AEHR TEST SYSTEMS Income Taxes Disclosure

 6. INCOME TAXES

Domestic and foreign components of income (loss) before income tax expense (benefit) are as follows:

The income tax expense (benefit) consists of the following:

The Company’s effective tax rate differs from the U.S. federal statutory tax rate, as follows:

The components of the net deferred tax assets and liabilities are as follows:

During the year ended May 31, 2024, the Company concluded that its deferred tax assets are more likely than not to become realizable, and as such, the Company reversed all its existing valuation allowance totaling $21.9 million. The conclusion that a valuation allowance was no longer needed was based on three years of cumulative pre-tax income, current year utilization of federal and state net operating losses, combined with estimates of future years' pre-tax income that are sufficient to realize the remaining deferred tax assets. The amount of the deferred tax asset considered realizable can change if estimates of future taxable income change or if objective negative and positive evidence change. 

At May 30, 2025 and May 31, 2024, the Company has federal net operating loss carryforwards of approximately $28.0 million and $34.6 million and respectively, that are available to reduce future taxable income. A portion of the federal net operating losses will begin to expire in 2034. Federal net operating losses of $14.4 million will carryforward indefinitely and would be subject to an 80% taxable income limitation in the year utilized. At May 31, 2025 and May 31, 2024, the Company has state net operating loss carryforwards of $29.7 million and $29.8 million respectively, that are available to reduce future taxable income. The state net operating loss carryforwards will begin to expire in 2028.

At May 30, 2025 and May 31, 2024, the Company has federal research and development credit carryforwards of approximately $3.2 million and $3.3 million, respectively, that are available to offset future tax liability. The federal credit carryforwards began to expire in 2026. At May 30, 2025 and May 31, 2024, the Company has state research and development credit carryforwards of approximately $7.1 million and $7.1 million, respectively, that are available to offset future tax liability. The state credit carryforwards are not subject to expiration. The Company also has alternative minimum tax credit carryforwards of $34.1 thousand for state purposes. The credits may be used to offset regular tax and do not expire.

Sections 382 and 383 of the Internal Revenue Code limit the annual use of NOL carryforwards and tax credit carryforwards, respectively, following an ownership change. NOL carryforwards may be subject to annual limitations under Section 382 (or comparable provisions of state law) if certain changes in ownership of our company were to occur. In general, an ownership change occurs for the purposes of Section 382 if there is a more than 50% change in ownership of a company by 5% shareholders over a 3-year testing period. During the year ended May 31, 2024, a Section 382 study was completed and it was determined that there is no limitation on the Company’s ability to utilize its NOLs under Section 382. During the year ended May 30, 2025, the Company did not complete a formal Section 382 study on the potential limitation of its tax attributes due to no significant change in ownership.

The Company has made no provision for U.S. income taxes on undistributed earnings of certain foreign subsidiaries because it is the Company’s intention to permanently reinvest such earnings in its foreign subsidiaries. If such earnings were distributed, the Company would be subject to additional U.S. income tax expense.

The Company maintains liabilities for uncertain tax positions and such liabilities relate primarily to estimated tax credits and are treated as a reduction of deferred tax assets for tax credit carryforward. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available.

The aggregate changes in the balance of gross unrecognized tax benefits are as follows:

As of May 30, 2025 and May 31, 2024, the total amount of unrecognized tax benefits was approximately $2.5 million and $2.5 million, respectively. The unrecognized tax benefit of $2.5 million would impact the effective tax rate, if recognized. The Company had zero accrued interest and accrued penalties related to unrecognized tax benefit as of May 30, 2025. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months. The Company policy is to recognize interest and penalties in income tax expense.

The Company’s federal and state income tax returns are subject to possible examination by the taxing authorities until the expiration of the related statutes of limitations on those tax returns. In general, the federal income tax returns have a three-year statute of limitations, and the state income tax returns have a four-year statute of limitations. The Company’s foreign income tax returns are also subject to examination by the foreign tax authorities with the longest statute of limitations period of four-year. The Company is not currently under audit with the Internal Revenue Service, or any foreign, state or local jurisdictions, nor has it been notified of any other potential future income tax audit.