Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

D. Income Taxes

Prior to the Separation, the Company's U.S. operations and certain of its non-U.S. operations were historically included in the income tax returns of LGL Group or its subsidiaries. For the periods prior to the Separation, the income tax expense and all tax liabilities that are presented in these financial statements were calculated on a "carve-out" basis, which applied the accounting guidance as if the Company filed income tax returns on a standalone, separate return basis. The Company believes the assumptions supporting its allocation and presentation of income taxes on a separate return basis are reasonable. However, the Company's tax results, as presented in these financial statements for periods prior to the Separation, may not be reflective of the results that the Company expects to generate in the future.

Post-Separation, the Company will file a consolidated U.S. federal income tax return as well as separate and combined income tax returns in various state, local and international jurisdictions. Income tax expense for the period prior to the Separation is based on the combined financial statements prepared on a "carve-out" basis. Income tax expense for the period after the Separation is based on the consolidated results of the Company on a standalone basis.

Income tax provision for the years ended December 31, 2022 and 2021 is as follows:

	2022			2021
	(in thousands)
Current:
Federal	$	703		$	—
State and local		188			23
Foreign		213			-
Total Current		1,104			23
Deferred:
Federal		(263	)		455
State and local		(78	)		52
Foreign		34			1
Net deferred		(307	)		508
Income tax provision	$	797		$	531

A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before income taxes is detailed below:

	2022			2021
	(in thousands)
Tax provision at expected statutory rate	$	544		$	444
State taxes, net of federal benefit		91			75
Permanent differences		83			3
Tax credits		(61	)		(74	)
Foreign tax expense, and other		161			(12	)
Change in rate		—			1
Change in valuation allowance		—			(374	)
Change in uncertain tax positions		—			448
Other		(21	)		20
Provision for income taxes	$	797		$	531
Effective tax rate		30.7	%		25.1	%

Deferred income taxes for 2022 and 2021 were provided for the temporary differences between the financial reporting basis and the income tax basis of the Company's assets and liabilities. Tax effects of temporary differences and carryforwards at December 31, 2022 and 2021 were as follows:

	December 31, 2022				December 31, 2021
	Deferred Tax				Deferred Tax
	Asset		Liability		Asset		Liability
	(in thousands)
Inventory reserve	$	320	$	—	$	334	$	—
Fixed assets		471		80		—		44
Other reserves and accruals		181		—		181		—
Stock-based compensation		61		—		2		—
Other		84		36		—		15
Tax credit carryforwards		50		—		1,343		—
Federal tax loss carryforwards		—		—		204		—
State tax loss carryforwards		—		—		148		—
Foreign tax loss carryforwards		—		—		34		—
Total deferred income taxes		1,167	$	116		2,246	$	59
Net deferred tax assets	$	1,051			$	2,187

As of December 31, 2022, our unrecognized tax benefits totaled $77,000, and are included within other liabilities in our Consolidated and Combined Balance Sheet. The following table summarizes the activity related to the Company’s unrecognized tax benefits, without interest and penalties:

	2022			2021
	(in thousands)
Balance at January 1	$	448		$	—
Additions for tax positions of prior years		—			419
Additions based on tax positions related to the current year		77			29
Transfer to LGL Group, Inc.		(448	)		—
Balance at December 31	$	77		$	448

The Company will recognize any interest and penalties related to unrecognized tax positions in Income Tax Provision in the Consolidated and Combined Statements of Operations. Our total accrued interest and penalties associated with uncertain tax positions were immaterial as of December 31, 2022. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $77,000. We do not expect a significant change to the amount of unrecognized tax benefits over the next 12 months. The Company believes that the taxes accrued in our Consolidated and Combined Balance Sheets fairly represent the amount of income taxes to be settled or realized in the future.

As of December 31, 2022, the Company had Federal and research and development tax credit carryforwards of approximately $50,000 available to reduce future tax liabilities, which will begin to expire starting in 2027.

The Company will file a U.S. federal income tax return as well as income tax returns in various states and in non-U.S. jurisdictions. The Company has not filed its initial consolidated U.S. federal income tax return; therefore, there are no open Internal Revenue Service examinations.

On August 19, 2022, the Company and LGL Group entered into an Amended and Restated Tax Indemnity and Sharing Agreement. Under the agreement, LGL Group will generally be responsible for all U.S. federal, state, local and non-U.S. income taxes of the Company for any taxable period, or portion of such period, ending on or before the Separation. Accordingly, the net liabilities associated with uncertain tax positions that were presented in the financial statements in prior periods on a carve-out basis were not transferred to the Company as part of the Separation.