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Income Taxes
 12 Months Ended
Jan. 31, 2024
Income Tax Disclosure [Abstract]  
Income Taxes

Note 15—Income Taxes

The components of income before income taxes are as follows:

 

 

 

2024

 

 

2023

 

 

2022

 

(In thousands)

 

 

 

 

 

 

 

 

 

Domestic

 

$

5,448

 

 

$

1,773

 

 

$

5,046

 

Foreign

 

 

625

 

 

 

1,637

 

 

 

1,988

 

 

$

6,073

 

 

$

3,410

 

 

$

7,034

 

 

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

 

 

 

2024

 

 

2023

 

 

2022

 

(In thousands)

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

Federal

 

$

966

 

 

$

902

 

 

$

(183

)

State

 

 

71

 

 

 

313

 

 

 

76

 

Foreign

 

 

420

 

 

 

870

 

 

 

501

 

 

 

1,457

 

 

 

2,085

 

 

 

394

 

Deferred:

 

 

 

 

 

 

 

 

 

Federal

 

$

(32

)

 

$

(1,053

)

 

$

180

 

State

 

 

2

 

 

 

(315

)

 

 

177

 

Foreign

 

 

(48

)

 

 

32

 

 

 

(146

)

 

 

(78

)

 

 

(1,336

)

 

 

211

 

 

$

1,379

 

 

$

749

 

 

$

605

 

 

 

Total income tax provision differs from the expected tax provision as a result of the following:

 

 

 

2024

 

 

2023

 

 

2022

 

(In thousands)

 

 

 

 

 

 

 

 

 

Income Tax Provision at Statutory Rate

 

$

1,275

 

 

$

716

 

 

$

1,477

 

Foreign Rate Differential

 

 

197

 

 

 

157

 

 

 

61

 

Change in Valuation Allowance

 

 

73

 

 

 

182

 

 

 

57

 

Change in Reserves Related to ASC 740 Liability

 

 

60

 

 

 

93

 

 

 

(245

)

State Taxes, Net of Federal Tax Effect

 

 

56

 

 

 

(2

)

 

 

143

 

Meals and Entertainment

 

 

14

 

 

 

—

 

 

 

9

 

Return to Provision Adjustment

 

 

12

 

 

 

(22

)

 

 

368

 

R&D Credits

 

 

(160

)

 

 

(160

)

 

 

(180

)

Foreign Derived Intangible Income

 

 

(98

)

 

 

(180

)

 

 

(55

)

Share Based Compensation

 

 

(43

)

 

 

(52

)

 

 

(95

)

PPP Loan Forgiveness

 

 

—

 

 

 

—

 

 

 

(937

)

Other

 

 

(7

)

 

 

17

 

 

 

2

 

 

$

1,379

 

 

$

749

 

 

$

605

 

Our effective tax rate for fiscal 2024 was 22.7% compared to 22.0% in fiscal 2023 and 8.6% in fiscal 2022. The increase in the effective tax rate in fiscal 2024 from fiscal 2023 is primarily related to the impact of the valuation allowance recorded on China net operating losses, the increase in the current provision for state and local taxes, and the change in the foreign rate differential. This increase was partially offset by other factors decreasing the effective tax rate such as foreign derived intangible income (“FDII”) deduction, share based compensation, and the R&D tax credit.

The increase in the effective tax rate in fiscal 2023 from fiscal 2022 is primarily related to the absence of the PPP loan forgiveness which is tax-exempt income that was a one-time item that reduced the rate in fiscal 2022. Specific items increasing the effective tax rate in fiscal 2023 include the change in reserves related to ASC 740 liability and the increase in the valuation allowance recorded on China net operating losses. This increase was partially offset by state taxes, return to provision adjustments, share-based compensation, R&D tax credits, and foreign derived intangible income FDII deduction.

