Ethan Allen Interiors Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Note 13 - Income Taxes

Note 13 - Income Taxes

12 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

(

)

Income Taxes

Income tax expense consists of the following components for the fiscal years ended

June 30 (

in thousands):

	2020			2019			2018
Current:
Federal	$	2,432		$	10,132		$	10,289
State		8			1,237			1,689
Foreign		325			304			824
Total current		2,765			11,673			12,802
Deferred:
Federal		181			(3,091	)		174
State		2,368			(381	)		(124	)
Foreign		(25	)		(39	)		(156	)
Total deferred		2,524			(3,511	)		(106	)
Total Income tax expense	$	5,289		$	8,162		$	12,696

The following is a reconciliation of our effective tax rate to the U.S. federal income tax rate for the fiscal years ended

June 30 (

in thousands):

	2020					2019					2018

Expected income tax expense at U.S. federal income tax rate	$	2,980		21.0	%	$	7,111		21.0	%	$	13,739		28.0	%
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal benefit		159		1.1	%		737		2.2	%		1,263		2.6	%
Change in valuation allowance		2,534		17.9	%		602		1.8	%		42		0.1	%
Remeasurement of deferred taxes for changes in statutory U.S. tax rate		-		0.0	%		-		0.0	%		(2,651	)	-5.4	%
Section 199 Qualified Production Activities deduction		-		0.0	%		-		0.0	%		(678	)	-1.4	%
Section 250 Foreign Derived Intangible Income deduction		-		0.0	%		(161	)	-0.5	%		-		0.0	%
Unrecognized tax benefits		(215	)	-1.5	%		26		0.1	%		55		0.1	%
Stock-based compensation - forfeitures and exercises		17		0.1	%		184		0.5	%		570		1.2	%
Other, net		(186	)	-1.3	%		(337	)	-1.0	%		356		0.7	%
Actual income tax expense (and corresponding effective tax rate)	$	5,289		37.3	%	$	8,162		24.1	%	$	12,696		25.9	%

The significant components of deferred tax assets recorded within the consolidated balance sheet were as follows at

June 30 (

in thousands):

	2020			2019
Deferred tax assets:
Leases	$	32,184		$	-
Employee compensation accruals		2,259			2,697
Stock-based compensation		670			715
Deferred rent		-			4,184
Net operating loss carryforwards		2,002			4,259
Property, plant and equipment		1,020			1,021
Other		2,825			2,341
Subtotal deferred tax assets		40,960			15,217
Less: Valuation allowance		(3,158	)		(3,197	)
Total deferred tax assets	$	37,802		$	12,020

The significant components of deferred tax liabilities recorded within the consolidated balance sheet were as follows at

June 30 (

in thousands):

	2020		2019
Operating lease right-of-use assets	$	27,334	$	-
Intangible assets other than goodwill		9,080		9,007
Commissions		2,207		1,974
Other		118		-
Total deferred tax liabilities	$	38,739	$	10,981

Deferred tax balances are classified in the consolidated balance sheets as follows at

June 30 (

in thousands):

	2020			2019
Other assets	$	137		$	2,108
Other non-current liabilities		1,074			1,069
Total net deferred tax asset (liability)	$	(937	)	$	1,039

We evaluate our deferred taxes to determine if the “more likely than

not”

standard of evidence has

not

been met thereby supporting the need for a valuation allowance. The evaluation of the amount of net deferred tax assets expected to be realized necessarily involves forecasting the amount of taxable income that will be generated in future years. We have forecasted future results using estimates management believes to be reasonable. Our forecasts are based on our best estimate of expected trends resulting from certain leading economic indicators. The realization of deferred income tax assets is dependent on future events. Actual results inevitably will vary from management's forecasts which

may

be impacted by the ongoing COVID-

pandemic, possibly resulting in a sustained economic downturn, or significantly extended economic recovery. Such variances could result in adjustments to the valuation allowance on deferred tax assets in future periods, and such adjustments could be material to the financial statements. A valuation allowance must be established for deferred tax assets when it is more likely than

not

that assets will

not

be realized.

