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Income Taxes | 12 Months Ended
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May 29, 2021
Income Tax Disclosure [Abstract] |
Income Taxes |
7. | INCOME TAXES
Income (loss) before income taxes included the following components (in thousands):
|  | Fiscal Year Ended |
|  | May 29, 2021 |  |  | May 30, 2020 |  |  | June 1, 2019 |
United States |  | $ | 1,077 |  |  | $ | (3,716 | ) |  | $ | (9,971 | )
Foreign |  |  | 1,231 |  |  |  | 2,502 |  |  |  | 3,660 |
Income (loss) before income taxes |  | $ | 2,308 |  |  | $ | (1,214 | ) |  | $ | (6,311 | )
The provision for income taxes for fiscal 2021, fiscal 2020 and fiscal 2019 consisted of the following (in thousands):
|  | Fiscal Year Ended |
|  | May 29, 2021 |  |  | May 30, 2020 |  |  | June 1, 2019 |
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 108 |  |  | $ | — |  |  | $ | 33 |
State |  |  | — |  |  |  | — |  |  |  | 3 |
Foreign |  |  | 665 |  |  |  | 616 |  |  |  | 652 |
Total current |  | $ | 773 |  |  | $ | 616 |  |  | $ | 688 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | — |  |  | $ | (88 | ) |  | $ | (104 | )
Foreign |  |  | (120 | ) |  |  | 96 |  |  |  | 433 |
Total deferred |  | $ | (120 | ) |  | $ | 8 |  |  | $ | 329 |
Income tax provision |  | $ | 653 |  |  | $ | 624 |  |  | $ | 1,017 |
The differences between income taxes at the U.S. federal statutory income tax rate of 21.0% for fiscal 2021, fiscal 2020 and fiscal 2019 and the reported income tax provision for fiscal 2021, fiscal 2020 and fiscal 2019, are summarized as follows:
|  | Fiscal Year Ended |
|  | May 29, 2021 |  |  | May 30, 2020 |  |  | June 1, 2019 |
Federal statutory rate |  |  | 21.0 | % |  |  | 21.0 | % |  |  | 21.0 | %
Effect of: |  |  |  |  |  |  |  |  |  |  |  |
State income taxes, net of federal tax benefit |  |  | 21.6 |  |  |  | 6.6 |  |  |  | 5.4 |
Foreign taxes at other rates |  |  | 10.5 |  |  |  | (15.3 | ) |  |  | (4.1 | )
Permanent tax differences |  |  | 18.3 |  |  |  | (41.1 | ) |  |  | (16.1 | )
Change in valuation allowance for deferred tax assets |  |  | (49.7 | ) |  |  | (29.8 | ) |  |  | (22.8 | )
Return to provision adjustments |  |  | 2.2 |  |  |  | 1.4 |  |  |  | (0.5 | )
Other |  |  | 4.4 |  |  |  | 5.8 |  |  |  | 1.0 |
Effective tax rate |  |  | 28.3 | % |  |  | (51.4 | )% |  |  | (16.1 | )%
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components as of May 29, 2021 and May 30, 2020 were as follows (in thousands):
|  | Fiscal Year Ended |
|  | May 29, 2021 |  |  | May 30, 2020 |
Deferred tax assets: |  |  |  |  |  |  |  |
NOL carryforwards - foreign and domestic |  | $ | 7,362 |  |  | $ | 7,834 |
Inventory valuations |  |  | 1,501 |  |  |  | 1,388 |
Goodwill |  |  | 1,286 |  |  |  | 1,390 |
Foreign tax credits |  |  | 1,782 |  |  |  | 1,782 |
Severance reserve |  |  | 185 |  |  |  | 165 |
Foreign capital loss |  |  | 1,261 |  |  |  | 1,167 |
Other |  |  | 1,469 |  |  |  | 1,847 |
Subtotal |  | $ | 14,846 |  |  | $ | 15,573 |
Valuation allowance - foreign and domestic |  |  | (12,225 | ) |  |  | (12,322 | )
Net deferred tax assets after valuation allowance |  | $ | 2,621 |  |  | $ | 3,251 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Accelerated depreciation |  | $ | (2,279 | ) |  | $ | (2,944 | )
Tax on undistributed earnings |  |  | (24 | ) |  |  | (24 | )
Other |  | 18 |  |  | 13 |
Subtotal |  | $ | (2,285 | ) |  | $ | (2,955 | )
Net deferred tax assets |  | $ | 336 |  |  | $ | 296 |
Supplemental disclosure of net deferred tax assets, excluding valuation allowance: |  |  |  |  |  |  |  |
Domestic |  | $ | 10,653 |  |  | $ | 10,925 |
Foreign |  |  | 1,913 |  |  |  | 1,693 |
Total |  | $ | 12,566 |  |  | $ | 12,618 |
On December 22, 2017, the U.S. government enacted new tax legislation, Tax Cuts and Jobs Act (the “Act”). The Company was subject to requirements of the Act beginning in fiscal 2019. Provisions include an income inclusion for global intangible low-taxed income (“GILTI”), a tax determined by base erosion and anti-avoidance tax (“BEAT”) related to certain payments between a U.S. corporation and foreign related entities, a limitation of certain executive compensation and a deduction for foreign derived intangible income. The Company has determined its accounting policy to treat the taxes due on GILTI as a period cost. The Company is not subject to the BEAT provision due to the revenue thresholds. During fiscal 2021, final regulations were released that provide taxpayers with a high tax exception (“HTE”) election. Given