Note 14 - Income Taxes

12 Months Ended

Aug. 31, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

14.         INCOME TAXES

The provision for income taxes for the fiscal years ended August 31, 2021 and 2020 was approximately as follows:

	Fiscal Year Ended August 31,
	2021		2020
Current:
Federal	$	—	$	—
State		39,000		23,000
Foreign		1,307,000		1,226,000
		1,346,000		1,249,000
Deferred:
Federal		—		1,501,000
State		—		101,000
Foreign		115,905		(176,365	)
		115,905		1,425,635
	$	1,461,905	$	2,674,635

Reconciliations of the expected federal income tax at the statutory rate of 21.0% with the provisions for income taxes for the fiscal years ended August 31, 2021 and 2020 were approximately as follows:

	Fiscal Year Ended August 31,
	2021			2020
Tax computed at statutory rates	$	1,794,000		$	365,000
State income tax, net of federal benefit		37,000			23,000
Tax effect on equity in income of international joint ventures		(1,560,000	)		(888,000	)
Tax effect of foreign operations		839,000			641,000
Deemed repatriation		—			108,000
Expired foreign tax credit		897,000			—
Research and development credit		(277,000	)		(368,000	)
Valuation allowance		(492,000	)		2,797,000
Stock based compensation		75,000			189,000
Non-controlling interest		(83,000	)		(55,000	)
Other		231,905			(137.365	)
	$	1,461,905		$	2,674,635

The Company has not provided U.S. income taxes or foreign withholding taxes with respect to its portion of the cumulative undistributed earnings of certain foreign subsidiaries and joint ventures that are essentially permanent in duration. As a result of the 2017 tax law changes, U.S. federal income taxes on dividends received from the Company’s foreign subsidiaries and joint ventures after December 31, 2017 have been generally eliminated. However, the Company continues to be subject to foreign withholding taxes upon repatriation of any undistributed earnings that are not essentially permanent in duration. The Company recorded a tax expense of approximately $113,000 and tax benefit of approximately $76,000 during fiscal 2021 and fiscal 2020, respectively, representing changes in the deferred tax liability for foreign withholding taxes to be paid with respect to the portion of the cumulative undistributed earnings of foreign subsidiaries and joint ventures that the Company determined were not essentially permanent in duration.

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. The tax effect of the temporary differences and tax carryforwards comprising the net deferred taxes shown on the consolidated balance sheets as of August 31, 2021 and 2020 was approximately as follows:

	August 31,
	2021			2020
Accrued compensation	$	539,300		$	173,500
Inventory costs		55,100			64,000
Other accrued expenses		103,100			74,900
Lease liability		84,300			147,500
Goodwill and other intangible assets		453,000			581,200
Stock-based compensation		466,300			397,300
Foreign tax credit carryforward		4,893,300			5,790,500
Other credit and loss carryforwards		5,243,100			4,824,200
Total deferred tax assets		11,837,500			12,053,100
Valuation allowance		(11,447,500	)		(11,561,700	)
Total deferred tax assets after valuation allowance		390,000			491,400
Property and equipment		(7,300	)		(50,700	)
Right-of-use asset		(84,300	)		(147,500	)
Unremitted foreign earnings		(154,900	)		—
Other		(50,900	)		(83,400	)
Total deferred tax liabilities		(297,400	)		(281,600	)
Net deferred tax assets	$	92,600		$	209,800

As of August 31, 2020, the Company had foreign tax credit carryforwards of $5,790,500 of which $897,000 expired during August 31, 2021. The remaining $4,893,300 of foreign tax credit carryforwards as of August 31, 2021 will begin to expire if not utilized prior to August 31, 2022. In addition, the Company had federal and state tax credit carryforwards of $3,552,500 as of August 31, 2021, which began to expire in fiscal 2022.  These federal and state tax credit carryforwards consist primarily of federal and Minnesota research and development credit carryforwards. The Company also has a deferred tax asset of $1,065,500 for federal net operating loss carryforwards and $377,600 for state net operating loss carryforwards as of August 31, 2021. The federal net operating loss carryforward has an indefinite carryforward period. The state net operating loss carryforward will begin to expire if not utilized prior to August 31, 2022. The Company has a deferred tax asset of $247,500 for foreign net operating loss carryforwards, $223,300 of which has an indefinite carryforward period.

The Company records a tax valuation allowance to reduce deferred tax assets to the amount expected to be realized when it is more likely than not that some portion or all of its deferred tax assets will not be realized.

The Company determined based on all available evidence, including historical data and projections of future results, that it is more likely than not that its domestic deferred tax assets will not be realized due to the absence of objectively verifiable sources of taxable income. On the basis of this evaluation, the Company has recorded a valuation allowance of $11,447,500 and $11,561,700 as of August 31, 2021 and 2020, respectively, to recognize only the portion of the deferred tax assets that is more likely than not to be realized. The net deferred tax asset as of August 31, 2021 and 2020 relates entirely to non-US deferred tax assets which are expected to be realized by offset of deferred tax liability for withholding tax on cumulative undistributed earnings in foreign subsidiaries and joint ventures that the Company determined were not essentially permanent. The change in the valuation allowance totaled a decrease of $114,000 and an increase of $2,797,000 for the years ended August 31, 2021 and 2020, respectively.

The following is a tabular reconciliation of the total amounts of approximated unrecognized tax benefits:

	Fiscal Year Ended August 31,
	2021		2020
Gross unrecognized tax benefits – beginning balance	$	278,200	$	248,000
Gross increases – prior period tax positions		4,400		15,200
Gross increases – current period tax positions		15,000		15,000
Gross unrecognized tax benefits – ending balance	$	297,600	$	278,200

The entire amount of unrecognized tax benefits would affect the effective tax rate if recognized.  It is not expected that the amount of unrecognized tax benefits will change significantly in the next 12 months.

The Company recognizes interest related to unrecognized tax benefits and penalties as income tax expense. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. There was no liability for the payment of interest and penalties as of both August 31, 2021 and August 31, 2020.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. With few exceptions, as of August 31, 2021, the Company is no longer subject to federal, state, local, or foreign examinations by tax authorities for years prior to August 31, 2018.