FREQUENCY ELECTRONICS INC Income Taxes Disclosure

12. Income Taxes

 

The benefit from income taxes consisted of the following (in thousands):

 

		Fiscal Year Ended April 30,
		2025				2024
Current:
Federal		$	137			$	(127	)
State			374				(3	)
Current provision (benefit)			511				(130	)
Deferred:
Federal			(9,634	)			-
State			(2,419	)			-
Deferred tax benefit			(12,053	)			-
Total benefit		$	(11,542	)		$	(130	)

The following table reconciles the reported income tax provision with the amount computed using the federal statutory income tax rate (in thousands):  

 

		Fiscal Year Ended April 30,
		2025				2024
Statutory rate		$	2,550			$	1,147
State and local tax			223				167
Valuation allowance on deferred tax assets			(13,874	)			(1,060	)
Nondeductible expenses			5				4
FDII			(81	)			-
Uncertain tax positions			-				(127	)
Nontaxable life insurance cash value increase			(65	)			(63	)
Taxable life insurance gain			-				-
Capital loss			-				(8	)
Stock compensation			(153	)			106
Tax credits			(319	)			(16	)
Change in tax rate			173				(244	)
Other items			(1	)			(36	)
Total benefit		$	(11,542	)		$	(130	)

 

The components of deferred taxes are as follows (in thousands):

 

		Fiscal Year Ended April 30,
		2025				2024
Deferred tax assets:
Employee benefits		$	2,810			$	2,826
Inventory			2,876				2,536
Accounts receivable			144				70
Tax credits			1,945				2,173
Other assets			301				303
Deferred costs			1,511				681
Lease liability			2,128				1,547
Capital loss carry-forward			194				212
Research & development			2,247				1,104
Net operating loss carryforwards			2,276				6,320
Total deferred tax asset			16,432				17,772
Deferred tax liabilities:
Property, plant and equipment			(74	)			(191	)
Right of use asset			(2,104	)			(1,510	)
Other liabilities			(77	)			(61	)
Deferred state income tax			(779	)			(791	)
Net deferred tax asset			13,398				15,219
Valuation allowance			(1,353	)			(15,227	)
Net deferred tax asset (liability)		$	12,045			$	(8	)

 

In assessing the potential for realization of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. A valuation allowance, if needed, reduces the deferred tax assets to the amounts expected to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating loss carryforwards can be utilized. We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. Concluding that a valuation allowance is not needed is difficult when there is significant negative evidence such as cumulative losses in recent years.

For the fiscal year ended April 30, 2025, the valuation allowance decreased by approximately $13.9 million from the prior fiscal year primarily due to releasing the majority of the valuation allowance recorded against the deferred tax asset. The change in estimate occurred in the third quarter of fiscal year 2025 because Frequency no longer had cumulative losses in recent years due to significant earnings in the third quarter of fiscal year 2025. The positive evidence that led to the release of the valuation allowance in the third quarter included (i) objectively verifiable cumulative earnings as of January 31, 2025, (ii) utilization of net operating loss carryforwards and a reduction of the net deferred tax asset, (iii) a backlog of $73 million, and (iv) sufficient projections of future taxable income that supported the more-likely-than-not realization of the existing deferred tax asset and the remaining net operating loss carryforward. The projections of future taxable income were considered objectively verifiable positive evidence because the Company demonstrated a sustained return to profitability as of the third quarter of fiscal year 2025.

 

The Company maintains a valuation allowance of approximately $1.4 million against certain deferred tax assets including state tax credits and capital loss carryforwards because the realization of these tax attributes requires sufficient taxable income be sourced to the respective state jurisdiction and capital gain income is required to utilize capital losses. The Company will continue to evaluate the realizability of its deferred tax assets quarterly. Any further increases or decreases in the valuation allowance could have an unfavorable or favorable impact on the Company’s income tax provision and net income in the period in which such determination is made. As of April 30, 2025, the deferred tax asset is recorded at its more-likely-than-not realizable amount. 

 

As of April 30, 2025, the Company has U.S. federal net operating losses of $5 million of which $1.7 million begins to expire in fiscal year 2026 through fiscal year 2031. The U.S. federal net operating losses of $5 million includes $1.7 million which is subject to an annual limitation under Internal Revenue Code Section 382. The remaining U.S. federal net operating losses of $3.3 million have an indefinite carry-forward period. The U.S. federal capital loss carry-forward of $0.8 million expires in fiscal years 2028. U.S. federal R&D credits of $0.7 million begin to expire in fiscal year 2038 through fiscal year 2045. The Company also has state net operating loss carryforwards, and state tax credits that expire in various years and amounts.

 

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, is as follows (in thousands):

 

		2025				2024
Balance at the beginning of the fiscal year		$	111			$	230
Additions based on positions taken in the current year			-				-
Additions based on positions taken in prior years			45				-
Decreases based on positions taken in prior years			(12	)			-
Lapse in statute of limitations			-				(119	)
Balance at the end of the fiscal year		$	144			$	111

 

The entire amount reflected in the above table at April 30, 2025, if recognized, would reduce our effective tax rate. As of April 30, 2025 and 2024, the Company had $0, in both periods, accrued for the payment of interest and penalties. For the fiscal years ended April 30, 2025 and 2024, the Company recognized interest of $(0) and $(8,325), respectively. Although it is difficult to predict or estimate the change in the Company’s unrecognized tax benefits over the next twelve months, the Company believes $0 will be recognized in the next twelve months.

 

The Company is subject to taxation in the U.S. federal, and various state and local, jurisdictions. The Company is no longer subject to examination of its U.S. federal income tax returns by the Internal Revenue Service for fiscal years 2021 and prior. Net operating losses and tax attributes generated in closed years and utilized in open years are subject to adjustment by the tax authorities.