The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows:

 

 

 

January 31,

 

(In thousands)

 

2024

 

 

2023

 

Deferred Tax Assets:

 

 

 

 

 

 

Inventory

 

$

2,242

 

 

$

2,710

 

Honeywell Royalty Liability

 

 

3,561

 

 

 

3,008

 

State R&D Credits

 

 

2,160

 

 

 

1,851

 

Share-Based Compensation

 

 

590

 

 

 

620

 

Bad Debt

 

 

134

 

 

 

180

 

Warranty Reserve

 

 

171

 

 

 

258

 

Compensation Accrual

 

 

276

 

 

 

248

 

Net Operating Loss

 

 

199

 

 

 

135

 

ASC 842 Adjustment – Lease Liability

 

 

38

 

 

 

53

 

Unrecognized State Tax Benefits

 

 

49

 

 

 

58

 

Foreign Tax Credit

 

 

154

 

 

 

154

 

Deferred Service Contract Revenue

 

 

100

 

 

 

90

 

Section 174 Capitalization*

 

 

1,981

 

 

 

1,175

 

Other

 

 

381

 

 

 

281

 

 

 

12,036

 

 

 

10,821

 

Deferred Tax Liabilities:

 

 

 

 

 

 

Accumulated Tax Depreciation in Excess of Book Depreciation

 

 

1,491

 

 

 

1,037

 

Intangibles

 

 

989

 

 

 

694

 

ASC 842 Adjustment – Lease Liability

 

 

33

 

 

 

50

 

Other

 

 

206

 

 

 

180

 

 

 

2,719

 

 

 

1,961

 

Subtotal

 

 

9,317

 

 

 

8,860

 

Valuation Allowance

 

 

(2,534

)

 

 

(2,120

)

Net Deferred Tax Assets

 

$

6,783

 

 

$

6,740

 

 

* Beginning in fiscal 2023, changes to Section 174 of the Internal Revenue Code made by the Tax Cuts and Jobs Act of 2017 (“TCJA”) no longer permit an immediate deduction for research and development expenditures in the tax year that such costs are incurred. These costs are capitalized resulting in an increase in deferred tax assets of $0.8 million from fiscal 2023 to fiscal 2024.

Deferred taxes are reflected in the consolidated balance sheet as follows:

 

 

 

January 31,

 

(In thousands)

 

2024

 

 

2023

 

Deferred Tax Assets

 

 

6,882

 

 

 

6,907

 

Deferred Tax Liabilities

 

 

(99

)

 

 

(167

)

Total Net Deferred Tax Assets

 

$

6,783

 

 

$

6,740

 

 

The valuation allowances of $2.5 million at January 31, 2024 and $2.1 million at January 31, 2023, relate to Rhode Island research and development tax credit carryforwards, foreign tax credit carryforwards, and China’s net operating losses that are expected to expire unutilized.

At January 31, 2024, we had net operating loss carryforwards of $0.2 million in China, which expire in 2024 through 2028.

At January 31, 2024, we had state research credit carryforwards of approximately $2.2 million which expire in 2025 through 2031. Additionally, we had $0.2 million of foreign tax credits. We maintain a full valuation allowance against these credits as we expect these credits to expire unused.

We believe that it is reasonably possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as follows:

 

 

 

2024

 

 

2023

 

 

2022

 

(In thousands)

 

 

 

 

 

 

 

 

 

Balance, beginning of the year

 

$

414

 

 

$

303

 

 

$

384

 

Increases in prior period tax positions

 

 

—

 

 

 

24

 

 

 

63

 

Increases in current period tax positions

 

 

162

 

 

 

136

 

 

 

67

 

Reductions related to lapse of statutes of limitations

 

 

(71

)

 

 

(49

)

 

 

(211

)

Balance, end of the year

 

$

505

 

 

$

414

 

 

$

303

 

 

During fiscal 2024 and 2023, we released $71,000 and $49,000, respectively, of uncertain tax positions including accrued interest and penalties relating to a change in various unrecognized tax positions. We have accrued potential interest and penalties of $46,000 included in income taxes payable in the accompanying consolidated balance sheet at January 31, 2024.

The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. In fiscal 2024, we released $33,000 related to a federal tax exposure for the fiscal 2020 tax year and $39,000 of state nexus positions as a result of the expiration of the statute of limitations.

U.S. income taxes have not been provided on $10.0 million of undistributed earnings of our foreign subsidiaries since it is our intention to permanently reinvest such earnings offshore. If the earnings were distributed in the form of dividends, we would not be subject to U.S. tax as a result of the TCJA but, could be subject to foreign income and withholding taxes. Determination of the amount of this unrecognized deferred income tax liability is not practical.