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Note 5 - Income Taxes | 12 Months Ended
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Dec. 31, 2021
Notes to Financial Statements |
Income Tax Disclosure [Text Block] | 5. Income Taxes Beginning in 2018, the Tax Cuts and Jobs Act (the “Act”) included two (2) new U.S. corporate tax provisions, the global intangible low-taxed income (“GILTI”) and the base-erosion and anti-abuse tax (“BEAT”). The GILTI provision requires the Company to include in its U.S. income tax return non-U.S. subsidiary earnings in excess of an allowable return on the non-U.S. subsidiary’s tangible assets. The Company has elected to treat GILTI as a period cost. The Company evaluated the GILTI resulting in a financial statement impact of approximately $400,000 and $350,000 for the year ended December 31, 2021 and December 31, 2020 respectively. The Company is below the three-year average gross receipts threshold for BEAT to apply. Income (loss) before income taxes is summarized as follows (in thousands):
|  | Year Ended December 31, |
|  | 2021 |  |  | 2020 |
Domestic |  | $ | (5,672 | ) |  | $ | 603 |
Foreign |  |  | 9,780 |  |  |  | 8,671 |
Total: |  | $ | 4,108 |  |  | $ | 9,274 |
The income tax expense (benefit) is summarized as follows (in thousands):
|  | Year Ended December 31, |
|  | 2021 |  |  | 2020 |
Current: |  |  |  |  |  |  |  |
Federal |  | $ | - |  |  | $ | 473 |
Foreign |  |  | 2,438 |  |  |  | (218 | )
State |  |  | 117 |  |  |  | 35 |
Deferred: |  |  |  |  |  |  |  |
Federal |  |  | (654 | ) |  |  | (81 | )
Foreign |  |  | 219 |  |  |  | (7 | )
State |  |  | (12 | ) |  |  | 110 |
Net expense |  | $ | 2,108 |  |  | $ | 312 |
The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The items causing this difference are as follows (dollars in thousands):
|  | Year Ended December 31, |
|  | 2021 |  |  | Rate |  |  | 2020 |  |  | Rate |
Provision for income taxes at federal statutory rate |  | $ | 863 |  |  |  | 21.0 | % |  | $ | 1,947 |  |  |  | 21.0 | %
State income taxes, net of federal benefit |  |  | 68 |  |  |  | 1.6 | % |  |  | 144 |  |  |  | 1.6 | %
Permanent differences |  |  | 74 |  |  |  | 1.8 | % |  |  | 56 |  |  |  | 0.6 | %
Foreign tax rate differential |  |  | 731 |  |  |  | 17.8 | % |  |  | 112 |  |  |  | 1.2 | %
GILTI tax |  |  | 401 |  |  |  | 9.7 | % |  |  | 344 |  |  |  | 3.7 | %
2018 and 2019 impact of high tax exception |  |  | - |  |  |  | 0.0 | % |  |  | (545 | ) |  |  | -5.9 | %
Brazil Deferred Tax Allowance Release |  |  | - |  |  |  | 0.0 | % |  |  | (2,158 | ) |  |  | -23.3 | %
Other |  |  | (29 | ) |  |  | -0.6 | % |  |  | 412 |  |  |  | 4.4 | %
Net expense |  | $ | 2,108 |  |  |  | 51.3 | % |  | $ | 312 |  |  |  | 3.3 | %
In 2021, our effective income tax rate varied from the U.S. federal statutory rate primarily as a result of mix of income and impact of higher foreign tax rates, as well as the incremental tax expense associated with the global intangible low-taxed income inclusion under the Tax Cuts and Jobs Act of 2017.
