Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

Note 12. Income Taxes

Consolidated income before provision for income taxes was income of $20.9 million, $17.6 million and $7.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. We recorded a current tax provision of $2.2 million, $1.1 million and $2.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. The components of the provision for income taxes are summarized below (in thousands):

	Year Ended December 31,
	2022		2021		2020
Current:
Federal	$	848	$	223	$	—
State		34		91		15
Foreign		918		3,119		2,016
Total current		1,800		3,433		2,031
Deferred:
Federal		(591)		(188)		—
State		(4)		(1)
Foreign		980		(2,151)		—
Total deferred		385		(2,340)		—
Total provision for income taxes	$	2,185	$	1,093	$	2,031

A reconciliation of the effective income tax rates and the U.S. statutory federal income tax rate is summarized below:

	Year Ended December 31,
	2022		2021		2020
Statutory federal income tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal tax benefits	0.1		0.4		0.2
Valuation allowance	(19.3)		(25.4)		0.8
Stock-based compensation	0.7		(3.2)		(1.9)
Foreign tax rate differential	(2.6)		(8.6)		2.1
Foreign tax incentives	(3.5)		(3.2)		(3.8)
Foreign income inclusion	18.9		10.4		7.8
Gain from sale of IP	—		16.9		—
Tax effect in equity method loss or gain from unconsolidated affiliates	(3.0)		(2.6)		1.1
Other	(1.8)		0.5		1.4
Effective tax rate	10.5	%	6.2	%	28.7	%

Deferred tax assets and liabilities are summarized below (in thousands):

	As of December 31,
	2022		2021
Deferred tax assets:
Net operating loss carryforwards	$	9,571	$	11,275
Accruals, reserves and other		4,053		6,056
Credit carryforwards		206		358
Operating lease liability		60		125
Gross deferred tax assets		13,890		17,814
Valuation allowance		(11,885)		(15,371)
Total deferred tax assets		2,005		2,443
Deferred tax liabilities:
Operating lease right-of-use assets		(50)		(103)
Total net deferred tax assets (included in other assets)	$	1,955	$	2,340

As of December 31, 2022 we have federal net operating loss (“NOL”) carryforwards of approximately $31.9 million, which will begin to expire in 2025. We have California net operating loss carryforwards of approximately $21,000 as of December 31, 2022.

The deferred tax assets valuation allowance as of December 31, 2022 is attributed to U.S. federal, and state deferred tax assets, which result primarily from future deductible accruals, reserves, NOL carryforwards, and tax credit carryforwards. We believe that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include our history of losses related to domestic operations, and the lack of carryback capacity to realize deferred tax assets. The valuation allowance decreased for the years ended December 31, 2022 and 2021 by $3.5 million and $4.4 million, respectively.

The China Enterprise Income Tax Law (“EIT”) imposes a single uniform income tax rate of 25% on all Chinese enterprises. Our subsidiaries in China have qualified for a preferential 15% tax rate that is available for High and New Technology Enterprises (“HTE”). In order to retain the preferential tax rate, we must meet certain operating conditions, satisfy certain product requirements, meet certain headcount requirements and maintain certain levels of research expenditures. We realized benefits from this 10% reduction in tax rate of $0.9 million, $1.0 million and $1.0 million for 2022, 2021 and 2020, respectively. As of December 31, 2022, the favorable tax rate is still valid for the Company and it will stay the same for next year if there is no change of the business nature. The preferential tax rate that we enjoy could be modified or discontinued altogether at any time, which could materially and adversely affect our financial condition and results of operations.

Our subsidiaries in China also qualify for reduction in their taxable income in China for research and development (“R&D”) expenditures. Government pre-approval is required to claim R&D tax benefits. Any R&D claim is then submitted with the annual corporate income tax for the taxing authorities’ approval. Historically, we didn’t record such benefit until we received the tax refund from the Chinese government. Beginning in 2019, we record the tax benefit in the year it incurs the cost rather than in the year the tax benefit is received. This will better align the costs with the tax benefit. Our consolidated subsidiaries in China have enjoyed various tax holidays since 2000. Benefits under the tax holidays vary by jurisdiction.

Utilization of the NOL and R&D credit carryforwards may be subject to a substantial annual limitation due to ownership changes that might have occurred previously or that could occur in the future, as provided by Section 382 of the Internal Revenue Code of 1986 (“Section 382”), as well as similar state provisions. Ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. If there is a change of control, utilization of our NOL or tax credit carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion of the NOL or research and development credit

carryforwards before utilization. Subsequent ownership changes could further impact the limitation in future years. Until a Section 382 study for the year-ended December 31, 2022 is completed and any limitation known, no amounts are being presented as an uncertain tax position. The Company does not believe that per Section 382 there will be a limitation on the utilization of the net operating loss and tax credit carryforwards. A full valuation allowance has been provided against our NOL carryforwards and R&D credit carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no net impact to the consolidated balance sheets or statements of operations if an adjustment were required.

During fiscal year 2022 and 2021, the amount of gross unrecognized tax benefits was $1.1 million as of December 31, 2022 and 2021. The Company recognizes interest and penalties related to uncertain tax positions as part of the provision for income taxes. To date, such interest and penalties have not been material. All of the unrecognized tax benefit would impact the effective tax rate in future periods if recognized.

We comply with the laws, regulations, and filing requirements of all jurisdictions in which we conduct business. We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions.

We file income tax returns in the U.S. federal, various states and foreign jurisdictions. Currently, there is no tax audit in any of the jurisdictions and we do not expect there will be any significant change to this.

On December 27, 2020, a new $900 billion Coronavirus relief bill was signed into law by the President of the United States. The bill includes updates to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Employee Social Security Deferral and the Paycheck Protection Program. The Coronavirus relief bill had a de minimis effect on our consolidated financial statements.

On August 9, 2022, Congress passed the CHIPS Act of 2022 to strengthen domestic semiconductor manufacturing, design and research, fortify the economy and national security, and reinforce America’s chip supply chains. The CHIPS Act provides for a new 25% advanced manufacturing investment credit for investments in semiconductor manufacturing and for the manufacture of certain equipment required in the semiconductor manufacturing process. Since the Company has all its manufacturing in China, the Company will not qualify for the investment credit.

On August 16, 2022, President Biden signed the Inflation Reduction Act into law. The law is intended to address inflation by paying down the national debt, lower consumer energy costs, provide incentives for the production of clean energy and reduce health care costs. The new law imposes a 1% excise tax on corporate buybacks, based on Brown’s Stock Buyback Accountability Act. The Company currently has no plans to buy back its stock. Effective for tax years beginning after December 31, 2022, the act requires corporations with over $1 billion in profits to pay a minimum tax of 15% on their adjusted financial statement income. The Company does not qualify for the Inflation Reduction Act.