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

Annual report pursuant to Section 13 and 15(d)

Note 11 - Income Taxes

Note 11 - Income Taxes

12 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

(

)

Income Taxes

Income tax expense attributable to income from operations consists of the following for the fiscal years ended

June 30 (

in thousands):

	2017		2016			2015
Current:
Federal	$	15,265	$	27,660		$	15,064
State		1,585		2,898			489
Foreign		445		88			55
Total current		17,295		30,646			15,608
Deferred:
Federal		3,413		(237	)		2,979
State		85		207			759
Foreign		8		703			195
Total deferred		3,506		673			3,933
Income Tax Expense (Benefit)	$	20,801	$	31,319		$	19,541

The following is a reconciliation of expected income tax expense (benefit) (computed by applying the federal statutory income tax rate to income before taxes) to actual income tax expense (benefit) (in thousands):

	2017					2016					2015

Expected Income Tax Expense	$	19,947		35.0	%	$	30,785		35.0	%	$	19,839		35.0	%
State income taxes, net of federal income tax		1,403		2.5	%		2,514		2.9	%		1,597		2.8	%
Valuation allowance		329		0.6	%		339		0.4	%		409		0.7	%
Section 199 Qualified Production Activities deduction		(999	)	-1.8	%		(1,513	)	-1.7	%		(998	)	-1.8	%
Unrecognized tax expense (benefit)		(48	)	-0.1	%		(479	)	-0.5	%		(641	)	-1.1	%
Other, net		169		0.3	%		(327	)	-0.4	%		(665	)	-1.2	%
Actual income tax expense (benefit)	$	20,801		36.5	%	$	31,319		35.6	%	$	19,541		34.5	%

The deferred income tax asset and liability balances at

June 30 (

in thousands) include:

	2017			2016
Deferred tax assets:
Employee compensation accruals		4,395			4,343
Stock based compensation		2,878			2,665
Deferred rent credits		7,290			6,705
Net operating loss carryforwards		3,687			3,375
Inventories		1,254			155
Goodwill		953			1,729
Other, net		2,396			2,504
Total deferred tax assets		22,853			21,476
Less: Valuation allowance		(2,485	)		(2,155	)
Net deferred tax assets	$	20,368		$	19,321

	2017			2016
Deferred tax liabilities:
Property, plant and equipment		5,360			654
Intangible assets other than goodwill		14,166			14,260
Commissions		3,420			3,478
Other, net		-			-
Total deferred tax liability		22,946			18,392
Total net deferred tax asset (liability)	$	(2,578	)	$	929

The deferred tax balances are classified in the Consolidated Balance Sheets as follows at

June 30 (

in thousands):

	2017			2016
Current assets	$	3,916		$	3,174
Non-current assets		1,167			835
Current liabilities		-			-
Non-current liabilities		7,661			3,080
Total net deferred tax asset (liability)	$	(2,578	)	$	929

Current deferred tax assets and liabilities and non-current deferred tax assets and liabilities have been presented net in the Consolidated Balance Sheets.

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. A valuation allowance must be established for deferred tax assets when it is less than

50%

likely that assets will be realized. At

June 30

2017

and

2016,

such an allowance was in place against the Belgian foreign tax assets, and at

June 30, 2017

this valuation allowance was approximately

$2.5

million.

The Company’s deferred income tax assets at

June 30, 2017

with respect to the net operating losses expire as follows (in thousands):

	Deferred		Net Operating
	Income		Loss
	Tax Assets		Carryforwards
United States (State), expiring between 2018 and 2032	$	1,110	$	23,760
Foreign, Expiring in 2034		2,577		7,622

Deferred U.S. federal income taxes are

not

provided for unremitted foreign earnings of our foreign subsidiaries because we expect those earnings will be permanently reinvested.

Uncertain Tax Positions

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

$2.1

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

June 30, 2017

were recognized, approximately

$1.4

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, 2017

and

2016

is as follows (in thousands):

	2017			2016
Beginning balance	$	2,170		$	3,117
Additions for tax positions taken		646			776
Reductions for tax positions taken in prior years		(694	)		(1,530	)
Settlements		(16	)		(193	)
Ending balance	$	2,106		$	2,170

It is reasonably possible that various issues relating to approximately

$0.2

million of the total gross unrecognized tax benefits as of

June 30, 2017

will be resolved within the next

twelve

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

$0.1

million of unrecognized tax benefits would reduce our tax expense in the period realized. However, actual results could differ from those currently anticipated.

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

one

or more of its subsidiaries files income tax returns in the U.S., 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 U.S. Canada, Mexico, Belgium and Honduras. As of

June 30, 2017,

the Company and certain subsidiaries are currently under audit from

2014

through

2016

in the U.S. 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.