the Company’s tax profile, the Company intends to make such election with its fiscal 2021 tax return, and the forecasted GILTI inclusion has been estimated assuming the HTE is elected. The Company made this election on its fiscal 2020 tax return, adjusting its NOL and offsetting valuation allowance. As of May 29, 2021, we had approximately $3.0 million of net deferred tax assets related to federal net operating loss (“NOL”) carryforwards, compared to $3.7 million as of May 30, 2020. Net deferred tax assets related to domestic state NOL carryforwards at May 29, 2021 amounted to approximately $3.9 million, compared to $3.8 million at May 30, 2020. Net deferred tax assets related to foreign NOL carryforwards as of May 29, 2021 totaled approximately $0.4 million with various or indefinite expiration dates. The amount of net deferred tax assets related to foreign NOL carryforwards was $0.3 million as of May 30, 2020. We also had a domestic net deferred tax asset of $1.8 million of foreign tax credit carryforwards as of both May 29, 2021 and May 30, 2020. We did not have any alternative minimum tax credit carryforward as of May 29, 2021. We have historically determined that undistributed earnings of our foreign subsidiaries, to the extent of cash available, will be repatriated to the U.S. The deferred tax liability on the outside basis difference is now primarily withholding tax on future dividend distributions. The deferred tax liability related to undistributed earnings of our foreign subsidiaries was less than $0.1 million in both fiscal 2021 and fiscal 2020. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant component of objective evidence evaluated was the cumulative income or loss incurred in each jurisdiction over the three-year period ended May 29, 2021. Such objective evidence limits the ability to consider subjective evidence such as future income projections. We considered other positive evidence in determining the need for a valuation allowance in the U.S. including the subpart F and GILTI inclusions of our foreign earnings. The weight of this positive evidence is not sufficient to outweigh other negative evidence in evaluating our need for a valuation allowance in the U.S. jurisdiction. As of May 29, 2021, a valuation allowance of $12.2 million was established to record only the portion of the deferred tax asset that will more likely than not be realized. The valuation allowance as of May 30, 2020 was $12.3 million. We recorded a valuation allowance for all domestic federal and state net deferred tax assets considering the significant cumulative losses in the U.S. jurisdiction and the reversal of the deferred tax liability for foreign earnings. The valuation allowance also related to deferred tax assets in foreign jurisdictions where historical taxable losses have been incurred. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth. Income taxes paid, including foreign estimated tax payments, were $0.1 million, $1.0 million and $0.3 million, during fiscal 2021, fiscal 2020 and fiscal 2019, respectively. In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2015 are closed for examination under the statute of limitation for U.S. federal, U.S. state and local or non-U.S. tax jurisdictions. We are currently under examination in Thailand (fiscal 2008 through 2011) and Germany (fiscal 2015 through 2018). Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2019 and the Netherlands beginning in fiscal 2018. The uncertain tax positions as of both May 29, 2021 and May 30, 2020 were $0.1 million. We record penalties and interest related to uncertain tax positions in the income tax expense line item within the Consolidated Statements of Comprehensive Income (Loss). Accrued interest and penalties were included within the related tax liability line in the Consolidated Balance Sheets. We have not recorded a liability for interest and penalties as of May 29, 2021 or May 30, 2020. It is not expected that there will be a change in the unrecognized tax benefits due to the expiration of various statutes of limitations within the next twelve months. The following table summarizes the activity related to the unrecognized tax benefits (in thousands):
|  | Fiscal Year Ended |
|  | May 29, 2021 |  |  | May 30, 2020 |
Unrecognized tax benefits, beginning of period |  | $ | 129 |  |  | $ | 130 |
Currency translation adjustment |  |  | 13 |  |  |  | (1 | )
Unrecognized tax benefits, end of period |  | $ | 142 |  |  | $ | 129 |

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