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Note 18 - Income Taxes
 12 Months Ended
Dec. 31, 2022
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 (loss) income before taxes are as follows (in thousands):

 

   

Year ended December 31,

  
   

2022

    

2021

  

Domestic

   $ (4,661 )   $

408

  

Foreign

     3,115       3,588  

Total

   $ (1,546 )   $

3,996

  

 

 

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

 

   

Year ended December 31,

  
   

2022

    

2021

  
Current:                

Federal

   $ 0     $ 0  

State

     3       6  

Foreign

     616       52  

Total current income tax expense

     619       58  
                 
Deferred:                

Federal

     0       0  

State

     0       0  

Foreign

     329       1,015  

Total deferred income tax expense

     329       1,015  

Income tax expense, net

   $ 948     $ 1,073  

 

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.

 

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 2022 and 2021 totaled $3,000 and $6,000, respectively. There were no state income tax refunds received in the U.S. during 2022 or 2021. Foreign income taxes paid during 2022 and 2021 totaled $934,000 and $211,000. There were no foreign refunds received in 2022 and 2021. There were no federal taxes paid in 2022 and 2021. There were no federal refunds received in 2022 or 2021. At December 31, 2022, the Company had $146,548,000 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, 2022 are approximately $10,902,000.

 

 

At December 31, 2022, the Company had $108,063,000 of state net operating loss carryforwards available to offset future state taxable income, the majority of which relates to Florida ($59,901,000) and Kentucky ($48,162,000). The pre-2018 state net operating loss carryforwards totaling approximately $103,141,000 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, 2022 are approximately $4,922,000.

 

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,

  
   

2022

    

2021

  

Federal tax expense at the statutory rate

   $ (325 )   $

839

  

Current year permanent differences

     167      

(11

 )

State income taxes, net of federal tax impact

     (102 )    

14

  

Effect of tax rates of foreign subsidiary

     282       323  

Currency translation effect on temporary differences

     (161 )     111  

Change in valuation allowance

     876       919  

State NOL carryforwards

     706      

(256

 )

Other

     (495

)

     (866

)

Income tax expense (benefit), net

   $ 948     $ 1,073  

 

The gross deferred tax asset for the Company’s Mexican subsidiary was $2,367,000 and $2,548,000 as of December 31, 2022 and 2021, respectively.

 

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

 

   

Year ended December 31,

  
   

2022

    

2021

  
Deferred tax assets:                

Compensation and benefit accruals

   $ 423     $ 328  

Inventory valuation

     889       863  

Federal and state net operating loss carryforwards

     35,265       35,351  

Deferred revenue

     84       21  

Accounts receivable allowance

     18       15  

Defined benefit pension plan

     449       621  

Lease liabilities

     865       1,037  

Foreign deferred revenue and other provisions

     2,367       2,548  

Other

     788       779  

Total

     41,148       41,563  

Domestic valuation allowance

     (38,028

)

     (37,441

)

Total deferred tax assets

     3,120       4,122  
                 
Deferred tax liabilities:                

Depreciation

     (48

)

     (714

)

Right-of-use assets, net

     (705

)

     (860

)

Total deferred tax liabilities

     (753

)

     (1,574

)

Net deferred tax asset

   $ 2,367     $ 2,548  

 

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, 2022 and 2021 was $200,000. There were no changes to the unrecognized tax benefit balance during the years ended December 31, 2022 and 2021.

 

 

If the Company’s positions are sustained by the taxing authority, the entire balance at December 31, 2022 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, 2022 and 2021, 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 2019 through 2021, for which the statute has yet to expire. During the first quarter of 2023, the Company’s wholly-owned subsidiary in Mexico received a formal tax assessment notice from Mexico’s Federal Tax Administration Service, Servicio de Administracion Tributaria’s (the “SAT”) pertaining to revenue variances and disallowed deductions related to an audit by the SAT of the 2016 tax year. The tax liability for the variances is $20,922,000 Mexican pesos, which includes annual adjustments for inflation, interest and penalties and equals approximately $1,150,000 USD at February 23, 2023. The Mexican subsidiary believes the variances can be substantially eliminated and intends to file an administrative appeal with the SAT and further pursue all available legal actions in response to this assessment. No amounts have been accrued, as the Company does not believe a loss is probable. In addition, open tax years related to state and foreign jurisdictions remain subject to examination.