ROCKY BRANDS, INC. Income Taxes Disclosure

13. TAXES

 

We use the asset and liability method of accounting for income taxes based on ASC 740, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to reverse Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the asset will not be realized.

 

A breakdown of our income tax expense (benefit) for the years ended December 31 is as follows:

 

($ in thousands)		2024				2023				2022
Federal:
Current		$	(926	)		$	3,877			$	5,993
Deferred			2,337				(977	)			(1,417	)
Total federal			1,411				2,900				4,576
State & local:
Current			140				262				1,415
Deferred			148				123				(247	)
Total state & local			288				385				1,168
Foreign
Current			878				106				182
Deferred			94				337				(623	)
Total foreign			972				443				(441	)
Total		$	2,671			$	3,728			$	5,303

 

A reconciliation of recorded federal income tax expense to the expected expense computed by applying the applicable federal statutory rate for all periods to income before income taxes follows: 

 

		Year Ended December 31,
($ in thousands)		2024				2023				2022
Expected expense at statutory rate		$	2,947			$	2,975			$	5,414
Increase (decrease) in income taxes resulting from:
Tax on repatriated earnings from foreign operations			399				190				316
State and local income taxes			227				407				734
Tax rate differential effect of foreign operations			230				106				160
Permanent differences			165				69				11
Change in valuation allowance			(200	)			355				-
Provision to return filing adjustments and other			(117	)			329				(352	)
Foreign tax credit			(468	)			(227	)			(348	)
Exempt income from Dominican Republic operations due to tax holiday			(512	)			(476	)			(632	)
Total		$	2,671			$	3,728			$	5,303

 

Deferred income taxes recorded in the Consolidated Balance Sheets at December 31, 2024 and 2023 consisted of the following:

 

($ in thousands)		2024				2023
Deferred tax assets:
Inventories		$	3,640			$	2,428
Lease assets			1,252				1,853
Asset valuation allowances and accrued expenses			957				967
Transaction costs			608				684
Net operating losses			318				866
163(J) Interest limitation			262				4,644
State and local income taxes			195				305
Pension and deferred compensation			56				54
Total deferred tax assets			7,288				11,801
Valuation allowances			(155	)			(355	)
Total deferred tax assets			7,133				11,446
Deferred tax liabilities:
Intangible assets			11,908				11,713
Fixed assets			3,231				4,166
Lease liabilities			1,195				1,786
Other assets			587				748
Tollgate tax on Lifestyle earnings			228				228
State and local income taxes			28				280
Total deferred tax liabilities			17,177				18,921
Net deferred tax liability		$	10,044			$	7,475

 

The valuation allowance as of December 31, 2024 is related to certain foreign income tax net operating loss carry forwards.

 

We have provided Puerto Rico tollgate taxes on approximately $3.7 million of accumulated undistributed earnings of Lifestyle prior to the fiscal year ended June 30, 1994, that would be payable if such earnings were repatriated to the United States. In 2001, we received abatement for Puerto Rico tollgate taxes on all earnings subsequent to June 30, 1994; thus no other provision for tollgate tax has been made on earnings after that date. If we repatriate the earnings from Lifestyle, $0.2 million of tollgate tax would be due as of December 31, 2024. 

 

We are subject to tax examinations in various taxing jurisdictions. The earliest exam years open for examination are as follows:

 

		Earliest Exam Year
Taxing authority jurisdiction:
U.S. federal			2021
Various U.S. states		2020
Puerto Rico (U.S. territory)		2019
Canada		2019
China		2021
Mexico		2021
United Kingdom		2022
Australia		2022

 

Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax expense. As of December 31, 2024, no such expenses were recognized during the year. We do not believe there will be any material changes in our uncertain tax positions over the next 12 months.

 

Accounting for uncertainty in income taxes requires financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. Under this guidance, income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of the standard. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations.