ETHAN ALLEN INTERIORS INC Income Taxes Disclosure

(14)	Income Taxes

 

Income tax expense is based on taxable income determined in accordance with current enacted laws and tax rates. Deferred income taxes are recorded for the temporary differences between the financial statement and tax bases of assets and liabilities using currently enacted tax rates.

 

Income tax expense were as follows (in thousands):

 

		Fiscal Year Ended June 30,
		2025				2024				2023
U.S. operations		$	68,727			$	83,362			$	138,941
Non-U.S. operations			293				2,084				2,084
Income before income taxes		$	69,020			$	85,446			$	141,025
U.S. operations		$	16,753			$	21,001			$	34,679
Non-U.S. operations			671				629				539
Total income tax expense		$	17,424			$	21,630			$	35,218
Effective tax rate			25.2	%			25.3	%			25.0	%

 

The components of income tax expense were as follows (in thousands):

 

		Fiscal Year Ended June 30,
		2025				2024				2023
Current:
U.S. Federal		$	14,686			$	16,754			$	29,139
U.S. State and Local			3,044				4,150				7,076
Foreign			219				931				185
Total current			17,949				21,835				36,400
Deferred:
U.S. Federal			(980	)			(20	)			(1,362	)
U.S. State and Local			3				117				(174	)
Foreign			452				(302	)			354
Total deferred			(525	)			(205	)			(1,182	)
Total income tax expense		$	17,424			$	21,630			$	35,218

 

The following is a reconciliation of our effective tax rate to the U.S. federal income tax rate (in thousands):

 

		Fiscal Year Ended June 30,
		2025								2024								2023
Income tax expense at U.S. Federal statutory tax rate		$	14,494				21.0	%		$	17,944				21.0	%		$	29,616				21.0	%
Increase (decrease) in income taxes resulting from:
State and local income taxes, net of U.S. federal income benefit			2,237				3.2	%			2,749				3.2	%			5,203				3.7	%
Change in valuation allowance			500				0.7	%			491				0.6	%			-				-
Foreign derived intangible income deduction			(91	)			(0.1%	)			(137	)			(0.2%	)			428				0.3	%
Unrecognized tax benefits			122				0.2	%			709				0.8	%			(229	)			(0.2%	)
Stock-based compensation			219				0.3	%			228				0.3	%			5				-
Other, net			(57	)			(0.1%	)			(354	)			(0.4%	)			195				0.2	%
Total income tax expense (and corresponding effective tax rate)		$	17,424				25.2	%		$	21,630				25.3	%		$	35,218				25.0	%

 

The significant components of deferred tax assets and liabilities were as follows (in thousands):

 

		June 30,
		2025				2024
Assets
Operating lease liabilities		$	30,828			$	32,050
Employee compensation			2,607				2,196
Stock-based compensation			157				119
Net operating loss carryforwards			1,075				837
Property, plant and equipment, net			1,688				915
Valuation allowance			(991	)			(491	)
Other			2,670				3,185
Total deferred tax assets		$	38,034			$	38,811
Liabilities
Operating lease right-of-use assets		$	(27,234	)		$	(28,490	)
Intangible assets other than goodwill			(9,001	)			(9,014	)
Commissions			(2,852	)			(2,868	)
Other			(632	)			(650	)
Total deferred tax liabilities			(39,719	)			(41,022	)
Net deferred tax liabilities		$	(1,685	)		$	(2,211	)

 

The deferred tax assets at June 30, 2025 associated with net operating loss carryforwards and the related expiration dates are as follows (in thousands):

 

		Deferred				Net Operating
		Tax Assets				Loss Carryforwards			Expiration
Various U.S. net operating losses		$	607			$	10,000		Fiscal 2030-2045
Canada net operating loss		$	468			$	1,766		Fiscal 2039-2045

 

We evaluate our deferred taxes to determine if the “more likely than not” standard of evidence has not been met thereby supporting the need for a valuation allowance. A valuation allowance must be established for deferred tax assets when it is more likely than not that assets will not be realized. The evaluation of the amount of net deferred tax assets expected to be realized necessarily involves forecasting the amount of taxable income that will be generated in future years. We have forecasted future results using estimates management believes to be reasonable. Our forecasts are based on our best estimate of expected trends resulting from certain leading economic indicators. The realization of deferred income tax assets is dependent on future events. Actual results may vary from management's forecasts, which could result in adjustments to the valuation allowance on deferred tax assets in future periods.

 

At June 30, 2025, the Company’s deferred tax assets were subject to a $1.0 million valuation allowance, an increase from $0.5 million in the prior year period. During fiscal 2025, we recorded an additional $0.5 million valuation allowance in our Retail segment on the Canada deferred tax assets that are now not considered more likely than not to be realized. At June 30, 2024, the Company’s deferred tax assets were subject to a $0.5 million valuation allowance in our U.S. wholesale segments on state and local deferred tax assets held by our Lake Avenue Associates, Inc. wholly-owned subsidiary.

 

Uncertain Tax Positions

 

We recognize interest and penalties related to income tax matters as a component of income tax expense. As of June 30, 2025, we had gross unrecognized tax benefits totaling $3.9 million, consistent with the year ago period.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits including related interest and penalties is as follows (in thousands): 

 

		June 30,
		2025				2024
Beginning balance		$	3,888			$	3,000
Additions for current year tax positions			597				891
Additions for tax positions of prior years			352				335
Reductions resulting from lapse of applicable statute of limitations			(800	)			(338	)
Reductions related to settlements with taxing authorities			(114	)			-
Ending balance		$	3,923			$	3,888

 

We had $0.6 million and $0.5 million accrued for interest and penalties as of June 30, 2025 and 2024, respectively. If the $3.9 million of unrecognized tax benefits and related interest and penalties at June 30, 2025 were recognized, approximately $3.2 million would be recorded as a benefit to income tax expense. It is reasonably possible that various issues relating to approximately $1.0 million of the total gross unrecognized tax benefits at June 30, 2025 will be resolved within the next twelve months as exams are completed or statutes expire. If recognized, approximately $0.8 million of unrecognized tax benefits would reduce our income tax expense in the period realized.

 

The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries files income tax returns in the U.S., various state, and foreign jurisdictions. In the normal course of business, our tax filings are subject to examination by federal, state, and foreign taxing authorities. As of June 30, 2025, our U.S. federal income tax return for the tax year of 2022 through the current period remain subject to examination. In addition, we conduct business in various states which are subject to audit from fiscal year 2018 to the current year. Our foreign operations are subject to examination from the 2021 year through the current period in Canada and from the 2018 year through the current period in Mexico. We are not subject to income tax in Honduras.

 

On July 4, 2025, the U.S. President signed into law H.R.1, A bill to provide for reconciliation pursuant to Title II of H. Con. Res. 14, commonly referred to as the One Big Beautiful Bill Act (“OBBBA”). The OBBBA makes certain changes to U.S. federal tax laws, including provisions allowing accelerated tax deductions for qualified expenditures. We are in the process of evaluating the impact of the OBBBA on us, but based on the information currently available to us, we do not believe it will have a material impact on our consolidated financial statements.