Annual report [Section 13 and 15(d), not S-K Item 405]

INCOME TAXES

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INCOME TAXES
 12 Months Ended
Dec. 31, 2024
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for the amount of tax benefits which are not more likely than not to be realized.
The provision for (benefit from) income taxes at December 31 consists of the following:
(In thousands) 2024 2023 2022
Current
U.S. Federal $ 6,026  $ (2,573) $ 5,338 
State 985  937  (153)
Foreign 1,357  1,600  750 
Current 8,368  (36) 5,935 
Deferred
U.S. Federal (14) (336) 113 
State (98) 583  (239)
Foreign 92  (101) 145 
Deferred (20) 146  19 
Total $ 8,348  $ 110  $ 5,954 
The effective tax rates differ from the statutory federal income tax rate as follows:
2024 2023 2022
Statutory Federal Income Tax Rate 21.0  % 21.0  % 21.0  %
Permanent Items
Stock Compensation Expense (2.0) % (1.4) % (2.2) %
Meals and Entertainment (1.7) % —  % —  %
Parking Expenses (1.4) % —  % —  %
Other (7.4) % (1.4) % (0.3) %
Foreign Tax Rate Differential 7.1  % (0.4) % (2.8) %
State Income Tax, Net of Federal Income Tax Effect (8.9) % (4.6) % 1.0  %
Research and Development Tax Credits 47.4  % 14.1  % 7.7  %
Change in Valuation Allowance (172.7) % (26.1) % (44.6) %
Net GILTI and FDII Tax Expense (Benefit) 16.4  % (1.0) % 1.8  %
Foreign Tax Credit for Dividend Withholding —  % —  % (1.5) %
Penalties (3.1) % —  % —  %
Other (0.8) % (0.6) % (0.1) %
Effective Tax Rate (106.1) % (0.4) % (20.0) %
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as tax attributes.
Significant components of the Company’s deferred tax assets and liabilities at December 31, are as follows:
(In thousands) 2024 2023
Deferred Tax Assets:
Asset Reserves $ 22,293  $ 19,609 
Deferred Compensation 6,096  6,968 
Section 163(j) - Interest Expense Limitation 2,982  1,777 
State Investment and Research and Development Tax Credit Carryforwards, Net of Federal Tax 1,093  1,430 
Customer Advanced Payments and Deferred Revenue 257  870 
Net Operating Loss Carryforwards and Other 10,060  11,178 
Goodwill and Intangible Assets 890  1,001 
ASC 606 Revenue Recognition 374  92 
Research & Development Costs 35,061  25,659 
Lease Liabilities 6,059  6,952 
Other 6,941  5,308 
Total Gross Deferred Tax Assets 92,106  80,844 
Valuation Allowance (78,659) (65,640)
Deferred Tax Assets 13,447  15,204 
Deferred Tax Liabilities:
Depreciation 7,771  8,593 
ASC 606 Revenue Recognition - Section 481(a) Adjustment 113  227 
Lease Assets 5,695  6,595 
Earnout Income Accrual 102  99 
Other 1,041  997 
Deferred Tax Liabilities 14,722  16,511 
Net Deferred Tax Liabilities $ (1,275) $ (1,307)
The net deferred tax assets and liabilities presented in the Consolidated Balance Sheets are as follows at December 31:
(In thousands) 2024 2023
Other Assets — Long-term $ 159  $ — 
Deferred Tax Liabilities — Long-term (1,434) (1,307)
Net Deferred Tax Liabilities $ (1,275) $ (1,307)
The Company records a valuation allowance against the deferred tax assets if and to the extent it is more likely than not that the Company will not recover the deferred tax assets. In evaluating the need for a valuation allowance, the Company weighs all relevant positive and negative evidence, and considers among other factors, historical financial performance, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, and tax planning strategies. After considering the losses in recent periods and cumulative pre-tax losses in the three-year period ending with the current year, the Company determined that projections of future taxable income could not be relied upon as a source of income to realize its deferred tax assets. However, the Company is relying on a significant portion of its existing deferred tax liabilities for the realizability of deferred tax assets. As a result, the Company has valuation allowances against its deferred tax assets of approximately $78.7 million, $65.6 million, and $57.4 million during the years ended December 31, 2024, 2023 and 2022, respectively, for the portion of deferred tax assets not realizable by the Company’s existing deferred tax liabilities.
