Note 7 - Income Taxes

12 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Income Tax Disclosure [Text Block]

(7) Income Taxes

For the years ended December 31, 2023, 2022, and 2021, income before income taxes consists of the following:

	2023			2022			2021
	(In thousands)
U.S. Operations	$	40,031		$	43,156		$	48,145
Foreign Operations		(69	)		(341	)		476
Income before income taxes	$	39,962		$	42,815		$	48,621

Income tax expense consisted of the following components:

	2023			2022			2021
	(In thousands)
Federal:
Current	$	8,220		$	9,988		$	9,092
Deferred		(891	)		(1,427	)		(224	)
Total	$	7,329		$	8,561		$	8,868
Foreign:
Current	$	(32	)	$	(90	)	$	143
Deferred		14			—			(17	)
Total	$	(18	)	$	(90	)	$	126
State:
Current	$	1,924		$	2,846		$	2,197
Deferred		(244	)		(302	)		(36	)
Total	$	1,680		$	2,544		$	2,161
Total	$	8,991		$	11,015		$	11,155

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 of $1.4 million in 2022. 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 in 2022.

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, 2023, 2022 and 2021, the amortization of credits reduced operating expenses by approximately $200,000, $510,000 and $473,000, respectively. In addition, income tax credits of $2,000, $36,000 and $10,000 were recorded as a reduction to income tax expense for the years ended December 31, 2023, 2022 and 2021, respectively. Credits were lower in the 2023 year due to not meeting certain full time equivalent thresholds in Nebraska, causing certain credits to be recaptured and no additional credits to be earned. The NAA credit earning years are now complete. We have applied for the ImagiNE Act, the new economic development incentive program that replaces the NAA. When we meet certain investment criteria we will have the ability to earn similar credits as with the NAA.

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:

	2023			2022			2021
	(In thousands)
Expected federal income taxes	$	8,392		$	8,991		$	10,210
Foreign tax rate differential		(4	)		(24	)		26
State income taxes, net of federal benefit and state tax credits		1,323			2,100			1,531
Share-based compensation		(334	)		(120	)		(660	)
Federal tax credits		(569	)		(408	)		(272	)
Uncertain tax positions		73			22			254
Reclassification of cumulative translation adjustment into earnings		—			539			—
Withholding tax on repatriation of foreign earnings		—			(100	)		8
Non-deductible expenses		92			30			—
Other		18			(15	)		58
	$	8,991		$	11,015		$	11,155

Deferred tax assets and liabilities at December 31, 2023 and 2022, were comprised of the following:

	2023			2022
	(In thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	18		$	16
Accrued expenses		581			691
Share-based compensation		1,177			1,072
Accrued bonuses		12			96
Uncertain tax positions		326			256
Research & experimental expenditures		2,903			856
Other		—			78
Gross deferred tax assets		5,017			3,065
Less valuation allowance		—			—
Deferred tax assets		5,017			3,065
Deferred tax liabilities:
Prepaid expenses		145			135
Deferred contract costs		354			601
Property and equipment		1,966			1,066
Intangible assets		6,636			6,523
Other		55			—
Deferred tax liabilities		9,156			8,325
Net deferred tax liabilities	$	(4,139	)	$	(5,260	)

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. We accrued excise taxes that increased the cost of treasury stock we acquired by $152,000 in 2023 due to the IRA. The excise tax will be paid in early 2024. We have no other financial impacts from the IRA.

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.

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 we capitalized costs of $7.8 million and $7.1 million for tax purposes in 2023 and 2022, respectively, resulting in deferred tax assets of $2.9 million and $856,000 at December 31, 2023 and 2022, respectively.

We had an unrecognized tax benefit at December 31, 2023 and 2022, of $1.9 million and $1.6 million, respectively, excluding interest of $43,000 and $25,000 at December 31, 2023 and 2022, respectively. Of these amounts, $1.6 million and $1.3 million at December 31, 2023 and 2022, 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 2023 and 2022 was as follows:

	(In thousands)
Balance of unrecognized tax benefits at December 31, 2021	$	1,075
Reductions due to lapse of applicable statute of limitations		(76	)
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		558
Balance of unrecognized tax benefits at December 31, 2022	$	1,557
Reductions due to lapse of applicable statute of limitations		(92	)
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		478
Balance of unrecognized tax benefits at December 31, 2023	$	1,943

We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and Canada federal and provincial jurisdictions. Tax years 2020 and forward remain subject to U.S. federal examination. Tax years 2017 and forward remain subject to state examination. Tax years 2019 and forward remain subject to Canadian federal and provincial examination.