NORTHERN TECHNOLOGIES INTERNATIONAL CORP Income Taxes Disclosure

15.	INCOME TAXES

 

The provision for income taxes for the fiscal years ended August 31, 2025 and 2024 was approximately as follows:

 

		Fiscal Year Ended August 31,
		2025				2024
Current:
Federal		$	—			$	—
State			69,000				48,000
Foreign			1,823,000				1,601,000
			1,892,000				1,649,000
Deferred:
Federal			—				—
State			—				—
Foreign			153,002				(323,203	)
			153,002				(323,203	)
		$	2,045,002			$	1,325,797

 

Reconciliations of the expected federal income tax at the statutory rate of 21.0% with the provisions for income taxes for the fiscal years ended August 31, 2025 and 2024 were approximately as follows:

 

		Fiscal Year Ended August 31,
		2025				2024
Tax computed at statutory rates		$	647,000			$	1,627,000
State income tax, net of federal benefit			120,000				21,000
Tax effect on equity in income of international joint ventures			(742,000	)			(887,000	)
Tax effect of foreign operations			875,000				371,000
Deemed repatriation			26,000				4,000
Foreign tax credit			—				(321,000	)
Research and development credit			(138,000	)			(512,000	)
Valuation allowance			1,363,000				1,066,000
Stock based compensation			77,002				175,000
Non-controlling interest			(62,000	)			(71,000	)
Prior year true-up			(112,000	)			(146,000	)
Other			(9,000	)			(1,203	)
		$	2,045,002			$	1,325,797

 

The Company has not provided U.S. income taxes or foreign withholding taxes with respect to its portion of the cumulative undistributed earnings of certain foreign subsidiaries and joint ventures that are essentially permanent in duration. As a result of the 2017 tax law changes, U.S. federal income taxes on dividends received from the Company’s foreign subsidiaries and joint ventures after December 31, 2017 have been generally eliminated. However, the Company continues to be subject to foreign withholding taxes upon repatriation of any undistributed earnings that are not essentially permanent in duration. The Company recorded tax expense of approximately $200,000 in fiscal 2025 and a tax benefit of approximately $180,000 during fiscal 2024, representing changes in the deferred tax liability for foreign withholding taxes to be paid with respect to the portion of the cumulative undistributed earnings of foreign subsidiaries and joint ventures that the Company determined were not essentially permanent in duration.

 

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. The tax effect of the temporary differences and tax carryforwards comprising the net deferred taxes shown on the consolidated balance sheets as of August 31, 2025 and 2024 was approximately as follows:

 

		August 31,
		2025				2024
Stock-based compensation		$	797,000			$	637,100
Foreign tax credit carryforward			2,814,400				3,844,800
Capitalized research and experimentation			2,472,400				2,037,800
Other credit and loss carryforward			6,757,900				5,974,200
Capital loss carryforward			129,900				—
Interest expense limitation			71,300				—
Other			922,400				965,368
Total deferred tax assets			13,965,300				13,459,268
Valuation allowance			(13,153,200	)			(12,694,800	)
Total deferred tax assets after valuation allowance			812,100				764,468
Right-of-use asset			(51,900	)			(64,700	)
Intangible assets			(1,457,700	)			(1,564,200	)
Unremitted foreign earnings			(234,600	)			(34,800	)
Other			(77,491	)			(61,100	)
Total deferred tax liabilities			(1,821,691	)			(1,724,800	)
Net deferred tax liabilities		$	(1,009,591	)		$	(960,332	)

 

As of August 31, 2025, the Company has foreign tax credit carryforwards of $2,814,400. This amount begins to expire to the extent not utilized by August 31, 2026. In addition, the Company had federal and state tax credit carryforwards of $5,575,300 as of August 31, 2025, which begin to expire in fiscal 2026.  These federal and state tax credit carryforwards consist primarily of federal and Minnesota research and development credit carryforwards. The Company also has a deferred tax asset of $832,700 for federal net operating loss carryforwards and $330,100 for state net operating loss carryforwards as of August 31, 2025. The federal net operating loss carryforward has an indefinite carryforward period. The state net operating loss carryforward will begin to expire to the extent not utilized by August 31, 2026. The Company has a deferred tax asset of $441,600 for foreign net operating loss carryforwards, which will begin to expire to the extent not utilized by August 31, 2033.

 

The Company records a tax valuation allowance to reduce deferred tax assets to the amount expected to be realized when it is more likely than not that some portion or all of its deferred tax assets will not be realized.

 

The Company determined based on all available evidence, including historical data and projections of future results, that it is more likely than not that its domestic deferred tax assets will not be realized due to the absence of objectively verifiable sources of taxable income. On the basis of this evaluation, the Company has recorded a valuation allowance of $13,153,200 and $12,694,800 as of August 31, 2025 and 2024, respectively, to recognize only the portion of the deferred tax assets that is more likely than not to be realized. The net deferred tax asset as of August 31, 2025 and 2024 relates entirely to non-US deferred tax assets which are expected to be realized offset by deferred tax liability for withholding tax on cumulative undistributed earnings in foreign subsidiaries and joint ventures that the Company determined were not essentially permanent. The change in the valuation allowance totaled an increase of $458,400 and $761,100 for the years ended August 31, 2025 and 2024, respectively.

 

The following is a tabular reconciliation of the total amounts of approximated unrecognized tax benefits:

 

		Fiscal Year Ended August 31,
		2025				2024
Gross unrecognized tax benefits – beginning balance		$	399,300			$	361,200
Gross (decreases) increases – prior period tax positions			(17,400	)			(5,400	)
Gross increases – current period tax positions			40,000				43,500
Gross unrecognized tax benefits – ending balance		$	421,900			$	399,300

 

The entire amount of unrecognized tax benefits would affect the effective tax rate if recognized.  It is not expected that the amount of unrecognized tax benefits will change significantly in the next 12 months.

 

The Company recognizes interest related to unrecognized tax benefits and penalties as income tax expense. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. There was no liability for the payment of interest and penalties as of both August 31, 2025 and August 31, 2024.

 

The Company is subject to taxation in the United States and various states and foreign jurisdictions. With few exceptions, as of August 31, 2025, the Company is no longer subject to federal, state, local, or foreign examinations by tax authorities for years prior to August 31, 2022.

 

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was signed into law, which included various provisions, including the reinstatement of full expensing for qualified business property acquired and placed in service after January 19, 2025. Further, the OBBBA includes other provisions which are not effective for the Company until years ending August 31, 2026 and beyond, including immediate expensing of domestic research and experimental expenditures, modification of the limitation on the business interest deduction, and on the taxation of foreign operations. We do not expect the OBBBA to have a material impact on our consolidated financial statements.