12. INCOME TAXES

Net income from operations before provision for income taxes is shown below:

The Company files a consolidated federal income tax return based on a June 30 tax year end. The provision for income tax expense by jurisdiction and the effective tax rate for the years ended June 30, 2020 and 2019 are shown below:

Our effective tax rate was 16.9% and 31.0% for the years ended June 30, 2020 and 2019, respectively.  For the year ended June 30, 2020, the Company recorded tax expense which differed from the statutory rates primarily due to state taxes (net of federal tax benefit), Section 162(m) executive compensation, normal course non-deductible expenditures, offset by earnings from minority interest in joint venture investments, special deduction for foreign-derived intangible income (“FDII”), and fiscal 2019 and 2018 NOL carryback refund claim under the CARES Act.  For the year ended June 30, 2019, the Company recorded tax expense which differed from the statutory rates primarily due to state taxes (including state minimum franchise taxes net of federal tax benefit), and normal course non-deductible expenditures.

A reconciliation of the income tax provisions to the amounts computed by applying the statutory federal income tax rate to income before income tax provisions for the years ended June 30, 2020 and 2019, are set forth below:

Recent Developments

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act, referred to herein as the CARES Act, as a response to the economic uncertainty resulting from the COVID-19 pandemic. Key business tax provisions in the CARES Act include modifications for net operating loss (“NOL”) carryovers and carrybacks, limitations of business interest expense deduction, as well as technical correction to the Tax Cuts and Jobs Act of 2017, providing the bonus depreciation eligibility of qualified improvement property, and a fiscal year company to carryback NOL arising in its 2018 tax year under the prior NOL carryback regime, allowing for a two-year carryback. As of June 30, 2020, the Company considered the impact of the carryback utilization of net operating losses generated from fiscal years June 30, 2019 and 2018 as provided for in the CARES Act. The income tax impact of the NOL carryback is further discussed below.

The Tax Cut and Jobs Act enacted on December 22, 2017 included a tax incentive which allows U.S. corporations that earn income from qualifying sale, lease, or license of goods and services abroad in the form of a foreign derived intangible income (“FDII”) deduction which effectively taxes FDII at an effective rate of 13.125%. The incremental U.S. tax savings as a result of FDII in fiscal years 2020 and fiscal 2019 was $0.6 million and $0.0 million, respectively.

Tax Balances and Activity

Income Taxes Receivable and Payable

As of June 30, 2020, income taxes payable totaled $2.1 million compared to income tax receivable of $1.5 million in the comparative period.  The net income tax payable balance of $2.1 million is net of income tax receivable of $4.1 million primarily due to the carryback of fiscal 2019 and 2018 NOLs.

Deferred Tax Assets and Liabilities

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized by evaluating both positive and negative evidence. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  As of June 30, 2020 and June 30, 2019, management concluded that it was more likely than not that the Company would be able to realize the benefit of the U.S. federal and state deferred tax assets. We based this conclusion on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets.  Furthermore, the CARES Act allows NOLs originating after December 31, 2017 through January 1, 2021 to be carried back five years. It also enacts a technical correction to the Tax Cuts and Jobs Act of 2017 allowing non-calendar year filers with a taxable year that began in 2017 and ended during 2018, to carryback NOLs under the old tax laws, which enable the Company to fully utilize its NOLs. A tax valuation allowance was considered unnecessary as of June 30, 2020 and June 30, 2019.

As of June 30, 2020, the consolidated balance sheet reflects the deferred tax items for each tax-paying component (i.e., federal and state), resulting in a state deferred tax asset of $1.0 million and a federal deferred tax liability of $1.1 million. As of June 30, 2019, the consolidated balance sheet reflects the deferred tax items for each tax-paying component (i.e., federal and state), resulting in a state deferred tax asset of $1.6 million and a federal deferred tax asset of $1.6 million primarily comprised of net operating loss carryforwards. Deferred tax asset has been reduced by $3.2 million primarily due to the carryback utilization of federal NOLs under the CARES Act.

The schedule of deferred taxes presented below summarizes the components of deferred taxes that have been classified as deferred tax assets and deferred tax liabilities related to taxable and deductible temporary differences as of June 30, 2020 and June 30, 2019:

Net Operating Loss Carryforwards and Tax Credits

As of June 30, 2020 and June 30, 2019, the Company has approximately $0.0 million and $9.1 million of federal net operating loss carryforwards and approximately $12.6 million and $17.1 million, state and city net operating loss carryforwards, respectively. The reduction in federal NOLs to zero is due to the Company’s ability to carryback its NOLs to offset prior year’s taxable income under the CARES Act. The Company's combined federal, state and city tax-effected net operating loss carryforwards totaled, as of June 30, 2020 and June 30, 2019, $0.9 million and $3.1 million, respectively.  The state NOLs primarily originated from the Company’s normal course of business prior to the spinoff in 2014.  These state and city net operating loss carryforwards start to expire in the year ending June 30, 2022.

As of June 30, 2020 and June 30, 2019, the Company has approximately $0 and $53,000, respectively, of a California state tax credit that can be carried-over indefinitely to future tax years.

Unrecognized Tax Benefits

The Company has taken or expects to take certain tax benefits on its income tax return filings that it has not recognized a tax benefit (i.e., an unrecognized tax benefit) on its consolidated statements of income. The Company's measurement of its uncertain tax positions is based on management's assessment of all relevant information, including, but not limited to prior audit experience, audit settlement, or lapse of the applicable statute of limitations.  

Below is a reconciliation of the net unrecognized tax benefits for the years ended June 30, 2020 and 2019:

In addition to the $163,000 of accrued tax expense related to unrecognized tax positions, as shown in the table above, the Company has $42,000 of interest and $41,000 of penalties accrued to date related to its uncertain tax positions. As of June 30, 2020, the amount of this accrued liability (inclusive of the uncertain tax deductions and the associated interest and penalty accrual) totaled $246,000, and, if recognized, would reduce the Company's effective tax rate.

Tax Examinations

With exception of the open examinations noted below, either prior federal, state or local examinations have been completed by the tax authorities or the statute of limitations have expired for U.S. federal, state and local income tax returns filed for tax years through June 30, 2016.

Open Tax examinations

Tax examination that Closed during Fiscal Year 2020