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Income Taxes | 12 Months Ended
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May 27, 2023
Income Tax Disclosure [Abstract] |
Income Taxes | 8. INCOME TAXES Income before income taxes included the following components (in thousands):
|  | Fiscal Year Ended |
|  | May 27, 2023 |  |  | May 28, 2022 |  |  | May 29, 2021 |
United States |  | $ | 22,258 |  |  | $ | 12,299 |  |  | $ | 1,077 |
Foreign |  |  | 2,772 |  |  |  | 3,460 |  |  |  | 1,231 |
Income before income taxes |  | $ | 25,030 |  |  | $ | 15,759 |  |  | $ | 2,308 |
The provision (benefit) for income taxes for fiscal 2023, fiscal 2022 and fiscal 2021 consisted of the following (in thousands):
|  | Fiscal Year Ended |
|  | May 27, 2023 |  |  | May 28, 2022 |  |  | May 29, 2021 |
Current: |  |  |  |  |  |  |  |  |
Federal |  | $ | 954 |  |  | $ | (4,213 | ) |  | $ | 108 |
State |  |  | 1,212 |  |  |  | 950 |  |  |  | — |
Foreign |  |  | 547 |  |  |  | 1,038 |  |  |  | 665 |
Total current |  |  | 2,713 |  |  |  | (2,225 | ) |  |  | 773 |
Deferred: |  |  |  |  |  |  |  |  |
Federal |  |  | — |  |  |  | — |  |  |  | — |
Foreign |  |  | (16 | ) |  |  | 57 |  |  |  | (120 | )
Total deferred |  |  | (16 | ) |  |  | 57 |  |  |  | (120 | )
Income tax provision (benefit) |  | $ | 2,697 |  |  | $ | (2,168 | ) |  | $ | 653 |
The differences between income taxes at the U.S. federal statutory income tax rate of 21.0% for fiscal 2023, fiscal 2022 and fiscal 2021 and the reported income tax provision for fiscal 2023, fiscal 2022 and fiscal 2021, are summarized as follows:
|  | Fiscal Year Ended |
|  | May 27, 2023 |  |  | May 28, 2022 |  |  | May 29, 2021 |
Federal statutory rate |  |  | 21.0 | % |  |  | 21.0 | % |  |  | 21.0 | %
Effect of: |  |  |  |  |  |  |  |  |
State income taxes, net of federal tax benefit |  |  | 3.6 |  |  |  | 5.5 |  |  |  | 21.6 |
Foreign taxes at other rates |  |  | 0.9 |  |  |  | 4.5 |  |  |  | 10.5 |
Permanent tax differences |  |  | 0.1 |  |  |  | (2.0 | ) |  |  | 18.3 |
Change in valuation allowance for deferred tax assets |  |  | (7.0 | ) |  |  | (43.1 | ) |  |  | (49.7 | )
Return to provision adjustments |  |  | (0.7 | ) |  |  | 0.2 |  |  |  | 2.2 |
R&D credit |  |  | (3.7 | ) |  |  | — |  |  |  | — |
Other |  |  | (3.4 | ) |  |  | 0.2 |  |  |  | 4.4 |
Effective tax rate |  |  | 10.8 | % |  |  | (13.7 | )% |  |  | 28.3 | %
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. Our deferred tax assets and liabilities reflect operations as of May 27, 2023 and May 28, 2022. Significant components were as follows (in thousands):
|  | Fiscal Year Ended |
|  | May 27, 2023 |  |  | May 28, 2022 |
Deferred tax assets: |  |  |  |  |  |
NOL carryforwards - foreign and domestic |  | $ | 2,324 |  |  | $ | 2,796 |
Inventory valuations |  |  | 1,506 |  |  |  | 1,571 |
Goodwill |  |  | 1,056 |  |  |  | 1,182 |
Foreign tax credits |  |  | 26 |  |  |  | 1,782 |
Severance reserve |  |  | 131 |  |  |  | 183 |
Foreign capital loss |  |  | 944 |  |  |  | 1,224 |
Section 174 capitalization |  |  | 1,215 |  |  |  | — |
Lease liability |  |  | 381 |  |  |  | 520 |
Other |  |  | 1,067 |  |  |  | 1,480 |
Subtotal |  |  | 8,650 |  |  |  | 10,738 |
Valuation allowance - foreign and domestic |  |  | (1,375 | ) |  |  | (3,474 | )
Net deferred tax assets after valuation allowance |  |  | 7,275 |  |  |  | 7,264 |
Deferred tax liabilities: |  |  |  |  |  |
Accelerated depreciation |  |  | (2,441 | ) |  |  | (2,406 | )
Tax on undistributed earnings |  |  | (24 | ) |  |  | (24 | )
ROU assets |  |  | (381 | ) |  |  | (520 | )
Other |  |  | (1 | ) |  |  | (1 | )
Subtotal |  |  | (2,847 | ) |  |  | (2,951 | )
Net deferred tax assets |  | $ | 4,428 |  |  | $ | 4,313 |
Supplemental disclosure of net deferred tax assets, excluding valuation allowance: |  |  |  |  |  |
Domestic |  | $ | 4,517 |  |  | $ | 6,017 |
Foreign |  |  | 1,285 |  |  |  | 1,770 |
Total |  | $ | 5,802 |  |  | $ | 7,787 |
The Inflation Reduction Act (the "IRA"), signed into law by President Biden on August 16, 2022, has several key corporate tax-related provisions, including a 15% creditable book minimum tax on adjusted financial statement income (“AFSI”) of applicable corporations, clean energy tax incentives and 1% excise tax on certain corporate stock buybacks. The Company did not rise to the level of AFSI to be subject to the 15% creditable book minimal tax. The Company did not have a material impact from the IRA. The Creating Helpful Incentives to Produce Semiconductors Act of 2022 (the "CHIPS Act") was signed into law by President Biden on August 9, 2022, which created a new 25% investment tax credit for qualified property placed in service for semiconductor manufacturing. This production credit was not applicable to the Company. During the fourth quarter of fiscal 2023, the Company recorded research and development (“R&D”) tax credits of $0.9 million. These credits represent the expected U.S. federal and state credits to be claimed for fiscal 2020 