June 30, 2020,

a valuation allowance of

$3.2

million was in place against the retail segment's U.S. state and local and Canadian tax assets. At

June 30, 2019,

such an allowance was in place against the Belgian and Canadian foreign tax assets and totaled

$3.2

million. With the liquidation of the Belgian subsidiary during fiscal

2020,

the valuation allowance of

$2.6

million was removed in the

fourth

quarter of fiscal

2020.

During fiscal

2020,

we recorded a

$2.5

million valuation allowance on our U.S. retail segment's state and local deferred tax assets that are now

not

considered more likely than

not

to be realized.

The deferred tax assets at

June 30, 2020

associated with net operating loss carryforwards and the related expiration dates are as follows (in thousands):

	Deferred		Net Operating Loss
	Tax Assets		Carryforwards
Various U.S. state net operating losses, expiring between 2025 and 2040	$	1,383	$	25,501
Foreign capital losses, expiring between 2034 and 2040	$	619	$	2,335

Deferred federal income taxes were previously

not

provided for unremitted foreign earnings of our foreign subsidiaries because we expected those earnings to be indefinitely reinvested. As part of the Tax Act, the Company reported the Deemed Repatriation Transition Tax (the “Transition Tax”) on previously untaxed accumulated earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we determined, in addition to other factors, the amount of post-

1986

E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We reported a Transition Tax obligation of

$0.1

million during fiscal

2018.

December 22, 2017,

the Tax Act was enacted. Among the significant changes to the United States Internal Revenue Code, the Tax Act lowered the United States federal corporate income tax rate (“Federal Tax Rate”) from

35%

21%

effective

January 1, 2018,

introduced a limitation on the deduction of certain interest expenses, introduced a deduction for certain business capital expenditures and introduced a system of taxing foreign-sourced income from multinational corporations. The Company computed its income tax expense for the

2018

fiscal year using a blended Federal Tax Rate of

28%.

The

21%

Federal Tax Rate applies to fiscal years ending

June 30, 2019

and each year thereafter. The Company re-measured its net deferred tax assets and liabilities using the Federal Tax Rate that would apply when these amounts were expected to reverse. At

June 30, 2018,

the Company's re-measurement of its deferred tax assets and liabilities resulted in a discrete tax benefit

$2.7

million, which lowered the effective tax rate by

5.4%

for that fiscal year.

Uncertain Tax Positions

We recognize interest and penalties related to income tax matters as a component of income tax expense. If the

$1.9

million of unrecognized tax benefits and related interest and penalties as of

June 30, 2020

were recognized, approximately

$1.5

million would be recorded as a benefit to income tax expense.

A reconciliation of the beginning and ending amount of unrecognized tax benefits including related interest and penalties as of

June 30, 2020

and

2019

is as follows (in thousands):

	2020			2019
Beginning balance	$	2,209		$	2,187
Additions for tax positions taken during the current year		214			329
Additions for tax positions taken during the prior year		126			143
Reductions for tax positions taken during the prior year		-			-
Decreases related to settlements with taxing authorities		-			-
Reductions resulting from a lapse of the applicable statute of limitations		(616	)		(450	)
Ending balance	$	1,933		$	2,209

It is reasonably possible that various issues relating to approximately

$0.4

million of the total gross unrecognized tax benefits as of

June 30, 2020

will be resolved within the next

twelve

months as exams are completed or statutes expire. If recognized, approximately

$0.4

million of unrecognized tax benefits would reduce our tax expense in the period realized.

The Company conducts business globally and, as a result, the Company or

one

or more of its subsidiaries files income tax returns in the United States, various state, and foreign jurisdictions. In the normal course of business, the Company is subject to examination by the taxing authorities in such major jurisdictions as the United States, Canada, Mexico and Honduras. As of

June 30, 2020,

the Company and certain subsidiaries are currently under audit from

2016

through

2018

in the United States. While the amount of uncertain tax benefits with respect to the entities and years under audit

may

change within the next

twelve

months, it is

not

anticipated that any of the changes will be significant.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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