Income Taxes

12 Months Ended

Jun. 30, 2021

Income Taxes

Income Taxes

NOTE 7 - Income Taxes

The provision for income taxes is comprised of the following as restated (in thousands):

	For the Year ended June 30,
	2021		2020		2019
Current income taxes:
Federal	$	1,912	$	1,765	$	334
State		265		418		151
		2,177		2,183		485
Deferred income tax provision		337		78		789
Provision for income taxes	$	2,514	$	2,261	$	1,274

A reconciliation of the U.S. Federal statutory income tax rate to our actual effective tax rate on earnings before income taxes is as follows for the years ended June 30,as restated (dollars in thousands):

	2021				2020				2019
			% of				% of				% of
			Pre-tax				Pre-tax				Pre-tax
	Amount		Income		Amount		Income		Amount		Income
Tax at Federal statutory rate	$	3,765	21.0	%	$	2,112	21.0	%	$	2,888	21.0	%
Increases (decreases) in taxes resulting from:
Meals and entertainment		29	0.2	%		44	0.4	%		49	0.4	%
State income taxes, net of Federal income tax benefit		135	0.8	%		122	1.2	%		111	0.8	%
Foreign source income not subject to tax		(1,647)	(9.2)	%		(1,089)	(10.8)	%		(1,241)	(9.0)	%
R&D Credit		(523)	(2.9)	%		(523)	(4.7)	%		(408)	(3.0)	%
Foreign withholding tax		205	1.1	%		—	—	%		—	—	%
Release of accrued tax reserves		—	—	%		—	—	%		(151)	(1.1)	%
Uncertain Tax Positions		312	1.7	%		775	7.2	%		—	—	%
IRS examination settlements		—	—	%		832	8.3	%		12	0.1	%
Other, net		238	1.3	%		(12)	(0.1)	%		14	0.1	%
Effective tax rate	$	2,514	14.0	%	$	2,261	22.5	%	$	1,274	9.3	%

Deferred tax assets and deferred tax liabilities at June 30, 2021 and 2020 are as follows as restated (in thousands):

	Deferred Tax Assets (Liabilities)
	2021		2020
Accounts receivable	$	43	$	40
Inventories		314		443
Accrued liabilities		374		262
Stock based compensation expense		102		96
Intangibles		(454)		(300)
Property, plant and equipment		(539)		(484)
Revenue reserves		393		308
Other deferred tax liabilities		(613)		(408)
		(380)		(43)
Valuation allowance		—		—
Net deferred tax liabilities	$	(380)	$	(43)

The Company has identified the United States and New York State as its major tax jurisdictions. Fiscal year 2018 and forward years are still open for examination. In addition, the Company has a wholly-owned subsidiary which operates in a Free Zone in the Dominican Republic (“DR”) and is exempt from DR income tax.

The Company was audited by the IRS for the fiscal year 2016. In July 2019, the Company received Form 4549-A, Income Tax Examination Changes from the IRS proposing an adjustment to income for the fiscal 2016 tax year regarding deemed dividends based on its interpretation of Internal Revenue Code ("IRC") Section 956 arising from the intercompany balances on the books of the Company. In August 2019, the Company filed a formal protest with the IRS requesting an opportunity to appeal the examination findings to the Appeals Office. During fiscal year 2020, the Company settled the issue at Appeals. There was a provision recorded for the federal and state impact of $762,000 and $70,000, respectively.

The Company was audited by the IRS for the fiscal year 2017. The Company received Form 4549-A, Income Tax Examination Changes from the IRS proposing an adjustment to income for the fiscal 2017 tax year regarding deemed dividends based on its interpretation under IRC Section 956 arising from the intercompany balances on the books of the Company. During the third quarter of fiscal 2021, the Company settled the issue and paid the IRS $399,000. The Company reported the results of the IRS exam to all the jurisdictions in which it files and paid taxes and interest totaling $97,000. Subsequent to the quarter end, the Company paid the IRS $68,000 for interest. None of the payments were recorded to expense since liabilities had previously been established.

The provision for income taxes represents Federal, foreign, and state and local income taxes. The effective rate differs from statutory rates due to the effect of tax rates in foreign jurisdictions, state and local income taxes, tax benefit of R&D credits, certain nondeductible expenses, uncertain tax positions, audit settlements and global intangible low-taxed income ("GILTI").

During the year ending June 30, 2021 the Company decreased its reserve for uncertain income tax positions by $208,000. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes. As of June 30, 2021, the Company had accrued interest totaling $63,000 and $678,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. The Company does not expect that its unrecognized tax benefits will significantly change within the next twelve months. The Company claims R&D tax credits on eligible research and development expenditures. The R&D tax credits are recognized as a reduction to income tax expense.

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

	Tax		Interest		Total
Balance of gross unrecognized tax benefits as of July 1, 2018	$	221	$	—	$	221
Decrease to unrecognized tax benefits resulting from release of R&D credits due to the IRS audit		(151)		—		(151)
Increases to unrecognized tax benefits resulting from the generation of additional R&D credits		55		—		55
Balance of gross unrecognized tax benefits as of June 30, 2019	$	125	$	—	$	125
Increase to unrecognized tax benefits resulting from deemed dividends for investments in US property		682		83		765
Increases to unrecognized tax benefits resulting from the generation of additional R&D credits		59		—		59
Balance of gross unrecognized tax benefits as of June 30, 2020	$	866	$	83	$	949
Decrease to unrecognized tax benefits from deemed dividends for investments in US property		(3)		(20)		(23)
Decrease to unrecognized tax benefits resulting from the release of R&D credits due to the settled IRS audit		(185)		—		(185)
Balance of gross unrecognized tax benefits as of June 30, 2021	$	678	$	63	$	741

The Company plans to permanently reinvest a substantial portion of its foreign earnings and as such has not provided withholding tax on the permanently reinvested earnings. The Company has accrued $613,000 for withholding taxes on undistributed earnings that are not permanently reinvested. As of June 30, 2021 the Company had approximately $60.4 million of undistributed earnings of foreign subsidiaries.