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Note 18 - Income Taxes
 12 Months Ended
Dec. 31, 2021
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

(18)         Income Taxes

 

The Company accounts for income taxes under the liability method. Accordingly, deferred income taxes have been provided for temporary differences between the recognition of revenue and expenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.

 

The components of income (loss) before taxes are as follows (in thousands):

 

  

Year ended December 31,

 
  

2021

  

2020

 

Domestic

 $408  $(3,115

)

Foreign

  3,588   1,823 

Total

 $3,996  $(1,292

)

 

The components of income tax expense (benefit) are as follows (in thousands):

 

  

Year ended December 31,

 
  

2021

  

2020

 

Current:

        

Federal

 $0  $0 

State

  6   (125

)

Foreign

  52   235 

Total current income tax expense

  58   110 
         

Deferred:

        

Federal

  0   0 

State

  0   0 

Foreign

  1,015   (3,070

)

Total deferred income tax expense (benefit)

  1,015   (3,070

)

Income tax expense (benefit), net

 $1,073  $(2,960

)

 

The Company recognizes liabilities or assets for the deferred tax consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements in accordance with Income Taxes, Topic 740 (ASC 740). These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of assets or liabilities are recovered or settled. ASC 740 requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company evaluates its deferred tax position on a quarterly basis and valuation allowances are provided as necessary. During this evaluation, the Company reviews its forecast of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred tax assets to determine if a valuation allowance is needed. Based on its current forecast, the Company believes it will have sufficient future taxable income to realize the deferred tax assets recorded by its Mexican subsidiary. Therefore, the Company reversed its valuation allowance recorded in prior years against certain Mexican net deferred tax assets and recognized an income tax benefit of $3,717,000 during the year ended December 31, 2020.

 

Based on the Company’s consideration of all positive and negative evidence, including the future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations, the Company has established a valuation allowance against all U.S. deferred tax assets. Until an appropriate level and characterization of profitability is attained, the Company expects to continue to maintain a valuation allowance on its net deferred tax assets related to future U.S. tax benefits.

 

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted, which significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Tax Reform Act also provided for a one-time deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company is subject to incremental U.S. tax on GILTI income due to expense allocations required by the U.S. foreign tax credit rules. The Company has elected to account for the GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements.

 

The Company files a consolidated federal income tax return which includes all domestic subsidiaries. State income taxes paid in the U.S. during 2021 and 2020 totaled $6,000 and $13,000, respectively. There were no state income tax refunds received in the U.S. during 2021. State income tax refunds received in the U.S. during 2020 totaled $5,000. Foreign income taxes paid during 2021 and 2020 totaled $211,000 and $206,000, respectively. There were no foreign refunds received in 2021 and 2020. There were no federal taxes paid in 2021 and 2020. There were no federal refunds received in 2021. The Company received federal refunds of $92,000 in 2020. At December 31, 2021, the Company had $146,619,000 of federal net operating loss carryforwards available to offset future federal taxable income. The pre-2018 federal net operating loss carryforwards of $135,646,000 expire in various amounts from 2026 to 2037. Federal net operating loss carryforwards generated in 2018 and forward will have an unlimited carryforward period as part of the Tax Act. The indefinite lived net operating loss carryforwards as of December 31, 2021 are approximately $10,973,000.

 

At December 31, 2021, the Company had $109,358,000 of state net operating loss carryforwards available to offset future state taxable income, the majority of which relates to Florida ($61,197,000) and Kentucky ($48,161,000). The pre-2018 state net operating loss carryforwards totaling approximately $103,386,000 expire in various amounts from 2026 to 2037. State net operating loss carryforwards generated in 2018 and forward will have an unlimited carryforward. The indefinite lived state net operating loss carryforwards as of December 31, 2021 are approximately $5,972,000.

 

The following is a reconciliation of income tax (benefit) expense to that computed by applying the federal statutory rate to income (loss) before income taxes (in thousands):

 

  

Year ended December 31,

 
  

2021

  

2020

 

Federal tax expense at the statutory rate

 $839  $(271

)

Current year permanent differences

  (11

)

  273 

State income taxes, net of federal tax impact

  14   (166

)

Effect of tax rates of foreign subsidiary

  323   151 

Currency translation effect on temporary differences

  111   223 

Change in valuation allowance

  919   (2,994

)

State NOL carryforwards

  (256

)

  (471

)

Other

  (866

)

  295 

Income tax expense (benefit), net

 $1,073  $(2,960

)

 

The gross deferred tax asset for the Company’s Mexican subsidiary was $2,548,000 and $3,604,000 as of December 31, 2021 and 2020, respectively.

 

Deferred income tax assets and liabilities are as follows (in thousands):

 

  

Year ended December 31,

 
  

2021

  

2020

 

Deferred tax assets:

        

Compensation and benefit accruals

 $328  $386 

Inventory valuation

  863   877 

Federal and state net operating loss carryforwards

  35,351   33,851 

Deferred revenue

  21   391 

Accounts receivable allowance

  15   7 

Defined benefit pension plan

  621   708 

Lease liabilities

  1,037   1,193 

Foreign deferred revenue and other provisions

  2,548   3,604 

Other

  779   718 

Total

  41,563   41,735 

Domestic valuation allowance

  (37,441

)

  (37,015

)

Total deferred tax assets

  4,122   4,720 
         

Deferred tax liabilities:

        

Depreciation

  (714

)

  (114

)

Right-of-use assets, net

  (860

)

  (1,002

)

Total deferred tax liabilities

  (1,574

)

  (1,116

)

Net deferred tax asset

 $2,548  $3,604 

 

The ASC Income Tax Topic 740 includes guidance for the accounting for uncertainty in income taxes recognized in an enterprise’s financials. Specifically, the guidance prescribes a two-step process, which is the recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The total amount of gross unrecognized tax benefits as of December 31, 2021 and 2020 was $200,000. There were no changes to the unrecognized tax benefit balance during the years ended December 31, 2021 and 2020.

 

If the Company’s positions are sustained by the taxing authority, the entire balance at December 31, 2021 would reduce the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2021 and 2020, the Company does not have an accrual for the payment of tax-related interest and penalties.

 

The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Internal Revenue Service (IRS) is not currently examining the Company’s U.S. income tax returns for 2018 through 2020, for which the statute has yet to expire. The Company’s wholly-owned subsidiary in Mexico is currently under audit by the Mexican taxing authorities for the 2016 tax year. In addition, open tax years related to state and foreign jurisdictions remain subject to examination.