Income Taxes

12 Months Ended

Sep. 30, 2022

Income Taxes

Income Taxes

6.     Income Taxes

The components of income before income tax expense, income tax expense (benefit), and deferred income tax are comprised of the following:

	For the Years Ended
	September 30,
	2022		2021
	(Amounts in thousands)
Income (loss) before income tax expense1
U.S.	$	417	$	1,316
Foreign		1,522		(173)
	$	1,939	$	1,143
Income tax expense (benefit):
Current:
Federal	$	—	$	(674)
State		50		(30)
	$	50	$	(704)
Deferred:
Federal	$	—	$	1,148
Total income tax expense	$	50	$	444

¹ FY 2021 consists of $678 thousand from continuing operations and $465 thousand from discontinued operations totaling $1,143 thousand.

The effective income tax rate differed from the statutory federal income tax rate due to the following:

	For the Years Ended September 30,
	2022				2021
	(Dollar amounts in thousands)
Computed “expected” tax expense	$	407	21.0	%	$	240	21.0	%
Increases (reductions) in taxes resulting from:
State income taxes, net of federal tax benefit		27	1.5	%		(38)	(3.3)	%
Foreign rate differential		(30)	(1.5)	%		13	1.1	%
Exclusion of PPP Loan Forgiveness Income		—	—	%		(458)	(40.1)	%
Exclusion of the UK's Gain on Sale of Disc Ops Entity		—	—	%		(98)	(8.6)	%
Permanent differences		(19)	(1.0)	%		(22)	(1.9)	%
Change in valuation allowance		(226)	(11.5)	%		1,598	139.8	%
Research and development credit		(131)	(6.8)	%		(116)	(10.1)	%
Benefit of US Federal NOL carryback		—	—	%		(359)	(31.4)	%
Return to Provision Adjustments		14	0.7	%		(394)	(34.5)	%
Other items		8	0.2	%		78	6.8	%
Income tax expense	$	50	2.6	%	$	444	38.8	%

Significant components of the Company's net deferred tax assets and liabilities as of September 30, 2022 and 2021 are as follows:

	September 30,		September 30,
	2022		2021
	(Amounts in thousands)
Deferred tax assets:
Pension	$	373	$	1,006
Intangibles		29		61
Other reserves and accruals		596		628
Inventory reserves and other		244		232
Federal and state tax credits		1,273		1,141
Federal and state net operating loss carryforwards		151		123
Foreign net operating loss carryforwards		2,693		2,333
Gross deferred tax assets		5,359		5,524
Less: valuation allowance		(5,029)		(5,334)
Realizable deferred tax asset	$	330	$	190
Deferred tax liabilities:
Depreciation and amortization	$	(121)	$	(190)
Pension		(209)		—
Realizable deferred tax liabilities	$	(330)	$	(190)
Net deferred tax assets	$	—	$	—

The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. In assessing the realizability of deferred tax assets, we consider taxable income in prior carryback years, as permitted under the tax law, our forecasted taxable earnings, tax planning strategies, and the expected timing of the reversal of temporary differences. This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information and is performed on a jurisdiction-by-jurisdiction basis.

The valuation allowance against deferred tax assets decreased by approximately $305 thousand during fiscal year 2022. During the year ended September 30, 2022, management assessed the positive and negative evidence in the U.S. operations and concluded that it is more likely than not that deferred tax assets as of September 30, 2022 will not be realized in light of recent results, the ongoing effects of the coronavirus (“COVID-19”) pandemic, and the resulting economic fallout. We continue to maintain a full valuation allowance against our U.K. deferred tax assets as we have experienced cumulative losses and do not have any indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards.

To the extent that actual experience deviates from our assumptions, our projections would be affected and hence our assessment of realizability of our deferred tax assets may change.

As of September 30, 2022 the Company had U.S. net operating loss carryforwards for federal purposes of approximately $162 thousand. There were no U.S. net operating loss carryforwards for federal purposes as of September 30, 2021. As of September 30, 2022, and 2021, the Company had U.S. tax credit carryforwards for federal purposes of $884 thousand and $753 thousand, respectively. The U.S. tax credit carryforwards begin to expire in the Company's fiscal year 2038. The fiscal year 2022 federal R&D credit and all carried forward credits will be used to offset future tax liabilities.

As of September 30, 2022, and 2021, the Company had U.S. net operating loss carryforwards for state purposes of approximately $3.7 million and $3.4 million, respectively, which are available to offset future taxable income through fiscal year 2042. As of September 30, 2022, the Company had state tax credit carryforwards of $1.1 million available to

reduce future state tax expense, of which $50 thousand has unlimited carryover status and the remainder of the credits are available through fiscal year 2035.

As of September 30, 2022, the Company had U.K. net operating loss carryforwards of approximately $14.2 million that have an indefinite life with no expiration. Subsequent to September 30, 2022 approximately 3.5 million U.S. Dollars was transferred from the foreign subsidiary in the U.K. to Modcomp, Inc. (TS-US) to use in operations.

Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $6.1 million and $7.9 million as of September 30, 2022 and 2021, respectively. The Company is considering cash distribution of undistributed foreign earnings in the future and will continue to assess the potential impact of any future distributions on U.S. taxes. The state tax impact of a distribution of foreign earnings and profits would not be material.

In addition, the calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. The Company records liabilities for estimated tax obligations in the U.S. and other tax jurisdictions. These estimated tax liabilities include the provision for taxes that may become payable in the future.

As of September 30, 2022, the total amount of uncertain tax liabilities relates to state tax credit carryforwards and are all recorded net in deferred taxes.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

	For the Year Ended		For the Year Ended
	September 30, 2022		September 30, 2021
	(Amounts in thousands)
Balance, beginning of year	$	433	$	343
Additions for tax positions of current year		68		60
Additions for tax positions of prior years		1		30
Balance, end of period	$	502	$	433

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company has reviewed the tax positions taken on returns filed domestically and in its foreign jurisdictions for all open years, generally fiscal 2019 through 2022, and believes that tax adjustments in any audited year will not be material.