Note 7 - Income Taxes

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Income Tax Disclosure [Text Block]

(7) Income Taxes

For the years ended December 31, 2022, 2021, and 2020, income before income taxes consists of the following:

	2022			2021		2020
	(In thousands)
U.S. Operations	$	43,156		$	48,145	$	41,357
Foreign Operations		(341	)		476		110
Income before income taxes	$	42,815		$	48,621	$	41,467

Income tax expense consisted of the following components:

	2022			2021			2020
	(In thousands)
Federal:
Current	$	9,988		$	9,092		$	3,546
Deferred		(1,427	)		(224	)		(308	)
Total	$	8,561		$	8,868		$	3,238
Foreign:
Current	$	(90	)	$	143		$	225
Deferred		—			(17	)		(6	)
Total	$	(90	)	$	126		$	219
State:
Current	$	2,846		$	2,197		$	578
Deferred		(302	)		(36	)		172
Total	$	2,544		$	2,161		$	750
Total	$	11,015		$	11,155		$	4,207

As a result of the Tax Cuts and Jobs Act (the “Tax Act”), we determined that we would no longer indefinitely reinvest the earnings of our Canadian subsidiary. Our Canadian subsidiary declared a deemed dividend to the Company for $1.4 million and $9.6 million in 2022 and 2020, respectively. Additionally, a withholding tax of 5% was paid for the dividend distribution. Due to the closure of the Canadian office, we also processed a return of capital from the Canadian subsidiary to the Company of $1.2 million.

We qualify for tax incentives through the Nebraska Advantage LB312 Act (“NAA”). The NAA provides direct refunds of sales tax on qualified property, as well as investment credits and employment credits that can be claimed through credits of Nebraska income tax, employment tax, and sales tax on non-qualified property. For the year ended December 31, 2022, 2021 and 2020, adjustments for credits reduced operating expenses by approximately $510,000, $473,000 and $435,000, respectively. In addition, income tax credits of $36,000, $10,000 and $45,000 were recorded as a reduction to income tax expense for the years ended December 31, 2022, 2021 and 2020, respectively.

The differences between income taxes expected at the U.S. federal statutory income tax rate of 21 percent and the reported income tax (benefit) expense are summarized as follows:

	2022			2021			2020
	(In thousands)
Expected federal income taxes	$	8,991		$	10,210		$	8,708
Foreign tax rate differential		(24	)		26			6
State income taxes, net of federal benefit and state tax credits		2,100			1,531			607
Share-based compensation		(120	)		(660	)		(5,713	)
Compensation limit for covered employees		—			—			463
Federal tax credits		(408	)		(272	)		(261	)
Uncertain tax positions		22			254			157
Reclassification of cumulative translation adjustment into earnings		539			—			—
Goodwill Impairment		—			—			184
Withholding tax on repatriation of foreign earnings		(100	)		8			18
GILTI		—			—			10
Other		15			58			28
	$	11,015		$	11,155		$	4,207

Deferred tax assets and liabilities at December 31, 2022 and 2021, were comprised of the following:

	2022			2021
	(In thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	16		$	24
Accrued expenses		691			687
Share-based compensation		1,072			740
Accrued bonuses		96			267
Employer payroll tax deferral		—			200
Uncertain tax positions		256			161
Research & experimental expenditures		856			—
Other		78			66
Gross deferred tax assets		3,065			2,145
Less valuation allowance		—			—
Deferred tax assets		3,065			2,145
Deferred tax liabilities:
Prepaid expenses		135			89
Deferred contract costs		601			945
Property and equipment		1,066			1,579
Intangible assets		6,523			6,338
Repatriation withholding		—			182
Deferred tax liabilities		8,325			9,133
Net deferred tax liabilities	$	(5,260	)	$	(6,988	)

In March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak which, among other things, contains numerous income tax provisions. As a result of the CARES Act, we had deferred $1.3 million of employer social security tax payments as of December 31, 2020. In accordance with the CARES Act, we paid half of this liability in December 2021, and paid the remaining $656,000 in December 2022. We have had no other impacts to our consolidated financial statements or related disclosures from the CARES Act.

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into U.S. law. The IRA includes implementation of a new alternative minimum tax, an excise tax on stock buybacks, and significant tax incentives for energy and climate initiatives, among other provisions. After evaluating the provisions included under the IRA, the Company does not expect the provisions to have a material impact to the Company’s consolidated financial statements.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable income, carry-back opportunities, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences excluding the foreign tax credit carryforward. In 2020, we wrote off the deferred tax asset for prior year foreign tax credit carryforwards of $535,000 and the related valuation allowance. We made the assessment that due to our Canadian subsidiary’s decreased projected future income and the lower US tax rate compared to the Canadian tax rate, it was unlikely we would realize this asset.

The Tax Act amended Section 174 rules for the federal tax treatment of research or experimental (“R&E”) expenditures paid or incurred during the taxable year. The new Section 174 rules require taxpayers to capitalize and amortize specified R&E expenditures over a period of five years (attributable to domestic research) or 15 years (attributable to foreign research), beginning with the midpoint of the taxable year in which the expenses are paid or incurred.  Software development costs are expressly included in the definition of specified R&E expenditures after 2021. Due to this change in legislation the Company has deferred costs of $3.5 million for tax purposes, resulting in a deferred tax asset of $856,000 at December 31, 2022. The Company also recorded a deferred tax asset of $52,000 related to software development costs included in the overall fixed asset deferred tax liability.

We had an unrecognized tax benefit at December 31, 2022 and 2021, of $1.6 million and $1.1 million, respectively, excluding interest of $25,000 and $19,000 at December 31, 2022 and 2021, respectively. Of these amounts, $1.3 million and $918,000 at December 31, 2022 and 2021, respectively, represents the net unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate. The change in the unrecognized tax benefits for 2022 and 2021 was as follows:

	(In thousands)
Balance of unrecognized tax benefits at December 31, 2020	$	768
Reductions due to lapse of applicable statute of limitations		(38	)
Reductions due to tax positions of prior years		—
Reductions due to settlement with taxing authorities		—
Additions based on tax positions related to the current year		345
Balance of unrecognized tax benefits at December 31, 2021	$	1,075
Reductions due to lapse of applicable statute of limitations		(76	)
Additions due to tax positions of prior years		—
Reductions due to settlement with taxing authorities		—
Additions based on tax positions related to the current year		558
Balance of unrecognized tax benefits at December 31, 2022	$	1,557

We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and Canada federal and provincial jurisdictions. Tax years 2019 and forward remain subject to U.S. federal examination. Tax years 2016 and forward remain subject to state examination. Tax years 2018 and forward remain subject to Canadian federal and provincial examination.