Deferred taxes consist of the following (in thousands): |  | December 31, |
|  | 2021 |  |  | 2020 |
Deferred tax assets: |  |  |  |  |  |  |  |
Net operating loss carry forwards |  | $ | 4,144 |  |  | $ | 3,541 |
Federal Research and Development Credit |  |  | 240 |  |  |  | 240 |
Deferred revenue |  |  | 330 |  |  |  | – |
Accrued payroll |  |  | 217 |  |  |  | 445 |
Payroll taxes payable |  |  | 100 |  |  |  | 457 |
Outside basis in domestic partnership |  |  | 92 |  |  |  | 92 |
Allowance for doubtful accounts and other receivable |  |  | 93 |  |  |  | 98 |
Share-based compensation expense |  |  | 407 |  |  |  | 434 |
Depreciation |  |  | 156 |  |  |  | 16 |
Lease liabilities |  |  | 453 |  |  |  | 782 |
Other |  |  | 343 |  |  |  | 315 |
Valuation allowance |  |  | (478 | ) |  |  | (397 | )
Total deferred tax assets |  |  | 6,097 |  |  |  | 6,023 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Goodwill & Intangible assets of subsidiaries |  |  | 700 |  |  |  | 558 |
Capitalized software development costs |  |  | 476 |  |  |  | 482 |
Right To use assets |  |  | 453 |  |  |  | 782 |
Total deferred tax liabilities |  |  | 1,629 |  |  |  | 1,822 |
Net deferred taxes |  | $ | 4,468 |  |  | $ | 4,201 |
As discussed in Note 2, the following adjustments have been made to the 2020 disclosures: 1) the income before income taxes table has been corrected to allocate $615,000 of losses from Foreign to the Domestic pre-tax income (loss), 2) the deferred taxes inventory table has been corrected as the tax effected net operating loss carry forward deferred tax asset and other foreign deferred tax assets, i.e. accrued payroll, payroll taxes payable and allowance for doubtful accounts and other receivable, were understated by $2.4 million and $0.6 million, respectively, while the Company’s foreign subsidiaries deferred tax asset was overstated by $3.0 million. In addition, the Company’s deferred tax table overstated deferred tax assets and liabilities related to right to use assets and liabilities in the amount of $2.3 million. There was no impact to the net deferred tax asset and tax expense. For comparative purposes, the Company’s prior year income tax footnote has been revised to reflect the adjustment to the applicable deferred tax line items. As of December 31, 2021, the Company’s deferred tax assets were primarily the result of U.S. Net Operating Loss (“NOL”), Brazil NOL and temporary differences. The Company has Federal and State NOL carryforwards of $8.3 million, of which approximately $4.0 million has no expiration date, and the remaining balance, if unused, will expire in years 2026 through 2032. The Company has additional NOL carryforwards of $4.7 million in Brazil and $1.4 million in Australia, all of which has no expiration date. For the year ended December 31, 2020, the Company recorded a net valuation allowance release of $2.1 million (comprising a full-year valuation release related to the Brazil operations), on the basis of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2020, the Company achieved three (3) years of cumulative pretax income in the Brazil federal tax jurisdiction, management determined that there is sufficient evidence to conclude that it is likely that additional deferred taxes are realizable; therefore, the valuation allowance was reduced accordingly. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing net deferred tax assets. For the U.S. based net deferred tax assets, which are approximately $1.9 million, management continues to monitor its operating performance and currently believes that the achievement of the required future taxable income necessary to realize these deferred assets is more likely than not. Key considerations in this assessment includes current tax law that is expected to continue to generate future U.S. taxable income based on the results of our foreign operations (GILTI tax), our expectation of continued improvements in U.S. operating results and the period of time available to generate future taxable income. A reconciliation of the beginning and ending amount of uncertain tax position reserves is as follows (in thousands):
|  | Year Ended December 31, |
|  | 2021 |  |  | 2020 |
Beginning balance |  | $ | 13 |  |  | $ | 8 |
Current year provision |  | $ | 29 |  |  | $ | 5 |
Removal for tax provisions of prior years |  | $ | - |  |  |  | – |
Ending balance |  | $ | 42 |  |  | $ | 13 |
Interest and penalties that the tax law requires to be paid on the underpayment of taxes should be accrued on the difference between the amount claimed or expected to be claimed on the return and the tax benefit recognized in the financial statements. The Company's policy is to record this interest and penalties as additional tax expense. Details of the Company's tax reserves at December 31, 2021, are outlined in the table below (in thousands):
|  | Taxes |  |  | Interest |  |  | Penalty |  |  | Total Tax Liability |
Domestic |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State |  | $ | 42 |  |  | $ | 14 |  |  | $ | 13 |  |  | $ | 69 |
Federal |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |
International |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |
Total reserve |  | $ | 42 |  |  | $ | 14 |  |  | $ | 13 |  |  | $ | 69 |
In management's view, the Company's tax reserves at December 31, 2021 and 2020, for potential domestic state tax liabilities were sufficient. The Company has evaluated the tax liabilities of its international subsidiaries and does not believe a reserve is necessary at this time. SPAR and its subsidiaries file numerous consolidated, combined and separate company income tax returns in the U.S. Federal jurisdiction and in many U.S. states and foreign jurisdictions. With few exceptions, SPAR is subject to U.S. Federal, state and local income tax examinations for the years 2018 through the present. Foreign entities are subject to tax audits that vary based on jurisdiction. However, tax authorities have the ability to review years prior to the position taken by the Company to the extent that SPAR utilized tax attributes carried forward from those prior years. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions, among others, addressing the carryback of net operating losses for specific periods, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property. Additionally, the CARES Act, in efforts to enhance business' liquidity, provides for the deferral of the employer-paid portion of social security taxes. As of December 31, 2021, the Company has elected to defer the employer-paid portion of social security taxes of $686,000, which is included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets. The balance as of December 31, 2020 was $1.3 million.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI http://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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