Note 7 - Income Taxes

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 7.  Income Taxes

The following table summarizes the income tax benefit (expense) for the years ended December 31, 2022 and 2021 (in thousands):

	2022			2021
Current:
Federal	$	(62	)	$	-
State		(47	)		(34	)
Foreign		-			(190	)
Current Total		(109	)		(224	)
Deferred:
Federal		1,057			(552	)
State		6			(47	)
Deferred Total		1,063			(599	)
Total	$	954		$	(823	)

The income tax benefit (expense) differs from the amount computed by applying the statutory federal and state income tax rates to the net income before income tax.  The following table shows the reasons for these differences (in thousands):

	2022			2021
Computed income tax expense at statutory rate	$	(540	)	$	(1,122	)
Decrease (increase) in taxes resulting from:
Permanent and other deductions, net		(12	)		419
Global intangible low-taxed income		(80	)		(204	)
Foreign income taxes		196			156
State income taxes, net of federal benefit		(104	)		(119	)
Deferred tax effects		-			55
Valuation allowance		1,494			(8	)
Total income tax benefit (expense)	$	954		$	(823	)
Effective tax rate		(34.9%	)		15.4	%

The Company’s effective tax rate was -34.9% and 15.4% for the years ended December 31, 2022 and 2021. The income tax benefit in 2022 and low effective tax rate was primarily the result of the full release of a previous $1.5 million valuation allowance against deferred tax assets. In 2021, the effective tax rate was primarily driven by $2.0 million non-taxable gain on forgiveness of PPP loans, which was the result of governmental actions to mitigate the impacts of the COVID-19 pandemic.

Generally, the Company’s combined effective tax rate is high relative to reported income before taxes as a result of valuation allowances on deferred tax assets, certain amortization expense, stock based compensation, and corporate overhead not being deductible and income being attributable to certain states in which it operates. In recent years, the majority of taxes paid by the Company were state and foreign taxes, not U.S. federal taxes. The Company operates in three states which have relatively high tax rates: California, New York, and Florida. In 2021, the effective tax rate was lower than in typical years due to PPP loan forgiveness, which was not subject to income tax. Realization of net operating loss carryforwards, foreign tax credits, and other deferred tax temporary differences are contingent upon future taxable earnings. The Company’s deferred tax assets are reviewed for expected utilization by assessing the available positive and negative factors surrounding recoverability, including projected future taxable income, reversal of existing taxable temporary differences, tax-planning strategies, and results of recent operations. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized.

For the year ended December 31, 2021, Wilhelmina maintained a full $1.5 million valuation allowance against its deferred tax assets. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. In connection with its assessment for the third quarter of 2022, management determined that there was sufficient evidence to conclude that it was more likely than not that all deferred tax assets were realizable. This evidence included three years of cumulative pretax income, excluding nonrecurring items, and expected reversal of existing taxable temporary differences. Consequently, the full valuation allowance against our deferred tax assets was released in 2022, resulting in a $1.5 million income tax benefit. The Company will continue to assess the evidence used to determine the need for a valuation allowance and may reinstate the valuation allowance in future periods if warranted by changes in estimated future income and other factors.

As of December 31, 2022, the Company had no federal income tax loss carryforwards.

The following table shows the tax effect of significant temporary differences, which comprise the deferred tax asset and liability (in thousands):

	2022			2021
Deferred tax asset:
Net operating loss carryforward	$	63		$	293
Foreign tax credits		474			495
Accrued expenses		573			552
Allowance for doubtful accounts		82			78
Lease liability		1,008			493
Share-based compensation		117			66
Other intangible assets		11			20
Less: Valuation allowance		-			(1,494	)
Total deferred income tax asset		2,328			503
Deferred tax liability:
Property and equipment		(77	)		(39	)
Right of use asset		(971	)		(469	)
Intangible assets-brand name		(1,183	)		(1,183	)
Goodwill		(395	)		(340	)
Other intangible assets		(687	)		(520	)
Total deferred income tax liability		(3,313	)		(2,551	)
Deferred income tax, net	$	(985	)	$	(2,048	)

Net deferred tax assets and liabilities are presented as noncurrent within the Company’s consolidated balance sheets. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are actually paid or recovered. The Company recognizes a valuation allowance for deferred tax assets when it is more likely than not that these assets will not be realized. In making this determination, all positive and negative evidence is considered, including future reversals of existing taxable temporary differences, tax planning strategies, future taxable income, and taxable income in prior carryback years.

At December 31, 2021, the Company had $1.1 million of U.S. federal net operating loss carryforwards. At December 31, 2022, the Company had no U.S. federal net operating loss carryforwards and has $0.5 million of foreign tax credit carryforwards which expire between 2023 and 2031.

The Company does not believe that it had any significant uncertain tax positions at December 31, 2022 and December 31, 2021, nor is this expected to change within the next twelve months due to the settlement and expiration of statutes of limitation.

The U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduced the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and base erosion tax, respectively. In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company elected to treat any potential GILTI inclusions as a period cost.