Income taxes

12 Months Ended

Dec. 31, 2022

Income taxes

Income taxes

Note 7 - Income taxes

Income before income taxes for the years ended December 31, 2022 and 2021 was $117.2 million and $33.4 million, respectively. Income tax expense for the years ended December 31, 2022 and 2021 was $13.4 million and $1.1 million, respectively. The tax provision during the year ended December 31, 2022 includes a $15.1 million tax benefit related to the Company’s valuation allowance release. The income tax expense for each of the years ended December 31, 2022 and 2021 was for federal and state income tax at statutory rates applied to the adjusted pre-tax income for each of the periods.

The following summarizes the provision for income taxes:

Years Ended December 31,	2022		2021
(in thousands)
Current:
Federal	$	11,995	$	453
State and local		2,835		350
		14,830		803
Deferred:
Federal		(323)		267
State and local		(1,126)		70
		(1,449)		337
Expense for income taxes	$	13,381	$	1,140

Reconciliation of the Company’s actual tax rate to the U.S. Federal statutory rate is as follows:

Years ended December 31,	2022		2021
Income tax rates
- Statutory U.S. federal rate	21	%	21	%
- State income taxes, net of federal benefit	4	%	0	%
- Excess tax benefits related to stock compensation	(1)	%	(4)	%
- 162m limitation	1	%	—
- PPP Benefit	0	%	(2)	%
- Change in valuation allowance	(13)	%	(12)	%
- Other true-up	(1)	%	—
Total	11	%	3	%

As of December 31, 2022, the Company had no federal NOL carryforwards. As of December 31, 2022, the Company had state tax NOL carryforwards of approximately $1.5 million, expiring in various years.

Deferred income tax represents the tax effect of the differences between the book and tax bases of assets and liabilities. The net deferred income tax assets (liabilities) consisted of the following at:

December 31,	2022		2021
(in thousands)
- Depreciation & amortization	$	(4,916)	$	(6,365)
- Reserves for doubtful accounts		500		398
- Inventory reserve		1,045		977
- Non qualified stock options		383		612
- Net operating losses		—		7,270
- Deferred interest		2,637		10,381
- Accrued expenses		107		184
- Valuation allowance		—		(15,149)
Total		(244)		(1,692)

We review the likelihood that we will realize the benefit of our deferred tax assets, and therefore the need for valuation allowances, on a quarterly basis. In determining the requirement for a valuation allowance, the historical and projected financial results are considered, along with all other available positive and negative evidence.

Concluding that a valuation allowance is not required is difficult when there is significant negative evidence that is objective and verifiable, such as cumulative losses in recent years. The Company utilizes a rolling twelve quarters of pre-tax income or loss adjusted for significant permanent book to tax differences, as well as non-recurring items, as a measure of its cumulative results in recent years. Based on its assessment as of December 31, 2019, 2020 and 2021, the Company concluded that due to the uncertainty that the deferred tax assets will not be fully realized in the future, it recorded a valuation allowance of approximately $11.3 million during 2018, and due to additional losses, increased the valuation allowance through 2019 and 2020 to $19.0 million. For the year ended December 31, 2021, and due to additional income that resulted in the utilization of net operating losses of $16.8 million, the Company reduced the valuation allowance by $3.9 million resulting in an ending balance of $15.1 million as of December 31, 2021. During the year ended December 31, 2022, the Company concluded that its deferred tax assets are more likely than not to become realizable, and as such, the Company reversed all $15.1 million of its existing valuation allowance. The conclusion that a valuation allowance was no longer needed was based on the current year achievement of three years of cumulative pre-tax income, current year utilization of the Company’s $29.3 million Federal NOLs, which comprised a majority of the Company’s deferred tax assets, combined with estimates of future years’ pre-tax income that are sufficient to realize the remaining deferred tax assets. The amount of the deferred tax asset considered realizable can change if estimates of future taxable income change or if objective negative and positive evidence changes.

The Company’s 2017 and prior federal tax years have been closed. The Company operates in many states throughout the United States and, as of December 31, 2022, the state statutes of limitations remain open for tax years subsequent to 2017. The Company recognizes interest and penalties, if any, relating to income taxes as a component of the provision for income taxes.