Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

v3.24.0.1
INCOME TAXES
 12 Months Ended
Dec. 31, 2023
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) 2023 2022 2021
Current
U.S. Federal $ (2,573) $ 5,338  $ (1,713)
State 937  (153) (667)
Foreign 1,600  750  1,439 
Current (36) 5,935  (941)
Deferred
U.S. Federal (336) 113  (237)
State 583  (239) (87)
Foreign (101) 145  (117)
Deferred 146  19  (441)
Total $ 110  $ 5,954  $ (1,382)
The effective tax rates differ from the statutory federal income tax rate as follows:
2023 2022 2021
Statutory Federal Income Tax Rate 21.0  % 21.0  % 21.0  %
Permanent Items
Stock Compensation Expense (1.4) % (2.2) % (2.1) %
Contingent Consideration Liability Fair Value Adjustment —  % —  % 1.7  %
Other (1.4) % (0.3) % (0.7) %
Foreign Tax Rate Differential (0.4) % (2.8) % (2.7) %
State Income Tax, Net of Federal Income Tax Effect (4.6) % 1.0  % 2.2  %
Research and Development Tax Credits 14.1  % 7.7  % 12.8  %
Change in Valuation Allowance (26.1) % (44.6) % (29.8) %
Net GILTI and FDII Tax (Benefit) Expense (1.0) % 1.8  % —  %
Foreign Tax Credit for Dividend Withholding —  % (1.5) % 1.7  %
Tax Rate Change on 2020 Federal Net Operating Loss (NOL) Carryback —  % —  % 0.9  %
Other (0.6) % (0.1) % 0.1  %
Effective Tax Rate (0.4) % (20.0) % 5.1  %
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) 2023 2022
Deferred Tax Assets:
Asset Reserves $ 19,609  $ 17,680 
Deferred Compensation 6,968  6,798 
Section 163(j) - Interest Expense Limitation 1,777  — 
State Investment and Research and Development Tax Credit Carryforwards, Net of Federal Tax 1,430  1,128 
Customer Advanced Payments and Deferred Revenue 870  1,917 
Net Operating Loss Carryforwards and Other 11,178  11,307 
Goodwill and Intangible Assets 1,001  1,277 
ASC 606 Revenue Recognition 92  197 
Research & Development Costs 25,659  19,892 
Lease Liabilities 6,952  3,201 
Other 5,308  6,135 
Total Gross Deferred Tax Assets 80,844  69,532 
Valuation Allowance (65,640) (57,369)
Deferred Tax Assets 15,204  12,163 
Deferred Tax Liabilities:
Depreciation 8,593  8,886 
ASC 606 Revenue Recognition - Section 481(a) Adjustment 227  525 
Lease Assets 6,595  2,905 
Earnout Income Accrual 99  — 
Other 997  1,005 
Deferred Tax Liabilities 16,511  13,321 
Net Deferred Tax Liabilities $ (1,307) $ (1,158)
The net deferred tax assets and liabilities presented in the Consolidated Balance Sheets are as follows at December 31:
(In thousands) 2023 2022
Other Assets — Long-term $ —  $ 712 
Deferred Tax Liabilities — Long-term (1,307) (1,870)
Net Deferred Tax Liabilities $ (1,307) $ (1,158)
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 $65.6 million, $57.4 million, and $43.5 million during the years ended December 31, 2023, 2022 and 2021, respectively, for the portion of deferred tax asset 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 $5.8 million and $19.9 million during the years ended December 31, 2023 and 2022, respectively. The Company maintains a full valuation allowance against this deferred tax asset.
At December 31, 2023, gross federal net operating losses amounted to approximately $1.9 million, which are subject to annual limitations under Internal Revenue Code Section 382. Of these net operating losses, $1.5 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, 2023, gross state net operating loss carryforwards amounted to approximately $138.6 million. These state net operating loss carryforwards begin to expire at various dates from 2023 through 2043. The Company maintains a full valuation allowance against this deferred tax asset.
At December 31, 2023, state income tax credit carryforwards amounted to approximately $0.9 million and begin to expire at various dates from 2023 to 2040. Additionally, the Company has approximately $0.2 million of foreign tax credits that it can carry forward through 2027 and approximately $0.5 million of research and development tax credits that it can carry forward through 2043. 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) 2023 2022 2021
Balance at Beginning of the Year $ 443  $ 1,412  $ 1,890 
Decreases as a Result of Tax Positions Taken in Prior Years (343) (969) (478)
Balance at End of the Year $ 100  $ 443  $ 1,412 
There are no material penalties or interest liabilities accrued as of December 31, 2023, 2022, or 2021, nor are any material penalties or interest costs included in expense for each of the years ended December 31, 2023, 2022 and 2021. 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 2023 for federal purposes and 2017 through 2023 for state purposes.
Pretax income (loss) from the Company’s foreign subsidiaries amounted to approximately $6.5 million, $0.1 million and $(3.3) million for 2023, 2022 and 2021, 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, 2023 and 2022, we determined that we can no longer assert indefinite reinvestment on
approximately $1.9 million and $3.4 million of the unremitted earnings of Luminescent Systems Canada Inc, respectively. As a result, we have recorded a deferred tax liability of approximately $0.1 million and $0.2 million at December 31, 2023 and 2022, 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 $13.6 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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the economic uncertainty resulting from the COVID-19 pandemic. The CARES Act includes many measures to assist companies, including temporary changes to income and non-income based laws, some of which were enacted as part of the Tax Cuts and Jobs Act of 2017 (“TCJA”). Some of the key changes include eliminating the 80% of taxable income limitation by allowing corporate entities to fully utilize NOLs to offset taxable income in 2018, 2019 and 2020, allowing NOLs originating in 2018, 2019 and 2020 to be carried back five years, enhanced interest deductibility, and retroactively clarifying the immediate recovery of qualified improvement property costs rather than over a 39-year recovery period. During the year ended December 31, 2021, the Company recorded a tax benefit relating to the NOL carryback provisions and the technical correction for qualified improvement property provided for in the CARES Act of approximately $0.3 million. No tax benefit was recorded for the years ending December 31, 2023 and 2022.
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, 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 are expected to be enacted beginning January 1, 2024. The Company will continue to monitor the impact of Pillar Two; however, the Pillar Two is currently not applicable as the Company does not meet the threshold of having consolidated revenue over €750 million.