Beginning January 1, 2022, the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the option to deduct research and development expenditures in the current year and now requires taxpayers to capitalize and amortize research and development costs pursuant to Internal Revenue Code (“IRC”) Section 174. The capitalized expenses are amortized over a 5-year period for domestic expenses and a 15-year period for foreign expenses. As a result of this provision of the TCJA, deferred tax assets related to capitalized research expenses increased by approximately $9.4 million and $5.8 million during the years ended December 31, 2024 and 2023, respectively. The Company maintains a full valuation allowance against this deferred tax asset.
At December 31, 2024, gross federal net operating losses amounted to approximately $1.1 million, which are subject to annual limitations under Internal Revenue Code Section 382. Of these net operating losses, $0.7 million expire in 2038 and the remaining $0.4 million will carryforward indefinitely. The Company maintains a full valuation allowance against this deferred tax asset.
At December 31, 2024, gross state net operating loss carryforwards amounted to approximately $132.6 million. Of these state net operating loss carryforwards, $118.9 million begin to expire at various dates from 2024 through 2044 and the remaining $13.7 million will carryforward indefinitely. The Company maintains a full valuation allowance against this deferred tax asset.
At December 31, 2024, state income tax credit carryforwards amounted to approximately $1.1 million and begin to expire at various dates from 2024 to 2040. Additionally, the Company has approximately $0.2 million of foreign tax credits that it can carry forward through 2027. The Company maintains a full valuation allowance against these credits.
The Company has analyzed its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. Should the Company need to accrue a liability for uncertain tax benefits, any interest and penalties associated with that liability would be recorded as income tax expense. A reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:
(in thousands) 2024 2023 2022
Balance at Beginning of the Year $ 100  $ 443  $ 1,412 
Decreases as a Result of Tax Positions Taken in Prior Years (100) (343) (969)
Balance at End of the Year $ —  $ 100  $ 443 
There are no material penalties or interest liabilities accrued as of December 31, 2024, 2023, or 2022, nor are any material penalties or interest costs included in expense for each of the years ended December 31, 2024, 2023 and 2022. The years under which we conducted our evaluation coincided with the tax years currently still subject to examination by major federal and state tax jurisdictions, those being 2019 through 2024 for federal purposes and 2017 through 2024 for state purposes.
Pretax income from the Company’s foreign subsidiaries amounted to approximately $9.6 million, $6.5 million and $0.1 million for 2024, 2023 and 2022, respectively. The balance of pretax earnings or loss for each of those years were domestic.
Historically, we have asserted that the unremitted earnings of our foreign subsidiaries were indefinitely reinvested. However, for the years ended December 31, 2024 and 2023, we determined that we could no longer assert indefinite reinvestment on approximately $3.0 million and $1.9 million of the unremitted earnings of Luminescent Systems Canada Inc., respectively. As a result, we have recorded a deferred tax liability of approximately $0.2 million and $0.1 million at December 31, 2024 and 2023 respectively, related to local country withholding taxes that are expected to be incurred upon ultimate repatriation of such earnings. All other foreign unremitted earnings, which total approximately $18.7 million, continue to be indefinitely reinvested. We continue to be permanently reinvested in outside basis differences other than unremitted earnings as we have no plans to liquidate or sell any foreign subsidiaries. In addition, we have not provided deferred taxes on any outside basis differences of our domestic subsidiaries as we have the ability and intent to recover these basis differences in a tax-free manner. It is not practicable to determine the amount of unrecognized deferred tax related to these basis differences.
The Inflation Reduction Act of 2022 (IRA) was signed into law on August 16, 2022. Key provisions under the IRA include a 15% corporate alternative minimum tax imposed on certain large corporations and the extension and expansion of clean energy tax incentives. There were no impacts related to the IRA recorded for the years ending December 31, 2024, 2023, and 2022.
Under an Organization for Economic Co-operation and Development Inclusive Framework, countries that agreed to enact a two-pillar solution aim to address the challenges arising from the digitalization of the world economy (Pillar Two). Pillar Two sets out global minimum Effective Tax Rate (ETR) rules to ensure that large multinational businesses with consolidated revenue over €750 million are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions. Rules under Pillar Two generally became effective beginning January 1, 2024 in most jurisdictions that have issued legislation. The Company will continue to monitor the impact of Pillar Two; however, Pillar Two is currently not applicable as the Company does not meet the threshold of having consolidated revenue over €750 million in two out of the four preceding years.