Note 7 - Income Taxes

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

(7) Income Taxes

For the years ended December 31, 2020, 2019, and 2018, income before income taxes consists of the following:

	2020		2019		2018
	(In thousands)
U.S. Operations	$	41,357	$	40,045	$	32,056
Foreign Operations		110		474		2,653
Income before income taxes	$	41,467	$	40,519	$	34,709

Income tax expense consisted of the following components:

	2020			2019		2018
	(In thousands)
Federal:
Current	$	3,546		$	5,574	$	2,144
Deferred		(308	)		718		1,328
Total	$	3,238		$	6,292	$	3,472
Foreign:
Current	$	225		$	94	$	882
Deferred		(6	)		33		(178	)
Total	$	219		$	127	$	704
State:
Current	$	578		$	1,322	$	204
Deferred		172			372		282
Total	$	750		$	1,694	$	486
Total	$	4,207		$	8,113	$	4,662

Federal Tax Reform

On December 22, 2017, the Tax Cut and Jobs Act (the “Tax Act”) was enacted which made broad and complex changes to the U.S. tax code, including the following:

● Reduction in the U.S. Federal Corporate Tax Rate: The Tax Act reduced the corporate tax rate to 21%, effective
January 1, 2018

● Availability of 100% bonus depreciation on assets placed in service after September 27, 2017

● Certain stock compensation plans potentially subject to limitations on excess tax benefits

● The Global Intangible Low Taxed Income (GILTI) provision

As a result of the Tax Act, we determined that we would no longer indefinitely reinvest the earnings of our Canadian subsidiary. Our Canadian subsidiary declared a deemed dividend to the Company for $9.6 million and $3 million in 2020 and 2018, respectively. Additionally, a withholding tax of 5% was paid for each dividend distribution.

The Tax Act subjects a U.S. corporation to tax on its Global Intangible Low Taxed Income (“GILTI”). Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act. Under Generally Accepted Accounting Principles, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into the measurement of deferred taxes. We elected the current period expense method and have not reflected any corresponding deferred tax assets and liabilities associated with the GILTI tax in the table of deferred tax assets and liabilities. GILTI tax has been recorded as current period expense of $10,000, $13,000, and $40,000 in 2020, 2019, and 2018, respectively.

We received notice in December 2019, that we met qualification requirements for the Nebraska Advantage LB312 Act (“NAA”) related to certain investment and full-time equivalent employee thresholds in the year ended 2017. NAA provides direct refunds of sales tax on qualified property, as well as investment credits and employment credits that can be claimed through credits of Nebraska income tax, employment tax, and sales tax on non-qualified property. We will receive direct refunds of Nebraska sales tax on qualified property incurred from 2014 to 2023. Investment credits started to accumulate in 2014 and can be earned through 2023. These credits can be claimed against Nebraska income taxes or through sales tax on non-qualified property through 2028. The employment credits are earned from 2017 through 2023, and they can be claimed against Nebraska payroll taxes through 2028. In 2019, we recorded cumulative adjustments for direct refunds and credits earned through the year ending December 31, 2019, which reduced operating expenses by approximately $1.9 million. For the year ended December 31, 2020, adjustments for credits reduced operating expenses by approximately $435,000. In addition, income tax credits of $45,000 and $24,000 were recorded as a reduction to income tax expense for the years ended December 31, 2020 and 2019, respectively.

The differences between income taxes expected at the U.S. federal statutory income tax rate of 21 percent and the reported income tax (benefit) expense are summarized as follows:

	2020			2019			2018
	(In thousands)
Expected federal income taxes	$	8,708		$	8,509		$	7,285
Foreign tax rate differential		6			26			146
State income taxes, net of federal benefit and state tax credits		607			1,344			376
Share-based compensation		(5,713	)		(1,579	)		(3,041	)
Compensation limit for covered employees		463			--			--
Federal tax credits		(261	)		(419	)		(150	)
Uncertain tax positions		157			34			90
Nondeductible expenses (income) related to recapitalization		--			(24	)		151
Goodwill Impairment		184			--			--
Tax depreciation method change		--			--			(308	)
Withholding tax on repatriation of foreign earnings		18			107			--
GILTI		10			13			40
Other		28			102			73
	$	4,207		$	8,113		$	4,662

Deferred tax assets and liabilities at December 31, 2020 and 2019, were comprised of the following:

	2020			2019
	(In thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	29		$	35
Accrued expenses		696			537
Share-based compensation		735			1,267
Accrued bonuses		145			120
Employer payroll tax deferral		323			--
Foreign tax credit from repatriation		--			535
Other		27			--
Gross deferred tax assets		1,955			2,494
Less valuation allowance		--			(535	)
Deferred tax assets		1,955			1,959
Deferred tax liabilities:
Prepaid expenses		93			135
Deferred contract costs		1,111			990
Property and equipment		1,725			1,926
Intangible assets		6,109			5,553
Repatriation withholding		174			528
Unrealized translation gain on intercompany loan		--			214
Other		8			12
Deferred tax liabilities		9,220			9,358
Net deferred tax liabilities	$	(7,265	)	$	(7,399	)

In March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak which, among other things, contains numerous income tax provisions. As a result of the CARES Act, we have deferred $1,323,000 of employer social security tax payments into future years. We have had no other impacts to our consolidated financial statements or related disclosures from the CARES Act.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable income, carry-back opportunities, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences excluding the foreign tax credit carryforward. In 2020, we wrote off the deferred tax asset for prior year foreign tax credit carryforwards of $535,000 and the related valuation allowance. We made the assessment that due to our Canadian subsidiary’s decreased projected future income and the lower US tax rate compared to the Canadian tax rate, it was unlikely we would realize this asset.

We had an unrecognized tax benefit at December 31, 2020 and 2019, of $768,000 and $592,000, respectively, excluding interest of $15,000 and $7,000 at December 31, 2020 and 2019, respectively. Of these amounts, $668,000 and $515,000 at December 31, 2020 and 2019, respectively, represents the net unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate. The change in the unrecognized tax benefits for 2020 and 2019 is as follows:

	(In thousands)
Balance of unrecognized tax benefits at December 31, 2018	$	554
Reductions due to lapse of applicable statute of limitations		(43	)
Reductions due to tax positions of prior years		--
Reductions due to settlement with taxing authorities		(300	)
Additions based on tax positions related to the current year		381
Balance of unrecognized tax benefits at December 31, 2019	$	592
Reductions due to lapse of applicable statute of limitations		(34	)
Additions due to tax positions of prior years		4
Reductions due to settlement with taxing authorities		--
Additions based on tax positions related to the current year		206
Balance of unrecognized tax benefits at December 31, 2020	$	768

We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and Canada federal and provincial jurisdictions. Tax years 2017 and forward remain subject to U.S. federal examination. Tax years 2014 and forward remain subject to state examination. Tax years 2016 and forward remain subject to Canadian federal and provincial examination.