SPAR Group, Inc. Income Taxes Disclosure

5. Income Taxes

 

Beginning in 2018, the Tax Cuts and Jobs Act (the "Act”) included two (2) new U.S. corporate tax provisions, the global intangible low-taxed income regime ("GILTI”) and the base-erosion and anti-abuse tax ("BEAT”). The GILTI provision requires the Company to include in its U.S. income tax return non-U.S. subsidiary earnings in excess of an allowable return on the non-U.S. subsidiary’s tangible assets. The Company has elected to treat GILTI as a period cost. The Company evaluated the GILTI provision resulting in a financial statement impact of approximately $0.28 million and $0 for the year ended December 31, 2024 and December 31, 2023 respectively. The Company is below the three-year average gross receipts threshold for BEAT to apply.

 

Income (loss) before income taxes is summarized as follows (in thousands):

 

		Year Ended December 31,
		2024				2023
Domestic		$	1,234			$	(2,134	)
Foreign			(2,703	)			9,267
Total:		$	(1,469	)		$	7,133

 

The income tax expense (benefit) is summarized as follows (in thousands):

 

		Year Ended December 31,
		2024				2023
Current:
Federal		$	21			$	(54	)
Foreign			2,475				2,311
State			222				150
Deferred:
Federal			(1,196	)			(145	)
Foreign			(114	)			91
State			(190	)			4
Net expense		$	1,218			$	2,357

 

The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The items causing this difference are as follows (dollars in thousands):

 

		Year Ended December 31,
		2024				Rate				2023				Rate
Provision for income taxes at federal statutory rate		$	(309	)			21.0	%		$	1,498				21.0	%
State income taxes, net of federal benefit			32				(2.2	)%			123				1.7	%
Permanent differences			(45	)			3.1	%			282				4.0	%
Section 162(m) adjustment			245				(16.7	)%			55				0.8	%
Return to provision adjustment			(10	)			0.7	%			(339	)			(4.8	)%
Foreign tax rate differential			(157	)			10.7	%			877				12.3	%
GILTI tax			284				(19.3	)%			-				-
Sale of membership interest			-				0.0	%			149				2.1	%
Sale of foreign entities			102				(6.9	)%			-				-
Transaction costs			118				(8.0	)%			-				-
Withholding tax			1,046				(71.2	)%			-				-
Subpart F Income			213				(14.5	)%			-				-
Foreign tax credit			(556	)			37.8	%			-				-
Foreign disregarded income			292				(19.9	)%
Change in valuation allowance			(2	)			0.1	%			(268	)			(3.8	)%
Other			(35	)			2.4	%			(20	)			(0.3	)%
Net expense		$	1,218				-82.9	%		$	2,357				33.0	%

 

 

Deferred taxes consist of the following (in thousands):		December 31,
		2024				2023
Deferred tax assets:
Net operating loss carry forwards		$	389			$	2,270
Capital loss carry forwards			–				58
Federal research and development credit			164				240
Foreign withholding tax			872				316
Accrued payroll			4				155
Transaction costs			753				-
Allowance for credit losses and other receivable			93				63
Share-based compensation expense			258				253
Business interest limitation			889				519
Operating lease liability			128				504
Capitalized software development costs			277				63
Other			891				1,371
Total deferred tax assets, gross			4,718				5,812
Valuation allowance			-				(242	)
Total deferred tax assets			4,718				5,570
Deferred tax liabilities:
Goodwill & Intangible assets of subsidiaries			291				324
Right to use asset			127				504
Depreciation			41				55
Total deferred tax liabilities			459				883
Net deferred income taxes		$	4,259			$	4,687

 

As of December 31, 2024, the Company’s deferred tax assets were primarily the result of the business interest limitation and transaction costs. The Company has gross U.S. Federal NOL carryforwards of $1.5 million and tax effected amount of $0.3 million. The $0.3 million U.S Federal NOL carryforward has no expiration date. The Company has a U.S. State NOL deferred tax asset of $0.1 million of varying expiration dates from 2024 to 2041. The Company has $0.1 million of US Research and Development credits with expiration dates ranging from 2031 to 2035. The Company has $0.9 million of US foreign tax credits with expiration dates ranging from 2033 to 2034.

 

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing net deferred tax assets. U.S.-based net deferred tax assets are approximately $4.2 million. Management continues to monitor its operating performance and currently believes that the achievement of the required future taxable income necessary to realize these deferred assets is more likely than not. Key considerations in this assessment include our expectation of continued improvements in U.S. operating results and the period of time available to generate future taxable income.

 

A reconciliation of the beginning and ending amount of uncertain tax position reserves is as follows (in thousands):

 

		Year Ended December 31,
		2024				2023
Beginning balance		$	54			$	46
Additions based on tax positions related to the current year			60				8
Ending balance		$	114			$	54

 

The provision for income taxes includes the impact of uncertain tax position reserves and changes to reserves that are considered appropriate. As of December 31, 2024, included in the balance of uncertain tax position reserves are $0.11 million of reserves that, if recognized, would affect the effective rate of income from continuing operations. Interest and penalties that the tax law requires to be paid on the underpayment of taxes should be accrued on the difference between the amount claimed or expected to be claimed on the return and the tax benefit recognized in the financial statements. The Company's policy is to record this interest and penalties as additional tax expense. We accrued penalties of $0.8 thousand and interest of $3 thousand during 2024 and in total, as of December 31, 2024 recognized a liability related to the uncertain tax position reserves noted above for penalties of $16 thousand and interest of $20 thousand. During 2023, we accrued penalties of $1 thousand and interest of $0.4 thousand and in total, as of December 31, 2023, recognized a liability of penalties of $15 thousand and interest of $17 thousand. Management does not expect in the next 12 months that the uncertain tax position reserves will significantly increase or decrease. Consistent with that expectation, interest and penalties related to the uncertain tax position reserve should not significantly increase.

 

Details of the Company's tax reserves at December 31, 2024 are outlined in the table below (in thousands).  These reserves are presented on the balance sheet within accrued expenses and other current liabilities.

 

		Taxes				Interest				Penalty				Total Tax Liability
Domestic
State		$	114			$	20			$	16			$	150
Federal			–				–				–				–
International			–				–				–				–
Total reserve		$	114			$	20			$	16			$	150

 

 

In management's view, the Company's tax reserves at December 31, 2024 and 2023, for potential domestic state tax liabilities were sufficient.

 

SPAR and its subsidiaries file numerous consolidated, combined and separate company income tax returns in the U.S. Federal jurisdiction and in many U.S. states and foreign jurisdictions. With few exceptions, SPAR is subject to U.S. Federal, state and local income tax examinations for the years 2021 through the present. Foreign entities are subject to tax audits that vary based on jurisdiction. However, tax authorities have the ability to review years prior to the position taken by the Company to the extent that SPAR utilized tax attributes carried forward from those prior years.