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Note 14 - Income Taxes
 12 Months Ended
Aug. 31, 2024
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

14.

INCOME TAXES

 

The provision for income taxes for the fiscal years ended August 31, 2024 and 2023 was approximately as follows:

 

   

Fiscal Year Ended August 31,

  
   

2024

    

2023

  

Current:

                

Federal

   $ —     $ —  

State

     48,000       26,000  

Foreign

     1,601,000       1,857,000  
      1,649,000       1,883,000  

Deferred:

                

Federal

     —       —  

State

     —       —  

Foreign

     (323,203 )     (533,400 )
      (323,203 )     (533,400 )
    $ 1,325,797     $ 1,349,600  

 

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, 2024 and 2023 were approximately as follows:

 

   

Fiscal Year Ended August 31,

  
   

2024

    

2023

  

Tax computed at statutory rates

   $ 1,627,000     $ 1,352,000  

State income tax, net of federal benefit

     21,000       (20,000 )

Tax effect on equity in income of international joint ventures

     (887,000 )     (1,354,000 )

Tax effect of foreign operations

     371,000       1,005,000  

Deemed repatriation

     4,000       —  

Foreign tax credit

     (321,000 )     783,000  

Research and development credit

     (512,000 )     (710,000 )

Valuation allowance

     1,066,000       354,000  

Stock based compensation

     175,000       31,000  

Non-controlling interest

     (71,000 )     (59,000 )

Prior year true-up

     (146,000 )     (51,000 )

Other

     (1,203 )     18,600  
    $ 1,325,797     $ 1,349,600  

 

 

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 benefit of approximately $180,000 in fiscal 2024 and tax expense of approximately $51,600 during fiscal 2023, 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, 2024 and 2023 was approximately as follows:

 

   

August 31,

  
   

2024

    

2023

  

Stock-based compensation

   $ 637,100     $ 556,700  

Foreign tax credit carryforward

     3,844,800       4,036,000  

Capitalized research and experimentation

     2,037,800       1,106,000  

Other credit and loss carryforward

     5,974,200       6,034,000  

Other

     965,368       1,048,800  

Total deferred tax assets

     13,459,268       12,781,500  

Valuation allowance

     (12,694,800 )     (11,933,700 )

Total deferred tax assets after valuation allowance

     764,468       847,800  

Right-of-use asset

     (64,700 )     (66,200 )

Intangible assets

     (1,564,200 )     (1,670,700 )

Unremitted foreign earnings

     (34,800 )     (214,800 )

Other

     (61,100 )     (201,215 )

Total deferred tax liabilities

     (1,724,800 )     (2,152,915 )

Net deferred tax liabilities

   $ (960,332 )   $ (1,305,115 )

 

As of August 31, 2024, the Company has foreign tax credit carryforwards of $3,844,800. This amount begins to expire to the extent not utilized by August 31, 2025. In addition, the Company had federal and state tax credit carryforwards of $5,405,560 as of August 31, 2024, which begin to expire in fiscal 2025.  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 $203,000 for federal net operating loss carryforwards and $274,000 for state net operating loss carryforwards as of August 31, 2024. The federal net operating loss carryforward has an indefinite carryforward period. The state net operating loss carryforward will begin to expire to the extent not utilized by August 31, 2025. The Company has a deferred tax asset of $481,200 for foreign net operating loss carryforwards, which will begin to expire to the extent not utilized by August 31, 2033.

 

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 $12,694,800 and $11,933,700 as of August 31, 2024 and 2023, 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, 2024 and 2023 relates entirely to non-US deferred tax assets which are expected to be realized offset by 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 $761,100 and $340,800 for the years ended August 31, 2024 and 2023, respectively.

 

 

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

 

   

Fiscal Year Ended August 31,

  
   

2024

    

2023

  

Gross unrecognized tax benefits – beginning balance

   $ 361,200     $ 319,000  

Gross (decreases) increases – prior period tax positions

     (5,400 )     100  

Gross increases – current period tax positions

     43,500       42,100  

Gross unrecognized tax benefits – ending balance

   $ 399,300     $ 361,200  

 

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, 2024 and August 31, 2023.

 

The Company is subject to taxation in the United States and various states and foreign jurisdictions. With few exceptions, as of August 31, 2024, the Company is no longer subject to federal, state, local, or foreign examinations by tax authorities for years prior to August 31, 2021.