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INCOME TAXES | 12 Months Ended
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Jul. 02, 2022
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES Income tax benefit consists of the following:
| Fiscal Year Ended
| July 2, 2022 |  | July 3, 2021 |  | June 27, 2020
| (in thousands)
Current income tax benefit: |  |  |  |  |
United States | $ | (2,179) |  |  | $ | 1,416 |  |  | $ | 365 |
Foreign | 2,012 |  |  | 1,098 |  |  | 154 |
| (167) |  |  | 2,514 |  |  | 519 |
Deferred income tax benefit: |  |  |  |  |
United States | 443 |  |  | (858) |  |  | (1,850) |
Foreign | 38 |  |  | (84) |  |  | 892 |
| 481 |  |  | (942) |  |  | (958) |
Total income tax provision (benefit) | $ | 314 |  |  | $ | 1,572 |  |  | $ | (439) |
The Company has gross tax credit carryforwards of approximately $11.0 million at July 2, 2022 consisting of federal research and development (R&D) tax credits, and approximately $1.9 million of net operating loss carryovers in China which expire in fiscal years 2025 through 2027. Management has reviewed all deferred tax assets for purposes of determining whether or not a valuation allowance may be required. A valuation allowance against deferred tax assets is required if it is more likely than not that some of the deferred tax assets will not be realized. Based upon the Company’s profitability, forecasted income, and evaluation of all other positive and negative evidence, management determined that it is more likely than not that the deferred tax assets will be realized. In the fourth quarter of fiscal year 2022, the Company, with its fiscal year 2021 federal income tax return, made automatic changes in tax accounting methods that created a fiscal year 2021 tax net operating loss. This loss is permitted to be carried back to the tax years ending in 2016, 2017, and 2019, resulting in a tax benefit of $0.6 million due to the higher federal income tax rate in effect in the years ending in 2016 and 2017. On January 27, 2021, the Company received official notice from the Vietnamese tax authorities, confirming tax benefits awarded related to the Company’s principal product line in Vietnam (the “Tax Holiday”). Under the Tax Holiday, the tax rate applied to income derived from this product line will be zero percent for four years beginning with fiscal year 2021, then five percent for nine years, then ten percent for one year (as opposed to the normal twenty percent Vietnamese statutory rate). Consequently, Management has revalued its net operating loss in Vietnam at the zero percent Tax Holiday rate, as the net operating loss carryovers are projected to expire before the end of the Tax Holiday. The Company eliminated the deferred tax assets attributable to the Vietnam net operating loss carryover ($0.2 million) in the third quarter of fiscal year 2021. The Company evaluated tax law changes and regulatory guidance issued through the quarter. Such changes and regulations include guidance under Sec. 162(m), Sec. 245A, Sec. 951A, foreign tax credits, and rules relating to consolidated NOL carryback claims. The Company evaluated the ongoing impact of these law and regulatory changes, which did not have a material impact on its provision for income taxes. Subsequent to the end of the fiscal year ending July 2, 2022, on August 16, 2022, the Inflation Reduction Act of 2022 was signed into law. This act includes a new book minimum tax on certain large corporations and an excise tax on corporate stock buybacks among other provisions. The Company is evaluating the impacts of this act, and at this time the Company does not believe they will have a material impact on our consolidated financial position, results of operations, or cash flows. Subsequent to the end of the fiscal year ending June 27, 2020, the Treasury Department issued final regulations applicable to the Company’s position with respect to the U.S. taxability of foreign earnings under the global intangible low taxed income (also known as “GILTI”) regime and the deductibility of interest expense under IRC Section 163(j). These regulations did not have a material impact to the Company's income tax positions. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss (NOL) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in years beginning in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is taking advantage of this NOL carryback provision by carrying back the fiscal year 2021 NOL to the fiscal 2016 and 2017 years, as described above. In addition, the CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. This modification did not have a material impact on the fiscal year 2020 or fiscal year 2021 provisions for income taxes. Also, under the CARES Act, AMT credits not previously refunded for the tax year beginning in 2018 are refundable in the tax year beginning in 2019 rather than in years beginning in 2019-2021, and taxpayers can elect to claim 100% of the AMT credits in the first taxable year beginning in 2018 by applying for a tentative refund claim on or before December 31, 2020. The Company has made this election by applying for a tentative refund claim. The Company took advantage of the deferred payment payroll taxes provision, resulting in decreased deductible payroll tax payments, and increased taxable income, in fiscal years 2020 and 2021. Other aspects of the CARES Act did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. In future years, repatriations of cash will generally be tax-free in the U.S. However, withholding taxes in China may still apply