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Note 16 - Income Taxes
 12 Months Ended
Aug. 31, 2022
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

16.         INCOME TAXES

 

The provision for income taxes for the fiscal years ended August 31, 2022 and 2021 was approximately as follows:

 

  

Fiscal Year Ended August 31,

 
  

2022

  

2021

 

Current:

        

Federal

 $—  $— 

State

  98,000   39,000 

Foreign

  1,894,000   1,307,000 
   1,992,000   1,346,000 

Deferred:

        

Federal

  —   — 

State

  —   — 

Foreign

  (118,164)  115,905 
   (118,164)  115,905 
  $1,873,836  $1,461,905 

 

Reconciliations of the expected federal income tax at the statutory rate of 21.0% with the provisions for income taxes for the fiscal years ended August 31, 2022 and 2021 were approximately as follows:

 

  

Fiscal Year Ended August 31,

 
  

2022

  

2021

 

Tax computed at statutory rates

 $1,780,000  $1,794,000 

State income tax, net of federal benefit

  34,000   37,000 

Tax effect on equity in income of international joint ventures

  (988,000)  (1,560,000)

Tax effect of foreign operations

  1,004,000   839,000 

Deemed repatriation

  10,000   — 

Expired foreign tax credit

  —   897,000 

Research and development credit

  (244,000)  (277,000)

Valuation allowance

  133,000   (492,000)

Stock based compensation

  67,000   75,000 

Non-controlling interest

  (72,000)  (83,000)

Other

  149,836   231,905 
  $1,873,836  $1,461,905 

 

The Company has not provided U.S. income taxes or foreign withholding taxes with respect to its portion of the cumulative undistributed earnings of certain foreign subsidiaries and joint ventures that are essentially permanent in duration. As a result of the 2017 tax law changes, U.S. federal income taxes on dividends received from the Company’s foreign subsidiaries and joint ventures after December 31, 2017 have been generally eliminated. However, the Company continues to be subject to foreign withholding taxes upon repatriation of any undistributed earnings that are not essentially permanent in duration. The Company recorded a tax expense of approximately $8,000 and $113,000 during fiscal 2022 and fiscal 2021, respectively, representing changes in the deferred tax liability for foreign withholding taxes to be paid with respect to the portion of the cumulative undistributed earnings of foreign subsidiaries and joint ventures that the Company determined were not essentially permanent in duration.

 

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. The tax effect of the temporary differences and tax carryforwards comprising the net deferred taxes shown on the consolidated balance sheets as of August 31, 2022 and 2021 was approximately as follows:

 

  

August 31,

 
  

2022

  

2021

 

Accrued compensation

 $329,100  $539,300 

Inventory costs

  93,900   55,100 

Other accrued expenses

  84,800   103,100 

Lease liability

  98,300   84,300 

Goodwill and other intangible assets

  398,600   453,000 

Stock-based compensation

  547,200   466,300 

Property and equipment

  9,100   — 

Foreign tax credit carryforward

  4,892,100   4,893,300 

Other credit and loss carryforward

  5,455,500   5,243,100 

Other

  23,000   — 

Total deferred tax assets

  11,931,600   11,837,500 

Valuation allowance

  (11,592,900)  (11,447,500)

Total deferred tax assets after valuation allowance

  338,700   390,000 

Property and equipment

  —   (7,300)

Right-of-use asset

  (98,300)  (84,300)

Intangible assets

  (1,777,200)  — 

Unremitted foreign earnings

  (163,200)  (154,900)

Other

  —   (50,900)

Total deferred tax liabilities

  (2,038,700)  (297,400)

Net deferred tax assets

 $(1,700,000) $92,600 

 

As of August 31, 2022, the Company has foreign tax credit carryforwards of $4,892,100. This amount will begin to expire if not utilized prior to August 31, 2023. In addition, the Company had federal and state tax credit carryforwards of $3,796,500 as of August 31, 2022, which will begin to expire in fiscal 2023.  These federal and state tax credit carryforwards consist primarily of federal and Minnesota research and development credit carryforwards. The Company also has a deferred tax asset of $1,170,100 for federal net operating loss carryforwards and $329,800 for state net operating loss carryforwards as of August 31, 2022. The federal net operating loss carryforward has an indefinite carryforward period. The state net operating loss carryforward will begin to expire to the extent it is not utilized prior to August 31, 2023. The Company has a deferred tax asset of $159,000 for foreign net operating loss carryforwards, which has an indefinite carryforward period.

 

The Company records a tax valuation allowance to reduce deferred tax assets to the amount expected to be realized when it is more likely than not that some portion or all of its deferred tax assets will not be realized.

 

The Company determined based on all available evidence, including historical data and projections of future results, that it is more likely than not that its domestic deferred tax assets will not be realized due to the absence of objectively verifiable sources of taxable income. On the basis of this evaluation, the Company has recorded a valuation allowance of $11,592,900 and $11,447,500 as of August 31, 2022 and 2021, respectively, to recognize only the portion of the deferred tax assets that is more likely than not to be realized. The net deferred tax asset as of August 31, 2022 and 2021 relates entirely to non-US deferred tax assets which are expected to be realized by offset of deferred tax liability for withholding tax on cumulative undistributed earnings in foreign subsidiaries and joint ventures that the Company determined were not essentially permanent. The change in the valuation allowance totaled an increase of $145,400 and a decrease of $114,000 for the years ended August 31, 2022 and 2021, respectively.

 

The following is a tabular reconciliation of the total amounts of approximated unrecognized tax benefits:

 

  

Fiscal Year Ended August 31,

 
  

2022

  

2021

 

Gross unrecognized tax benefits – beginning balance

 $297,600  $278,200 

Gross increases – prior period tax positions

  3,400   4,400 

Gross increases – current period tax positions

  18,000   15,000 

Gross unrecognized tax benefits – ending balance

 $319,000  $297,600 

 

The entire amount of unrecognized tax benefits would affect the effective tax rate if recognized.  It is not expected that the amount of unrecognized tax benefits will change significantly in the next 12 months.

 

The Company recognizes interest related to unrecognized tax benefits and penalties as income tax expense. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. There was no liability for the payment of interest and penalties as of both August 31, 2022 and August 31, 2021.

 

On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law in the United States. Among other provisions, the IRA includes a 15% corporate minimum tax rate applied to certain large corporations and a 1% excise tax on corporate stock repurchases made after December 31, 2022. We do not expect the IRA to have a material impact on our consolidated financial statements.

 

The Company is subject to taxation in the United States and various states and foreign jurisdictions. With few exceptions, as of August 31, 2022, the Company is no longer subject to federal, state, local, or foreign examinations by tax authorities for years prior to August 31, 2019.