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

		2024				2023
Current
Federal		$	(287	)		$	388
State			22				75
Foreign			633				491
Deferred
Federal			127				(2,360	)
State			(119	)			(241	)
Foreign			(20	)			239
Income tax expense (benefit)		$	356			$	(1,408	)

 

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

 SCHEDULE OF INCOME TAX STATUTORY RATE RECONCILIATION

		2024				2023
Statutory rate		$	(200	)		$	1,148
State income tax			(101	)			79
Effect of foreign operations			(126	)			(124	)
Research and development			(121	)			(316	)
Valuation allowance			-				(2,563	)
Maquiladora tax			176				158
US permanent differences			(48	)			(44	)
Global intangible low-taxed income effect			484				7
Withholding tax			143				318
Other			149				(71	)
Income tax expense (benefit)		$	356			$	(1,408	)

 

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

		2024				2023
United States		$	(3,284	)		$	3,307
Foreign			2,345				2,159
Total		$	(939	)		$	5,466

 

 

Deferred tax assets (liabilities) consist of the following for the years ended December 31:

 SCHEDULE OF DEFERRED TAX ASSETS (LIABILITIES)

		2024				2023
Deferred tax assets
Inventory		$	535			$	423
Net operating losses			241				-
Accrued bonus			-				440
Stock-based compensation			277				206
Other accruals			94				415
Lease accounting lease liability			1,624				1,229
Capitalized research expenses			928				1,007
Tax credit carryforwards			151				94
Intangibles			422				477
Other			542				139
Total deferred tax assets			4,814				4,430
Deferred tax liabilities
Lease accounting lease asset			(1,562	)			(1,168	)
Withholding tax			(219	)			(239	)
Prepaid expenses			(186	)			(213	)
Property and equipment			(278	)			(276	)
Other			(213	)			(133	)
Total deferred tax liabilities			(2,458	)			(2,029	)
Net deferred tax assets		$	2,356			$	2,401

 

We regularly assess 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, 2024, 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, 2024 have a deferred tax asset of $2,575 related to our US taxable operations and a $219 deferred tax liability included other long-term liabilities related to our Chinese taxes, for a net deferred tax asset of $2,356.

 

As of December 31, 2024, for U.S. state purposes, we have a Minnesota research and development credit carry forward of $123, which will begin to expire in 2029.

 

The Tax Cuts and Jobs Act (“TCJA”) was enacted on December 22, 2017 and includes the requirement to capitalize and amortize over years research and experimental expenditures beginning in 2022. As of December 31, 2024 and 2023 the deferred tax asset associated with capitalized research and experimental expenditures was $928 and $1,007, respectively.

 

 

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, 2024 and 2023:

 SCHEDULE OF UNRECOGNIZED TAX BENEFIT LIABILITIES

Balance as of January 1, 2023		$	50
Tax positions - additions			81
Tax positions - reductions			-
Balance as of December 31, 2023			131
Tax positions - additions			13
Tax positions - reductions			(47	)
Balance as of December 31, 2024		$	97

 

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, 2024 and 2023 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 2020.