through fiscal 2023. The Company has not previously recorded any benefit from an R&D tax credit due to the fact that the Company did not believe it was economically prudent to pursue these credits in prior years. For taxable years beginning after December 31, 2021, taxpayers are required to capitalize certain R&D expenses and amortize them over five or fifteen years under IRC Section 174. This provision increased our taxable income for the year ended May 27, 2023, and resulted in additional cash tax payments for U.S. federal and state income taxes. This provision also generated a deferred tax asset for the year ended May 27, 2023. As of May 27, 2023 and May 28, 2022 we have utilized all net deferred tax assets related to federal net operating loss (“NOL”) carryforwards. Net deferred tax assets related to domestic state NOL carryforwards at May 27, 2023 amounted to approximately $2.1 million, compared to $2.4 million at May 28, 2022. Net deferred tax assets related to foreign NOL carryforwards was $0.2 million as of May 27, 2023 compared to $0.4 million as of May 28, 2022, with various or indefinite expiration dates. We released the valuation allowance and have utilized $1.8 million of domestic net deferred tax asset related to foreign tax credit carryforwards as of May 27, 2023. 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 2023 and fiscal 2022. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to support a more likely than not assertion that its deferred tax assets will be realized. A significant component of objective evidence evaluated was the cumulative income or loss incurred in each jurisdiction over the three-year period ended May 27, 2023. 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 changes in our business performance in recent years and the utilization of federal NOLs. The weight of this positive evidence is sufficient to outweigh other negative evidence in evaluating our need for a valuation allowance in the U.S. federal jurisdiction. As a result of the positive evidence outweighing the negative evidence for the year ended May 28, 2022, we released the full valuation allowance on the U.S. federal and state deferred tax items. In addition, in the year ended May 28, 2022, we partially released the valuation allowance on the state NOL deferred tax item, based on the amount of the NOLs that management believed it is more likely than not to realize. As of May 27, 2023, we have released $1.8 million of the valuation allowance on the deferred tax asset related to foreign tax credits based on positive evidence that arose during the fourth quarter of fiscal 2023 related to the foreign tax credit limitation calculation. As of May 27, 2023, a valuation allowance of $1.4 million was recorded, representing the portion of the deferred tax asset that management does not believe is more likely than not to be realized. The valuation allowance as of May 28, 2022 was $3.5 million. The remaining valuation allowance relates to state NOLs ($0.2 million) and deferred tax assets in foreign jurisdictions where historical taxable losses have been incurred ($1.3 million). 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 $4.8 million, $1.5 million and $0.1 million, during fiscal 2023, fiscal 2022 and fiscal 2021, respectively. In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2017 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 were under examination for fiscal 2015 through fiscal 2018 in Germany. The audit was settled in the fourth quarter of fiscal 2022. In the second quarter of fiscal 2023, the Company paid the audit assessment for the fiscal 2015 through fiscal 2018 years. The Company recorded a tax expense of less than $0.1 million due to receiving the final assessment for the German audit. The $0.1 million of uncertain tax positions recorded in prior quarters has been fully utilized as of May 27, 2023. 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 2021. The Company did no t record any uncertain tax positions as of May 27, 2023, as compared to $0.1 million as of May 28, 2022. The reserve for the German audits was reversed in fiscal 2023. We record penalties and interest related to uncertain tax positions in the income tax expense line item within the Consolidated Statements of Comprehensive Income. Accrued interest and penalties were included within the related tax liability line in the Consolidated Balance Sheets. We have no t recorded a liability for interest and penalties as of May 27, 2023 or May 28, 2022. The following table summarizes the activity related to the unrecognized tax benefits (in thousands):
|  | Fiscal Year Ended |
|  | May 27, 2023 |  |  | May 28, 2022 |
Unrecognized tax benefits, beginning of period |  | $ | 125 |  |  | $ | 142 |
Currency translation adjustment |  |  | (4 | ) |  |  | (17 | )
Release German reserve |  |  | (121 | ) |  |  | — |
Unrecognized tax benefits, end of period |  | $ | — |  |  | $ | 125 |

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