Note 9 - Income Taxes

9 Months Ended

Sep. 25, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

9. Income Taxes

For the three and nine months ended September 25, 2021, we used the estimated annual effective tax rate (“ETR”) expected to be applicable for the full fiscal year in computing our tax provision. The ETR on income from continuing operations for the three and nine months ended September 25, 2021 was 23.7% and 16.4%, respectively, and reflects a partial release of our domestic valuation allowance on deferred tax assets to offset tax liabilities on current year earnings, and an excess benefit relating to stock-based compensation. For the three and nine months ended September 26, 2020, we determined that a reliable estimate of the annual ETR could not be made, since relatively small changes in our projected income produce a significant variation in our ETR, and instead used the actual ETR for the year-to-date period to calculate our tax provision. The ETR on loss from continuing operations for the three and nine months ended September 26, 2020 was (20.2)% and (0.9)%, respectively, and primarily reflected the lack of a tax benefit on our domestic losses as a result of our valuation allowance on deferred tax assets, and non-deductible expenses relating to stock-based compensation.

We conduct business globally and as a result, Cohu or one or more of its subsidiaries files income tax returns in the US and various state and foreign jurisdictions. In the normal course of business, we are subject to examinations by taxing authorities throughout the world and are currently under examination in Germany, Malaysia and the Philippines. We believe our financial statement accruals for income taxes are appropriate.

In accordance with the disclosure requirements as described in ASC Topic 740, Income Taxes, we have classified unrecognized tax benefits as non-current income tax liabilities, or a reduction in non-current deferred tax assets, unless expected to be paid within one year. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. There were no material changes to our unrecognized tax benefits and interest accrued related to unrecognized tax benefits during the three and nine months ended September 25, 2021. There were no material changes to our unrecognized tax benefits and interest accrued related to unrecognized tax benefits during the three and nine months ended September 26, 2020.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carry back net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three and nine-month period ended September 25, 2021, or to our net deferred tax assets as of September 25, 2021.