Operating Income (Loss) Carryforwards |  |  |  |
|  | June 30, |
|  | 2023 |
|  | (In thousands) |
Federal |  | $ | 43,320 |
State |  | $ | 22,589 |
Our federal NOL carryforwards generated for tax years beginning before July 1, 2018 began to expire in the fiscal year ended June 30, 2021. Pursuant to the 2017 Act, we also have federal NOL carryforwards of $6,788,000 that will not expire but can only be used to offset 80% of future taxable income. For state income tax purposes, our NOL carryforwards began to expire in the fiscal year ended June 30, 2013. We continue to assert that our foreign earnings are indefinitely reinvested in our overseas operations and as such, deferred income taxes were not provided on undistributed earnings of certain foreign subsidiaries. The 2017 Act created a requirement that certain income earned by foreign subsidiaries, known as global intangible low-tax income (“GILTI”), must be included in the gross income of their U.S. shareholder. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current-period expense when incurred. During the fiscal years ended June 30, 2023 and 2022, we elected to treat the tax effect of GILTI as a current-period expense when incurred. Unrecognized Tax Benefits The following table summarizes our liability for uncertain tax positions for the fiscal year ended June 30, 2023:
Summary of uncertain tax position |  |  |  |
|  | Year Ended |
|  | June 30, 2023 |
|  | (In thousands) |
Balance as of June 30, 2022 |  | $ | 5,652 |
Change in balances related to uncertain tax positions |  |  | (839 | )
Balance as of June 30, 2023 |  | $ | 4,813 |
At June 30, 2023, we had $4,813,000 of gross unrecognized tax benefits which was recorded as a reduction to deferred tax assets, and a corresponding reduction in our valuation allowance of $4,813,000. The balance decreased from the prior year due to the expiration of certain federal research and development tax credit carryforwards. To the extent such portion of unrecognized tax benefits is recognized at a time such valuation allowance no longer exists, the recognition would reduce the effective tax rate. Our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. During the fiscal years ended June 30, 2023 and 2022, we recorded an immaterial expense for interest and penalties related to income tax matters in the provision for income taxes. At June 30, 2023, we had approximately $303,000 of accrued interest and penalties related to uncertain tax positions. At June 30, 2023, our fiscal years ended June 30, 2020 through 2023 remain open to examination by the federal taxing jurisdiction and our fiscal years ended June 30, 2019 through 2023 remain open to examination by the state taxing jurisdictions. However, we have NOLs beginning in the fiscal year ended June 30, 2001 which would cause the statute of limitations to remain open for the year in which the NOL was incurred. Our fiscal years ended June 30, 2015 through 2023 remain open to examination by foreign taxing authorities. We currently do not anticipate that the amount of unrecognized tax benefits as of June 30, 2023 will significantly increase or decrease within the next 12 months.

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