EMERSON RADIO CORP Income Taxes Disclosure

NOTE 5 — INCOME TAXES:

 

The Company accounts for uncertain tax positions in accordance with the provisions of ASC Topic 740-Accounting for Income Taxes. When uncertain tax positions exist, the Company will recognize the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of March 31, 2025, the Company does not believe it has any uncertain tax positions.

 

Income taxes are recorded in accordance with ASC 740, which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company determines its deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, which are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not some or all of the deferred tax assets will not be realized.

 

As of March 31, 2025, the Company had available net operating loss carryforwards to reduce federal and state income taxes of approximately $19.1 million and $21.1 million respectively. If not utilized, these carryforwards begin to expire in 2036. Of the federal net operating loss carryforwards at March 31, 2025, $19.1 million can be carried forward indefinitely. As of March 31, 2025, the Company had $2.0 million of foreign net operating loss carryforwards which do not expire.

 

Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future, as provided by Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, or Section 382, as well as similar state provisions and other provisions of the Code. Ownership changes may limit the amount of net operating losses and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, occurs when there is greater than 50% change in the ownership of stock among certain 5% shareholders over a three-year period.

 

The Company’s provision for income tax expense for fiscal 2025 and fiscal 2024 was as follows:

 

		2025				2024
		(In thousands)
Current:
Federal		$	3			$	78
Foreign, state and other			—				12
Deferred:
Federal			—				—
Foreign, state and other			—				—
Provision for income tax expense		$	3			$	90

 

The Company adopted ASU 2019-12 (Topic 740) Simplifying the Accounting for Income Taxes during fiscal 2024. In the table above, the income tax expense of $8,000 in fiscal 2025 and $9,000 in fiscal 2024, was removed as it represented non-income based taxes.

 

The Company files a consolidated federal return and certain state and local income tax returns.

 

The difference between the effective rate reflected in the provision for income taxes and the amounts determined by applying the statutory federal rate of 21% to earnings before income taxes for fiscal 2025 and fiscal 2024 is analyzed below:

 

		2025				2024
		(In thousands)
Statutory provision		$	(991	)		$	180
Foreign subsidiary			(118	)			(248	)
State taxes			(293	)			55
Permanent differences			124				261
Adjustment to prior year taxes			(355	)			86
Valuation allowance			1,636				(244	)
Provision for income tax expense		$	3			$	90

  

As of March 31, 2025 and March 31, 2024, the significant components of the Company's deferred tax assets and liabilities which were classified as non-current were as follows:

 

		2025				2024
		(In thousands)
Deferred tax assets:
Accounts receivable reserves		$	327			$	71
Inventory			175				190
Accruals			10				116
Net operating loss and credit carry forwards			5,649				4,152
Total deferred tax assets:			6,161				4,529
Valuation allowance			(6,145	)			(4,510	)
Net deferred tax assets:			16				19
Deferred tax liabilities:
Property and equipment			(16	)			(19	)
Total deferred tax liabilities:		$	(16	)		$	(19	)

 

The Company has $19.1 million of U.S. federal net operating loss carry forwards (“NOLs”) and $21.1 million of state NOLs as of March 31, 2025 as follows:

 

		Federal NOL's				State NOL's
Loss Year (Fiscal)		Included in DTA (in millions)				Included in DTA (in millions)				Expiration Year (Fiscal)
2014		$	—			$	—				2034
2016		$	—			$	0.6				2036
2017		$	—			$	0.8				2037
2018		$	—			$	2.6			Federal indefinite/State 2038
2019		$	1.9			$	2.7			Federal indefinite/State 2039
2020		$	3.7			$	3.0			Federal indefinite/State 2040
2021		$	4.0			$	3.2			Federal indefinite/State 2041
2022		$	3.4			$	2.9			Federal indefinite/State 2042
2024		$	2.4			$	2.1			Federal indefinite/State 2044
2025		$	3.7			$	3.2			Federal indefinite/State 2045
Total		$	19.1			$	21.1

 

The tax benefits related to these state NOLs and future deductible temporary differences are recorded to the extent management believes it is more likely than not that such benefits will be realized.

 

The income of foreign subsidiaries before taxes was $925,000 for the fiscal year ended March 31, 2025 as compared to income before taxes of $1,181,000 for the fiscal year ended March 31, 2024, respectively.

 

The Company analyzed the future reasonability of recognizing its deferred tax assets at March 31, 2025. As a result, the Company concluded that a valuation allowance of approximately $6,145,000 would be recorded against the assets.

 

The Company is subject to examination and assessment by tax authorities in numerous jurisdictions. As of March 31, 2025, the Company’s open tax years for examination for U.S. federal tax are tax years ending March 31, 2021 and forward. Based on the outcome of tax examinations or due to the expiration of statutes of limitations, it is reasonably possible that the unrecognized tax benefits related to uncertain tax positions taken in previously filed returns may be different from the liabilities that have been recorded for these unrecognized tax benefits. As a result, the Company may be subject to additional tax expense.

 

As of March 31, 2025 the Company is asserting under ASC 740-30 that all of the unremitted earnings of its foreign subsidiaries are indefinitely invested. The Company evaluates this assertion each period based on a number of factors, including the operating plans, budgets, and forecasts for both the Company and its foreign subsidiaries; the long-term and short-term financial requirements in the U.S. and in each foreign jurisdiction; and the tax consequences of any decision to repatriate earnings of foreign subsidiaries to the U.S.

 

The Tax Cut and Job Act (“TCJA”) establishes new tax rules designed to tax U.S. companies on global intangible low-taxed income (GILTI) earned by foreign subsidiaries. The Company has evaluated this provision of the TCJA and the application of ASC 740 and its impact is reflected in the financial statements as of March 31, 2025.