NORTECH SYSTEMS INC Income Taxes Disclosure

NOTE 6. INCOME TAXES

 

The income tax expense consists of the following for the years ended December 31:

 SCHEDULE OF INCOME TAX EXPENSE

		2025				2024
Current
Federal		$	43			$	(287	)
State			26				22
Foreign			752				633
Deferred
Federal			(581	)			127
State			(117	)			(119	)
Foreign			140				(20	)
Income tax expense		$	263			$	356

 

The statutory rate reconciliation is as follows for the years ended December 31:

 SCHEDULE OF INCOME TAX STATUTORY RATE RECONCILIATION

		2025				2024
Statutory rate		$	2			$	(200	)
State income tax			(97	)			(101	)
Effect of foreign operations			88				(63	)
Maquiladora tax			128				187
Cross-border tax laws			147				492
Research and development			(73	)			13
Nontaxble and nondeductable items			28				(21	)
US permanent differences			14				(46	)
Other			26				95
Income tax expense (benefit)		$	263			$	356

 

On July 4, 2025, H.R. 1, the One Big Beautiful Bill Act (the “OBBB Act”), was enacted in the United States. The OBBB Act introduced several tax law changes relevant to the manufacturing industry. Key provisions include the restoration of 100% bonus depreciation for qualified property, expanded interest deductibility under Internal Revenue Code Section 163(j) and other international tax reforms affecting global supply chains and cross-border operations. The OBBB Act also reinstates immediate expensing for domestic research and development expenditures for tax years beginning after December 31, 2024, reversing prior rules that required capitalization and amortization of such costs. Due to the impact on GILTI provisions, the Company does not intend to take 100% bonus depreciation. It also does not intend to immediately expense R&D expenditures for 2025 or accelerate the deduction of previously capitalized R&D expenditures.

 

Income and loss from operations before income taxes was derived from the following jurisdictions for the years ended December 31:

 SCHEDULE OF INCOME AND LOSS FROM OPERATIONS BEFORE INCOME TAX

		2025				2024
United States		$	(3,210	)		$	(3,284	)
Foreign			3,221				2,345
Total		$	11			$	(939	)

 

 

Deferred tax assets (liabilities) consist of the following as of December 31:

 SCHEDULE OF DEFERRED TAX ASSETS (LIABILITIES)

		2025				2024
Deferred tax assets
Inventory		$	585			$	535
Net operating losses			140				241
Stock-based compensation			337				277
Other accruals			45				94
Lease accounting lease liability			1,484				1,624
Capitalized research expenses			1,078				928
Tax credit carryforwards			210				151
Intangibles			351				422
Other			1,145				542
Total deferred tax assets			5,375				4,814
Deferred tax liabilities
Lease accounting lease asset			(1,399	)			(1,562	)
Withholding tax			(360	)			(219	)
Prepaid expenses			(171	)			(186	)
Property and equipment			(353	)			(278	)
Other			(58	)			(213	)
Total deferred tax liabilities			(2,341	)			(2,458	)
Net deferred tax assets		$	3,034			$	2,356

 

The Company regularly assesses the need for a valuation allowance related to our deferred income tax assets to determine, based on the weight of the available positive and negative evidence, whether it is more likely than not that some or all of such deferred assets will not be realized. In our assessments, the Company considers recent financial operating results, potential sources of taxable income, the reversal of existing taxable differences, taxable income in prior carryback years, if permitted under tax law, and tax planning strategies. Based on our most recent assessment, for the year ended December 31, 2025, we have concluded that our deferred income tax assets are more likely than not to be realized. Our consolidated balance sheets as of December 31, 2025 and 2024 have a deferred tax asset of $3,394 and $2,575, respectively, related to our US taxable operations and a $360 and $219, respectively, deferred tax liability included other long-term liabilities related to our Chinese taxes, for a net deferred tax asset of $3,034 and $2,356, respectively.

 

As of December 31, 2025, we have no US Federal net operating loss carryforward and a Minnesota net operating loss carryforward (pre-tax, post-apportionment) of approximately $2,100.

 

As of December 31, 2025, the Company has US Federal and Minnesota R&D tax credits of approximately $100 and $100, respectively. These balances are recorded net of any uncertain tax position. The R&D credits have a 20-year carryforward for Federal purposes (begin to expire in 2044) and 15-year carryforward for Minnesota purposes (begin to expire in 2029).

 

 

The tax effects from uncertain tax positions can be recognized in our consolidated financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The following tables set forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for the years ended December 31, 2025 and 2024:

 SCHEDULE OF UNRECOGNIZED TAX BENEFIT LIABILITIES

Balance as of January 1, 2024		$	131
Tax positions - additions			13
Tax positions - reductions			(47	)
Balance as of December 31, 2024			97
Tax positions - additions			12
Tax positions - reductions			1
Balance as of December 31, 2025		$	110

 

Our policy is to accrue interest related to potential underpayment of income taxes with a corresponding increase in income tax expense. The liability for accrued interest as of December 31, 2025 and 2024 was not significant. Interest is computed on the difference between our uncertain tax benefit positions and the amount deducted or expected to be deducted in our filed tax returns.

 

We are subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, we are no longer subject to federal and state and local income tax examinations for years before 2021.