Note 3 - Income Taxes

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

3.     INCOME TAXES

Within the calculation of the Company’s annual effective tax rate, the Company has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions.  For example, the Company anticipates that the state jurisdictions will continue to determine and announce their conformity to the U.S. Tax Act which could have an impact on the annual effective tax rate.

On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted which enacted the following relief among others;

● Amended federal tax laws to permit 100% bonus depreciation for eligible qualified improvement property placed in service by the taxpayer after December 31, 2017 and before January 1, 2023.

● Eliminated the 80% of taxable income limitations by allowing corporate entities to fully utilize Net Operating Losses (NOL) carryforwards to offset taxable income in 2018, 2019 or 2020. The 80% limitation is reinstated for tax years after 2020.

● Increased the net interest expense deduction limit to 50% of adjusted taxable income from 30% for tax years beginning January 1, 2019 and 2020.

● Allowed taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as originally enacted by the Tax Cuts and Jobs Act in 2017.

● Allowed taxpayers the carryback of Net Operating Losses (NOL) as a result of tax years beginning after December 31, 2017, but before January 1, 2021 for the five prior years of the generated loss.

The components of loss before taxes for the years ended December 31 are as follows:

Origin of income before taxes	2021			2020
United States	$	798		$	(3,411	)
Foreign		(730	)		(810	)
Income (loss) before income taxes	$	68		$	(4,221	)

Significant components of income tax benefit (expense) for the years ended December 31 are as follows:

	2021			2020
Current:
Federal	$	—		$	—
State		(9	)		(7	)
Foreign		—			(88	)
Total current		(9	)		(95	)
Deferred:
Federal		—			22
State		(5	)		16
Total deferred		(5	)		38
Income tax expense	$	(14	)	$	(57	)

A reconciliation between the provision for income taxes calculated at the U.S. federal statutory income tax rate and the consolidated income tax expense in the consolidated statements of operations for the years ended December 31 is as follows:

	2021			2020
Provision at the U.S. federal statutory rate		21.0	%		21.0	%
State taxes, net of federal benefit		(15.5	)%		1.5	%
Foreign tax rate differential		(30.2	)%		0.5	%
Valuation allowance		(1504.6	)%		(13.9	)%
Chile outside basis differential		34.4	%		—	%
PPP Loan Forgiveness		(484.6	)%		—	%
Accrual to return		(329.3	)%		—	%
Research and development credit		(144.9	)%		—	%
State rate change		(124.0	)%		(6.5	)%
China deferred adjustment		1006.0	%		—	%
China enterprise tax		—	%		(2.1	)%
Share based compensation		1590.3	%		(2.0	)%
Other true up		—	%		(2.7	)%
Intangible assets impairment and other non-deductibles		—	%		1.8	%
Other		2.0	%		1.0	%
Income tax (expense) benefit effective rate		20.6	%		(1.4	)%

The deferred tax assets and liabilities at December 31 are as follows:

	2021			2020
Deferred tax assets:
Stock compensation expense	$	173		$	1,240
Goodwill		591			986
Royalty accruals		10			560
Bad debt allowance		51			338
Net operating loss carryforwards		11,950			10,959
Credit carry-forwards		992			841
Inventory reserve		217			206
Depreciation		556			499
Other		376			334
Total deferred tax assets		14,916			15,963
Deferred tax liabilities:
Intangible assets		(105	)		(126	)
Total deferred tax liabilities		(105	)		(126	)
Net deferred tax asset before valuation allowance		14,811			15,837
Valuation allowances for deferred tax assets		(14,950	)		(15,971	)
Net deferred tax liability	$	(139	)	$	(134	)

The change in the valuation allowance for deferred tax assets for the years ended December 31 is as follows:

Year	Balance at January 1		Charged to costs and expenses			(Deductions)/Other		Balance at December 31
2020	$	15,394		577			—	$	15,971
2021	$	15,971		(1,021	)		—	$	14,950

For the years ended December 31, 2021 and 2020, there were exercises of stock options of $0 and $296, respectively.

As required by ASC 740, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. There were no interest and penalties recognized in income tax expense during the years ended December 31, 2021 and 2020. There were no unrecognized tax benefits as of December 31, 2021 and 2020.

We are subject to taxation in the U.S., various states, and in non-U.S. jurisdictions. Our U.S. income tax returns are primarily subject to examination from 2018 through 2020; however, U.S. tax authorities also have the ability to review prior tax years to the extent loss carryforwards and tax credit carryforwards are utilized. The open years for the non-U.S. tax returns range from 2013 through 2020 based on local statutes.

Management periodically estimates our probable tax obligations using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for both federal and state tax issues are included in current liabilities on the consolidated balance sheet.

The investment in foreign subsidiaries other than Fuel Tech S.p.A (Chile) and Beijing Fuel Tech is considered to be indefinite in duration and therefore we have not provided a provision for deferred U.S. income taxes on the unremitted earnings from those subsidiaries. A provision has not been established because it is not practicable to determine the amount of unrecognized deferred tax liability for such unremitted foreign earnings and because it is our present intention to reinvest the undistributed earnings indefinitely.

As required by ASC 740, a valuation allowance must be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. We have approximately $27,701 of U.S. net operating loss carryforwards available to offset future U.S. taxable income as of December 31, 2021.  The net operating loss carry-forwards related to tax losses generated in years ending December 31, 2017 and before in the U.S. totaling $10,733 begin to expire in 2034.  Further, we have tax loss carry-forwards of approximately $6,847 available to offset future foreign income in Italy as of December 31, 2021. We have recorded a full valuation allowance against the deferred tax asset because we cannot anticipate when or if this entity will have taxable income sufficient to utilize the net operating losses in the future. There is no expiration of the net operating loss carry-forwards related to tax losses generated in prior years in Italy. Finally, we have tax loss carry-forwards of approximately $13,476 available to offset future foreign income in China as of December 31, 2021. The net operating loss carry-forwards related to tax losses generated in prior years in China expire in 2022.

As of December 31, 2019, the investment in Fuel Tech S.p.A (Chile) was no longer considered to be indefinite and a provision for deferred U.S. income taxes was recorded. As of December 31, 2020, the provision for deferred U.S. income taxes related to the Fuel Tech S.p.A (Chile) investment was $155. As of December 31, 2021, Fuel Tech S.p.A (Chile) was still included in continuing operations. As a result an additional ($19) was recorded, adjusting the total consideration to $136. The deferred income taxes associated with this investment are offset by a valuation allowance of ($136).