Note 16. Income Taxes

The Company uses the liability method to account for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.

On December 22, 2017, the 2017 Tax Reform was enacted into law, which significantly revised the Internal Revenue Code of 1986, as amended. The 2017 Tax Reform includes, among other items, permanent reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%; and modifying or repealing many other business deductions and credits.

On March 27, 2020, in response to COVID-19 and its detrimental impact to the global economy, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law, which provides a stimulus to the U.S. economy in the form of various individual and business assistance programs as well as temporary changes to existing tax law. Among the changes to the provision in business tax laws include a five-year net operating loss carryback for the Fiscal 2019 - 2021 tax years, a deferral of the employer’s portion of certain payroll tax, and an increase in the interest expense deductibility limitation for the Fiscal 2020 and 2021 tax years. ASC 740 requires the tax effects of changes in tax laws or rates to be recorded in the period of enactment. As a result of the CARES Act, the Company will carry back its Fiscal 2020 taxable loss into the Fiscal 2015 tax year, which resulted in an approximately $2.8 million tax rate benefit in the current year. The Company also reviewed its existing deferred tax assets in light of COVID-19 and determined that no valuation allowance is required at this time. However, the Company will continue to monitor the status of the COVID-19 pandemic and its impact on our results of operations.

The following table summarizes the components of the provision for income taxes for the fiscal years ended June 30:


	June 30,		June 30,		June 30,
(In thousands)	2020		2019		2018
Current Income Tax Expense (Benefit)
Federal	$	(7,082)	$	13,185	$	(9,439)
State and Local		405		(81)		1,152
Total Current Income Tax Expense (Benefit)		(6,677)		13,104		(8,287)
Deferred Income Tax Expense (Benefit)
Federal		(6,525)		(85,022)		31,263
State and Local		(2,060)		(2,220)		(573)
Total Deferred Income Tax Expense (Benefit)		(8,585)		(87,242)		30,690
Total Income Tax Expense (Benefit)	$	(15,262)	$	(74,138)	$	22,403

A reconciliation of the differences between the effective rates and federal statutory rates was as follows:


	June 30,		June 30,		June 30,
	2020		2019		2018

Federal income tax at statutory rate	21.0	%	21.0	%	28.1	%
State and local income tax, net	2.7	%	0.5	%	0.6	%
Nondeductible expenses	(1.1)	%	(0.1)	%	0.2	%
Nondeductible drug fee	(1.6)	%	—	%	—	%
Foreign rate differential	(0.1)	%	(0.4)	%	0.4	%
Income tax credits	2.5	%	0.5	%	(1.4)	%
Domestic production activity deduction	—	%	—	%	(1.5)	%
Unrecognized tax benefits	(5.0)	%	0.1	%	(6.7)	%
Change in tax laws	15.4	%	—	%	25.6	%
Excess tax benefits on share-based compensation	(0.8)	%	(0.3)	%	(0.3)	%
Other	(1.6)	%	0.1	%	(1.2)	%
Effective income tax rate	31.4	%	21.4	%	43.8	%

The principal types of differences between assets and liabilities for financial statement and tax return purposes are accruals, reserves, impairment of intangibles, accumulated amortization, accumulated depreciation and share-based compensation expense. A deferred tax asset is recorded for the future benefits created by the timing of accruals and reserves and the application of different amortization lives for financial statement and tax return purposes. The Company’s deferred tax liability is mainly attributable to different depreciation methods for financial statement and tax return purposes. A deferred tax asset valuation allowance is established if it is more likely than not that the Company will be unable to realize certain of the deferred tax assets. As of June 30, 2020 and 2019, temporary differences which give rise to deferred tax assets and liabilities were as follows:


	June 30,		June 30,
(In thousands)	2020		2019
Deferred tax assets:
Share-based compensation expense	$	2,661	$	4,134
Reserve for returns		11,022		12,014
Reserves for accounts receivable and inventory		5,526		8,208
Federal net operating loss		273		324
State net operating loss		8,387		6,479
Impairment on Cody note receivable		1,171		1,161
Accumulated amortization on intangible assets		79,939		76,401
Foreign net operating loss		1,822		1,792
Interest Carryforward		25,392		11,008
Operating lease		3,439		—
Other		2,747		2,506
Total deferred tax asset		142,379		124,027
Valuation allowance		(14,622)		(13,549)
Total deferred tax asset less valuation allowance		127,757		110,478
Deferred tax liabilities:
Prepaid expenses		681		182
Property, plant and equipment		5,383		991
Operating lease		3,803		—
Total deferred tax liability		9,867		1,173
Net deferred tax asset	$	117,890	$	109,305

The net deferred tax asset as of June 30, 2020 and 2019 is reduced by a valuation allowance of $14.6 million and $13.5 million, respectively, which are primarily related to deferred tax assets for various states and foreign net operating losses. The federal and state and local tax deferred tax assets begin to expire in fiscal years 2026 and 2036, respectively. The increase in the valuation allowance in Fiscal 2020 primarily related to an increase of state deferred tax assets.

The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (exclusive of interest and penalties) was as follows:


(In thousands)	Balance
Balance at June 30, 2018	$	2,537
Additions for tax positions of the current year		244
Additions for tax positions of prior years		36
Lapse of statute of limitations		(618)
Balance at June 30, 2019	$	2,199
Additions for tax positions of the current year		2,467
Additions for tax positions of prior years		(51)
Lapse of statute of limitations		(24)
Balance at June 30, 2020	$	4,591

The amount of unrecognized tax benefits at June 30, 2020, 2019 and 2018 was $4.6 million, $2.2 million and $2.5 million, respectively, of which $4.5 million, $2.1 million and $2.3 million would impact the Company’s effective tax rate, respectively, if recognized.

The Company has not recorded any interest and penalties for the periods ended June 30, 2020, 2019 and 2018 in the statement of operations and no cumulative interest and penalties have been recorded either in the Company’s Consolidated Balance Sheet as of June 30, 2020 and 2019. The Company will recognize interest accrued on unrecognized tax benefits in interest expense and any related penalties in operating expenses.

The Company files income tax returns in the United States federal jurisdiction and various states. The Company’s tax returns for Fiscal Year 2014 and prior generally are no longer subject to review as such years generally are closed. The Company’s Fiscal Year 2015 through 2017 federal returns are currently under examination by the Internal Revenue Service (“IRS”). In October 2018, the Company was notified that the Commonwealth of Pennsylvania will conduct a routine field audit of the Company’s Fiscal 2016 and Fiscal 2017 corporate tax returns. In December 2019, the Company was notified that the Florida Department of Revenue will conduct a routine field audit of the Company’s Fiscal 2016, 2017 and 2018 corporate tax returns. The Company has received preliminary assessments from the IRS and the Florida Department of Revenue; however, we cannot reasonably predict the final outcome of the examinations at this time.