13. Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act includes provisions, among others, allowing for the carryback of net operating losses generated in tax years 2018, 2019 and 2020, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expense, and technical corrections so that qualified improvement property can be immediately expensed under IRC § 168(k) and net operating losses arising in tax years beginning in 2017 and ending in 2018 can be carried back two years and forward twenty years.

The Loss before (benefit) provision for income taxes consisted of (in thousands):

	Year Ended April 30,
	2020			2019
U.S.	$	(11,768	)	$	(4,713	)
Foreign		-			2,240
	$	(11,768	)	$	(2,473	)

The (benefit) provision for income taxes consisted of the following (in thousands):

	Year Ended April 30,
	2020			2019
Current:
Federal	$	(1,713	)	$	8
Foreign		-			196
State		(37	)		99
Current (benefit) provision		(1,750	)		303
Deferred:
Federal		9			-
Foreign		-			(247	)
State		(1	)		-
Deferred tax (benefit)		8			(247	)

Total (benefit) provision	$	(1,742	)	$	56

The following table reconciles the reported income tax (benefit) expense, recorded primarily due to the (i) enactment of the CARES Act, which allowed the Company to recognize a tax benefit for a portion of its pretax loss, (ii) state and local taxes, (iii) and a change in the valuation allowance, with the amount computed using the federal statutory income tax rate (in thousands):

	Year Ended April 30,
	2020			2019
Statutory rate	$	(2,471	)	$	(519	)
State and local tax		(417	)		(32	)
Valuation allowance on deferred tax assets		2,009			1,419
Effect of foreign operations		-			(51	)
Nondeductible expenses		(134	)		87
Sale of Subsidiary Stock		-			(863	)
Uncertain tax positions		-			101
Nontaxable life insurance cash value increase		(73	)		(120	)
Tax credits		(46	)		(28	)
Change in tax rate		(120	)		225
Impact of CARES Act		(592	)		-
Other items		102			(163	)
Total (benefit) expense	$	(1,742	)	$	56

The components of deferred taxes are as follows (in thousands):

	Year Ended April 30,
	2020			2019
Deferred tax assets:
Employee benefits	$	4,794		$	5,092
Inventory		1,904			1,649
Accounts receivable		207			204
Tax credits		1,610			1,300
Other assets		1,073			148
Lease Liability		2,807			-
Capital Loss carry-forward		2,515			2,455
Net operating loss carryforwards		6,185			5,556
Total deferred tax asset		21,095			16,404
Deferred tax liabilities:
Property, plant and equipment		(1,518	)		(1,344	)
Right of use asset		(2,696	)
Other liabilities		(193	)		(343	)
Deferred state income tax		(842	)		(767	)
Net deferred tax asset		15,846			13,950
Valuation allowance		(15,854	)		(13,950	)
Net deferred tax (liability) asset	$	(8	)	$	-

In assessing the potential for realization of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. A valuation allowance, if needed, reduces the deferred tax assets to the amounts expected to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating loss carryforwards can be utilized. We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. As of April 30, 2020 and 2019, we have a full valuation allowance against our U.S. net deferred tax assets. If these estimates and assumptions change in the future, the Company may be required to reduce its existing valuation allowance resulting in less income tax expense.

For the year ended April 30, 2020, the valuation allowance increased by approximately $1.9 million from the prior year primarily due to the portion of the fiscal year ended April 30, 2020 pretax loss for which no tax benefit was provided.

The Company may amortize indefinite-lived intangible assets for tax purposes which are not amortizable for financial reporting purposes. As a result of the technical correction to net operating losses in the CARES Act, the Company recorded a deferred tax liability related to the tax effect of differences between financial reporting and tax bases of intangible assets that are not expected to reverse within the Company’s net operating loss carryforward periods. The utilization of indefinite lived net operating losses are limited to 80% of taxable income in an annual period.

As of April 30, 2020, the Company has U.S. federal net operating losses of $24.6 million of which $16.4 million begins to expire in Fiscal 2026 through 2038, including $3.4 million which is subject to annual limitation under IRC § 382. The remaining U.S. federal net operating losses of $8.2 million have an indefinite carry-forward period. The U.S. federal capital loss carry-forward of $10.0 million expires in 2023. The Company also has state net operating loss carryforwards, U.S. federal R&D tax credits, and state tax credits that expire in various years and amounts.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, is as follows (in thousands):

	2020			2019
Balance at the beginning of the fiscal year	$	1,258		$	1,264
Additions based on positions taken in the fiscal year ended April 30, 2020		15			-
Additions based on positions taken in prior years		119			142
Decreases based on positions taken in prior years		(2	)		(119	)
Lapse in statute of limitations		(36	)		(29	)
Balance at the end of the fiscal year	$	1,354		$	1,258

The entire amount reflected in the table above at April 30, 2020, if recognized, would reduce our effective tax rate. The effects of uncertain tax positions embedded in net operating losses would not affect the effective tax rate if the unrecognized tax benefits are resolved while a full valuation allowance is maintained. As of April 30, 2020, and 2019, the Company had $119,000 and $64,000, respectively, accrued for the payment of interest and penalties. For the fiscal years ended April 30, 2020 and 2019, the Company recognized interest and penalties of $60,000 and $54,000, respectively. Although it is difficult to predict or estimate the change in the Company’s unrecognized tax benefits over the next twelve months, the Company believes that it is reasonably possible that decreases in unrecognized tax benefits of up to $1.3 million may be recognized during the next twelve months.

The Company is subject to taxation in the U.S. federal, various state and local, and foreign jurisdictions. The Company is no longer subject to examination of its U.S. federal income tax returns by the Internal Revenue Service for fiscal years 2016 and prior. The Company is no longer subject to examination by the taxing authorities in foreign jurisdictions for fiscal years 2016 and prior. Net operating losses and tax attributes generated by domestic and foreign entities in closed years and utilized in open years are subject to adjustment by the tax authorities.