ALLIANCE ENTERTAINMENT HOLDING CORP Income Taxes Disclosure

Note 11: Income Taxes

 

The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns as well as tax credits carry forward. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax laws or rates. Valuation allowances are established as necessary to reduce deferred tax assets to an amount more likely than not to be realized.

 

 

The Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of total interest expense and other expense, respectively. As of June 30, 2025, and 2024, the Company did not have any material uncertain tax positions and thus has not recognized any interest or penalties in these consolidated financial statements. The Federal income tax return remains open for examination by the U.S. tax authorities for all years subsequent to 2020.

 

The components of the provision for (benefit from) income taxes for the fiscal year-ended June 30, 2025 and 2024 are as follows:

 Schedule of Income Tax Provision

($ in thousands)		2025				2024
		Year Ended June 30
($ in thousands)		2025				2024
Income Tax Expense:
Current:
Federal		$	592			$	475
State			715				431
Total Current Expense		$	1,308			$	906
Deferred:
Federal		$	2,404			$	(2,856	)
State			(81	)			(778	)
Total Deferred Expense (Benefit)			2,322				(3,634	)
Income Tax Expense (Benefit)		$	3,630			$	(2,728	)

 

The items accounting for the difference between income taxes computed at the U.S. federal statutory income tax rate and the income tax expense (benefit) at the effective tax rate for each of the years are as follows:

 Schedule of Effective Income Tax Rate Reconciliation

		Year Ended June 30
($ in thousands)		2025								2024
Federal Income Tax Provision at Statutory Rate		$	3,922				21	%		$	389				21	%
State Taxes, Net of Federal Benefits			634				3	%			(347	)			(19	)%
Other – Permanent Adjustments			26				0	%			20				1	%
Fair Value Adjustments on Warrants			178				1	%			-				-
Foreign Derived Intangible Income			(349	)			(2	)%			(293	)			(16	)%
Deferred Tax True-Up			(682	)			0	%			(2,730	)			(147	)%
Immaterial Income Tax out-of-period Adjustment			(99	)			(4	)%			-				0	%
Equity Compensation			-				0	%			233				13	%
Income Tax Expense (Benefit)		$	3,630				20	%		$	(2,728	)			(147	)%

 

Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for accounting purposes and the amounts used for tax purposes.

 

The components of deferred taxes consist of the following (amounts in thousands):

 Schedule of Components of Deferred Taxes

		Year Ended				Year Ended
($in thousands)		June 30, 2025				June 30, 2024
Deferred Tax Assets:
Other Deferred Tax Assets (ICDISC)		$	-			$	590
Net Operating Losses			4,856				8,607
Credit Losses			234				149
Inventory			2,364				2,990
Section 248 Organization Costs			1,674				1,827
Accruals Not Currently Deductible			5,170				3,481
Lease Liability			5,347				5,800
Total Deferred Tax Assets			19,645				23,444
Deferred Tax Liabilities:
Prepaids			(1,033	)			(918	)
Property and Equipment			(2,223	)			(3,864	)
Operating Lease Assets			(4,970	)			(5,732	)
Goodwill/Intangibles			(7,208	)			(6,397	)
Total Deferred Tax Liabilities			(15,434	)			(16,911	)
Net Deferred Tax Asset, Net		$	4,211			$	6,533

 

 

As of June 30, 2025, 2024 and 2023, The Company had recorded no unrecognized tax benefits and, therefore, no accrued interest or penalties for unrecognized tax positions. In addition, The Company is under examination by the Florida tax authorities. These proceedings may lead to adjustments or proposed adjustments to their taxes or provisions for uncertain tax provisions. The Company believes that it would prevail under such examination and, accordingly, has not recorded a provision for uncertain tax positions.

 

The Company evaluates deferred tax assets each period for recoverability. The Company records a valuation allowance for assets that do not meet the threshold of “more likely than not” to be realized in the future. To make that determination, the Company evaluates the likelihood of realization based on the weight of all positive and negative evidence available. As of June 30, 2025 and 2024, The Company has not recorded a valuation allowance.

 

The Company will reevaluate this determination quarterly and record a tax expense if and when future evidence requires a valuation allowance.

 

As of June 30, 2025, the Company had federal net operating loss carryforwards (“NOLs”) of $14.7 million and state NOLs of $19.3 million. Of these carryforwards, approximately $10.3 million will expire, if not utilized, in various years through 2043. The remaining carryforwards have no expiration.

 

The Internal Revenue Code of 1986, as amended, imposes restrictions on the utilization of net operating losses and certain credits in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses and certain credits may be limited as prescribed under.