Note G - Income Taxes

12 Months Ended

Jun. 30, 2023

Notes to Financial Statements

Income Tax Disclosure [Text Block]

G. Income Taxes

During fiscal 2023, we recorded U.S.-based domestic tax expense of $0.8 million and foreign tax expense of $0.2 million. During fiscal 2022, we recorded U.S.-based domestic tax expense of $2.0 million and foreign tax expense of $0.9 million.

The following is a geographical breakdown of income before income taxes (in thousands):

	2023		2022
United States	$	2,588	$	9,152
Foreign		967		4,507
Total income before income taxes	$	3,555	$	13,659

The provision for income taxes for the years ended June 30 consisted of the following (in thousands):

	2023			2022
Current:
Federal	$	843		$	1,297
State		211			(1	)
Foreign		221			900
		1,275			2,196
Deferred:
Federal		(246	)		501
State		4			250
Foreign		—			—
		(242	)		751
Total provision for income taxes	$	1,033		$	2,947

Net deferred tax assets and deferred tax liabilities as of June 30 were as follows (in thousands):

	2023			2022
Deferred tax assets:
Inventory capitalization	$	220		$	373
Inventory reserves		164			113
Lease liability		2,018			2,139
Net operating loss carry forward		433			242
Accrued compensation		166			458
Capitalized research and experimentation		412			—
Accrued contingent fee		219			—
Stock-based compensation		81			66
Forward contracts		56			—
Tax credit carry forward		229			43
Allowance for bad debt		1			795
Interest expense		103			—
Other, net		87			—
Total gross deferred tax assets		4,189			4,229
Deferred tax liabilities:
Withholding taxes		(401	)		(1,133	)
Fixed assets		(1,451	)		(1,523	)
Forward contracts		—			(541	)
Lease asset		(1,951	)		(2,073	)
Other, net		(31	)		(179	)
Deferred tax liabilities		(3,834	)		(5,449	)
Net deferred tax assets (liabilities)	$	355		$	(1,220	)

At June 30, 2023, we had state tax net operating loss carry forwards of approximately $5.6 million. Under California Assembly Bill 85, effective June 29, 2020, net operating loss deductions were suspended for tax years beginning in 2019, 2020, and 2021 and the carry forward periods of any net operating losses not utilized due to such suspension were extended. California Senate Bill 113, effective February 9, 2022, reinstates net operating loss deductions in tax years beginning in 2022. Our state tax loss carry forwards will begin to expire in fiscal 2031, unless used before their expiration.

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the annual use of the net operating loss carry forwards and research and development tax credits could be limited by any greater than 50% ownership change during any three-year testing period. We did not have any ownership changes that met this criterion during the fiscal years ended June 30, 2023 and June 30, 2022.

We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended June 30, 2015 and forward are subject to examination by the U.S. tax authorities. Our tax years for the fiscal years ended June 30, 2018 and forward are subject to examination by the state tax authorities. Our tax years for the fiscal year ended June 30, 2022 and forward are subject to examination by the Swiss tax authorities.

NAIE’s effective tax rate for the fiscal year ended  June 30, 2023 for Swiss federal, cantonal and communal taxes is approximately 23%.

As part of the Tax Cuts and Jobs Act of 2017 (the Tax Act), we were required to recognize a one-time deemed repatriation transition tax during the fiscal year ended June 30, 2018 based on our total post-1986 earnings and profits (E&P) from our Swiss subsidiary, NAIE. This accumulated E&P amount has historically been considered permanently reinvested thereby allowing us to defer recognizing any U.S. income tax on the amount. We no longer consider undistributed foreign earnings from NAIE as of December 31, 2017 as indefinitely reinvested. We consider earnings accumulated subsequent to December 31, 2017 as indefinitely reinvested.

For tax years commencing on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017, also eliminates the ability to immediately deduct research and development costs. Instead, taxpayers are mandated to capitalize these expenses and amortize them over five years for research conducted within the United States and 15 years for research conducted abroad, as stipulated in IRC Section 174. There is ongoing consideration in Congress for legislation that may revoke or postpone this capitalization and amortization requirement; however, there is no guarantee that this provision will undergo repeal or any other form of modification. Should this requirement remain unchanged, it will result in a reduction of our tax deduction for research and development expenses in the forthcoming years. During fiscal 2023, NAIE declared and paid dividends to NAI in the amount of $14.7 million. This amount is part of the undistributed earnings that we recorded a one-time deemed repatriation transition tax on in fiscal 2018 and therefore we did not recognize any additional tax on this dividend in fiscal 2023. However, as part of this dividend, we were required to pay a 5% Swiss withholding tax totaling $0.7 million, which was also accrued for as part of the implementation of the Tax Act in fiscal 2018.

A reconciliation of our income tax provision computed by applying the statutory federal income tax rate of 21% for fiscal 2023 and for fiscal 2022 to net income before income taxes for the year ended June 30 is as follows (dollars in thousands):

	2023			2022
Income taxes computed at statutory federal income tax rate	$	749		$	2,868
State income taxes, net of federal income tax expense		90			174
Permanent differences		8			85
Foreign tax rate differential		18			(47	)
Tax credits		(347	)		(124	)
FDII export sales incentive		—			(46	)
Stock based compensation		61			37
Global intangible low-taxed income (GILTI)		355			—
Return to provision - differences		99
Income tax provision as reported	$	1,033		$	2,947
Effective tax rate		29.1	%		21.6	%

We expect our U.S. federal statutory rate to be 21% for fiscal years going forward.