Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

8. Income Taxes

The income tax expense (benefit) is summarized as follows:

	Years Ended December 31,
	2022		2021
Current:
Federal	$	0	$	0
State		0		3
		0		3
Deferred:
Federal		0		184
State		0		0
		0		184
	$	0	$	187

A reconciliation of the statutory U.S. income tax rate to the effective income tax rate follows:

	Years Ended December 31,
	2022			2021
Statutory U.S. income tax rate		(21.00	)%		(21.00	)%
State taxes, net of federal benefit		0.00	%		(.16	)%
Permanent differences		.12	%		(1.31	)%
Change in valuation allowance		23.60	%		(26.32	)%
Change in tax credits and state NOLs		(3.38	)%		16.72	%
Impact from accounting method change and expired options		0.66	%		19.72	%
Effective income tax rate		0.00	%		(12.35	)%

The components of the deferred income tax assets (liabilities) are as follows:

	Years Ended December 31,
	2022			2021
Deferred tax assets:
Operating loss carryforwards	$	2,989		$	984
R&D Tax Credit		2,625			2,233
Section 263A costs		50			38
Amortization		15			18
Net ROU asset and lease liability		63
Unrealized loss		508			442
Asset reserves:
Bad debts		11			11
Inventory allowance		280			292
Accrued expenses:
Non-qualified stock options		159			127
Compensation		86			116
Warranty		1,174			971
Deferred tax assets		7,960			5,235
Less valuation allowance		(3,356	)		(610	)
Total deferred tax assets		4,604			4,625
Deferred tax liabilities:
Depreciation		(488	)		(509	)
Total deferred tax liabilities		(488	)		(509	)
Net deferred tax assets (before unrealized gain)		4,116			4,116
Deferred tax liability: unrealized gain		—			—
Net deferred tax assets	$	4,116		$	4,116

As of December 31, 2022, the Company had a net deferred tax asset of approximately $4,604 (net of valuation allowance) offset by deferred tax liabilities of $488 derived from accelerated tax depreciation. This asset is primarily composed of net operating loss carryforwards (“NOLs”), research and development tax credits, and deferred revenue, net of a valuation allowance of approximately $3,356. The NOLs total approximately $13,088 for federal and $8,604 for state purposes, with expirations starting in 2022 for state purposes. State NOLs of $1,870 expired in 2022.

During 2021, the Company generated $126 of federal NOLs and during 2022, the Company generated $9,261 in additional federal NOLs. The deferred tax asset amounts are based upon management’s conclusions regarding, among other considerations, the Company’s current and anticipated customer base, contracts, and product introductions, certain tax planning strategies, and management’s estimates of future earnings based on information currently available, as well as recent operating results during 2022, 2021, and 2020.  GAAP requires that all positive and negative evidence be analyzed to determine if, based on the weight of available evidence, the Company is more likely than not to realize the benefit of the deferred tax asset.

Management’s analysis of all available evidence, both positive and negative, provides support that the Company does not have the ability to generate sufficient taxable income in the necessary period to utilize the entire benefit for the deferred tax asset.  Accordingly, as of December 31, 2022, a valuation allowance has been established totaling approximately $3,356.

Should the factors underlying management’s analysis change, future valuation adjustments to the Company’s net deferred tax asset may be necessary. If future losses are incurred, it may be necessary to record an additional valuation allowance related to the Company’s net deferred tax asset recorded as of December 31, 2022. It cannot presently be estimated what, if any, changes to the valuation of the Company’s deferred tax asset may be deemed appropriate in the future.  The 2022 federal and state NOLs and tax credit carryforwards could be subject to limitation if, within any three-year period prior to the expiration of the applicable carryforward period, there is a greater than 50% change in ownership of the Company by any stockholder with 5% or greater ownership.

The Company performed a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by GAAP. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return or planned to be taken in a future tax return that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, on January 1, 2023, the Company is not aware of any uncertain tax positions that would require additional liabilities or which such classification would be required. The amount of unrecognized tax positions did not change as of December 31, 2022, and the Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.

Penalties and tax-related interest expense, of which there were no material amounts for the years ended December 31, 2022 and 2021, are reported as a component of income tax expense (benefit).

The Company files federal income tax returns, as well as multiple state and local jurisdiction tax returns. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution on any particular uncertain tax position, the Company believes that its allowances for income taxes reflect the most probable outcome. The Company adjusts these allowances, as well as the related interest, in light of changing facts and circumstances. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and the effective tax rate in the period of resolution. The calendar years 2019, 2020, and 2021 are still open to IRS examination under the statute of limitations.  The last IRS examination on the Company’s 2007 calendar year was closed with no change.