Note 3 - Income Taxes

12 Months Ended

Dec. 31, 2023

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 August 16, 2022, President Biden signed into law the Inflation Reduction Act (IRA) of 2022, which, among other things, imposes a new 15% corporate Alternative Minimum Tax (AMT) based on audited financial statement income ("AFSI") applicable to corporations with a three-year average AFSI over $1 billion. The AMT is effective for the 2023 tax year and, if applicable, corporations must pay the greater of the regular corporate income tax or the AMT. Although NOL carryforwards created through the regular corporate income tax system cannot be used to reduce the AMT, financial statement net operating losses can be used to reduce AFSI and the amount of AMT owed. The IRA of 2022 as enacted requires the U.S. Treasury to provide regulations and other guidance necessary to administer the AMT, including further defining allowable adjustments to determine AFSI, which directly impacts the amount of AMT to be paid. Based on interim guidance issued by the U.S. Treasury in late December 2022, the Company was not subject to the AMT in 2023. Further, the Company believes that it is more likely than not it will not be subject to the AMT beginning 2024. The Company continues to evaluate the impacts of the Inflation Reduction Act of 2022 but does not expect this legislation to have a material impact on the Company's financial statements.

For tax years beginning before January 1, 2022, taxpayers can make an election with respect to research and experimental (R&E) expenditures incurred in connection with a trade or business to either currently deduct or defer and amortize such expenditures over a period of not less than 60 months. However, the Tax Cuts and Jobs Act of 2017 (TCJA) requires taxpayers to capitalize R&E expenditures effective for taxable years beginning after December 31, 2021. R&E expenditures attributable to US-based research must be amortized over a period of 5 years and R&E expenditures attributable to research conducted outside of the US must be amortized over a period of 15 years. Further, the statute provides that the definition of R&E expenditures includes amounts paid or incurred in connection with the development of any software.  The Company has recorded a deferred tax asset of $1,053 related to research and experimental expenditures for the year ending December 31, 2023.

The U.S. Tax Cuts and Jobs Act of 2017, or the Tax Act, imposed a mandatory transition tax on accumulated foreign earnings as of December 31, 2017 and created a new territorial tax system in which we recognize the tax impact of including certain foreign earnings in U.S. taxable income as a period cost. For the years ended December 31, 2023 and 2022, we incurred income tax expense under the global intangible low-taxed income, or GILTI, provisions and have treated it as a component of income tax expense in the period incurred.

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

Origin of (loss) income before taxes	2023			2022
United States	$	(1,772	)	$	(1,262	)
Foreign		303			(126	)
Loss before income taxes	$	(1,469	)	$	(1,388	)

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

	2023			2022
Current:
Federal	$	—		$	—
State		(19	)		(6	)
Foreign		(55	)		(10	)
Total current		(74	)		(16	)
Deferred:
Federal		2			(19	)
State		3			(19	)
Total deferred		5			(38	)
Income tax expense	$	(69	)	$	(54	)

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:

	2023			2022
Provision at the U.S. federal statutory rate		21.0	%		21.0	%
State taxes, net of federal benefit		4.7	%		3.1	%
Foreign tax rate differential		(0.6	)%		0.4	%
Valuation allowance		(4.9	)%		(48.8	)%
Chile outside basis differential		—	%		0.4	%
Italy IRES/IREP		(3.8	)%		—	%
Accrual to return		(5.8	)%		3.1	%
Research and development credit		5.4	%		5.9	%
State rate change		(1.4	)%		9.5	%
Share based compensation		(6.7	)%		3.3	%
Other Deferred true up		(6.6	)%		—	%
Global Intangible Low-Taxed Income (GILTI) inclusion		(4.4	)%		—	%
Other		(1.7	)%		(1.8	)%
Income tax (expense) benefit effective rate		(4.8	)%		(3.9	)%

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

	2023			2022
Deferred tax assets:
Stock compensation expense	$	250		$	272
Goodwill		—			182
Royalty accruals		10			10
Bad debt allowance		52			53
Net operating loss carryforwards		12,048			12,158
Credit carry-forwards		1,134			1,058
Inventory reserve		153			233
Depreciation		548			585
Research and Development Costs		1,053			528
Other		606			471
Total deferred tax assets		15,854			15,550
Deferred tax liabilities:
Goodwill		(238	)		—
Intangible assets		(89	)		(100	)
Total deferred tax liabilities		(327	)		(100	)
Net deferred tax asset before valuation allowance		15,527			15,450
Valuation allowances for deferred tax assets		(15,699	)		(15,627	)
Net deferred tax liability	$	(172	)	$	(177	)

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
2022	$	14,950		677		—	$	15,627
2023	$	15,627		72		—	$	15,699

For the years ended December 31, 2023 and 2022, there were $42 and $0 exercises of stock options, 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.

The table below sets forth a reconciliation of the beginning and ending amount of unrecognized tax benefit.

Year	Balance at January 1		Change in positions taken in a current period		Balance at December 31
2022	$	265		28	$	293
2023	$	293		33	$	326

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, 2023 and 2022. There were no unrecognized tax benefits as of December 31, 2023 and 2022. There is unrecognized tax benefit of $326 and $293 for the years ended December 31, 2023 and 2022, respectively, that would impact the future effective tax rate, if recognized.  We believe the unrecognized tax benefit will change in the next twelve months, either due to the generation or utilization of research and development credits.  We are unable to estimate the amount of change.  Tax years December 31, 2014 through December 31, 2023 remain open to assessment related to the unrecognized tax benefit.

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 2020 through 2022; 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 2015 through 2022 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 $27,953 of U.S. net operating loss carryforwards available to offset future U.S. taxable income as of December 31, 2023.  The net operating loss carry-forwards related to tax losses generated in years ending December 31, 2018 and before in the U.S. totaling $10,733 begin to expire in 2036.  Further, we have tax loss carry-forwards of approximately $6,373 available to offset future foreign income in Italy as of December 31, 2023. 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 $13,735 available to offset future foreign income in China as of December 31, 2023. 

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, 2022, the provision for deferred U.S. income taxes related to the Fuel Tech S.p.A (Chile) investment was $151. As of December 31, 2023, Fuel Tech S.p.A (Chile) was still included in continuing operations. As a result an additional ($2) was recorded, adjusting the total consideration to $149. The deferred income taxes associated with this investment are offset by a valuation allowance of ($149).