to any such future repatriations. Management has not changed its indefinite investment assertions regarding to the portion of accumulated earnings and profits in China that may be repatriated in the future. Accordingly, management estimates that future repatriations of cash from China may result in approximately $0.7 million of withholding tax. There would be no offsetting foreign tax credits in the U.S. and as such, this potential liability is a direct cost associated with actual repatriations. Withholding taxes will not apply to future repatriations from Mexico or Vietnam. The Company expects to repatriate a portion of its foreign earnings based on increased net sales growth driving additional capital requirements domestically, cash requirements for potential acquisitions and to implement certain tax strategies. The Company expects to repatriate approximately $7.1 million from China, in the future. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations. The Company’s effective tax rate differs from the federal tax rate as follows:
| Fiscal Year Ended
| July 2, 2022 |  | July 3, 2021 |  | June 27, 2020
| (in thousands)
Federal income tax provision at statutory rates | $ | 775 |  |  | $ | 1,242 |  |  | $ | 907 |
State income taxes, net of federal tax effect | 86 |  |  | 76 |  |  | 90 |
Foreign tax rate differences | 336 |  |  | (36) |  |  | 336 |
Tax rate change | — |  |  | 184 |  |  | — |
Federal rate differences applied to net operating loss carryback | (593) |  |  | — |  |  | — |
Effect of income tax credits | (920) |  |  | (413) |  |  | (310) |
Previously unrecognized tax benefits | 146 |  |  | (296) |  |  | (1,345) |
Effect of repatriation of foreign earnings, net | — |  |  | (61) |  |  | — |
Tax penalties & interest | 179 |  |  | — |  |  | — |
Global Intangible Low-Taxed Income (GILTI) tax | 59 |  |  | 34 |  |  | — |
Provision to return reconciliation | (32) |  |  | 50 |  |  | (241) |
Equity compensation shortfall | 104 |  |  | 572 |  |  | — |
Other | 174 |  |  | 220 |  |  | 124 |
Income tax provision (benefit) | $ | 314 |  |  | $ | 1,572 |  |  | $ | (439) |
The domestic and foreign components of income before income taxes were:
| Fiscal Year Ended
| July 2, 2022 |  | July 3, 2021 |  | June 27, 2020
| (in thousands)
Domestic | $ | (2,890) |  |  | $ | 2,839 |  |  | $ | 1,142 |
Foreign | 6,581 |  |  | 3,074 |  |  | 3,177 |
Income before income taxes | $ | 3,691 |  |  | $ | 5,913 |  |  | $ | 4,319 |
Deferred income tax assets and liabilities consist of the following at:
| July 2, 2022 |  | July 3, 2021
| (in thousands)
Deferred tax assets: |  |  |
Net operating loss | $ | 486 |  |  | $ | 465 |
Tax credit carryforwards, net | 7,990 |  |  | 3,581 |
Inventory | 247 |  |  | 1,190 |
Identifiable intangibles | 370 |  |  | 432 |
Accruals | 2,406 |  |  | 3,132 |
Fixed assets | 1,200 |  |  | — |
ASC 606 deferred costs | 4,216 |  |  | 4,670 |
Lease liabilities | 3,671 |  |  | 2,909 |
Interest expense deduction carryforward | 580 |  |  | — |
Other | 465 |  |  | 385 |
Deferred income tax assets | $ | 21,631 |  |  | $ | 16,764 |
Deferred tax liabilities: |  |  |
Accrued withholding tax - unremitted earnings | (754) |  |  | (754) |
Fixed assets | — |  |  | (794) |
Right-of-use assets | (3,663) |  |  | (2,930) |
Tax capital lease liabilities | (2,385) |  |  | — |
Mark-to-market adjustments | — |  |  | (816) |
ASC 606 accelerated revenue | (3,736) |  |  | (672) |
Other | (1,102) |  |  | (1,142) |
Deferred income tax liabilities | $ | (11,640) |  |  | $ | (7,108) |
Net deferred income tax assets | $ | 9,991 |  |  | $ | 9,656 |
Balance sheet caption reported in: |  |  |
Long-term deferred income tax asset | $ | 10,055 |  |  | $ | 9,656 |
Long-term deferred income tax liability | (64) |  |  | — |
Net deferred income tax asset | $ | 9,991 |  |  | $ | 9,656 |
Uncertain Tax Positions: The Company has R&D tax credits that approximate $11.0 million that have 20-year carryforwards before expiring. The Company’s R&D tax credits expire in various fiscal years from 2025 to 2042. As of July 2, 2022, the Company had unrecognized tax benefits of $3.0 million related to its gross R&D tax credits. The unrecognized tax benefits relate to certain R&D tax credits generated from 2001 to 2022. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| Fiscal Year Ended
| July 2, 2022 |  | July 3, 2021 |  | June 27, 2020
| (in thousands)
Beginning Balance | $ | 4,863 |  |  | $ | 2,863 |  |  | $ | 4,099 |
Additions based on tax positions related to the current year | 286 |  |  | 193 |  |  | 109 |
Adjustment to prior year tax positions & amended tax returns | (2,296) |  |  | 2,102 |  |  | — |
Lapse of statute of limitations | 145 |  |  | (295) |  |  | (1,345) |
Ending Balance | $ | 2,998 |  |  | $ | 4,863 |  |  | $ | 2,863 |
The $2.998 million of unrecognized tax benefits at the end of fiscal year 2022, if recognized, would reduce the effective tax rate. Management does not anticipate any material changes to this amount during the next 12 months. The Company recognizes interest accrued related to unrecognized tax benefits and penalties in its income tax provision. The Company has not recognized any interest or penalties in the fiscal years presented in these financial statements, except for $0.2 million in fiscal year 2022. The Company is subject to income tax in the U.S. federal jurisdiction, various state jurisdictions, Mexico, China and Vietnam. Certain years remain subject to examination but there are currently no ongoing exams in any taxing jurisdiction.

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