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Note D - Income Taxes | 12 Months Ended
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Sep. 30, 2018
Notes to Financial Statements |
Income Tax Disclosure [Text Block] | NOTE D – INCOME TAXES In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016 - 09, Improvements to Employee Share-Based Payment Accounting . The standard is required to be adopted by all companies in their first fiscal year beginning after December 15, 2016 but allows companies to early adopt prior to this date. The standard is intended to simplify various aspects of the accounting and presentation of share-based payments. During the quarter ended September 30, 2016, the Company elected to early adopt this standard as of October 1, 2015. Adoption of this standard had the following impact on the Company’s financial statements: Statements of earnings – The new accounting standard requires that the tax effects of stock-based compensation be recognized in the income tax provision of the Company’s Statements of Earnings. Previously, these amounts were recognized in additional paid-in capital on the Company’s Balance Sheets. The new standard requires these amounts to be recasted within these quarters due to the prospective adoption of this standard in the fourth quarter of fiscal 2016. Accordingly, tax benefits related to stock-based compensation awards of $104,134, $54,313, and $79,640 for the quarters ended December 31, 2015, March 31, 2016, and June 30, 2016, respectively, were recognized as reductions of income tax expense in the statements of earnings. These tax benefits reduced our effective income tax rate 5.2%, 2.5%, and 2.3% for the quarters ended December 31, 2015, March 31, 2016, and June 30, 2016, respectively. The changes were applied on a prospective basis and resulted in an increase in basic and diluted earnings per share of $0.01 and $0.01 for the quarters ended December 31, 2015 and June 30, 2016, respectively. The change had no effect on basic and diluted earnings per share for the quarter ended March 31, 2016. The net tax benefit recognized during the quarter ended September 30, 2016 was $437,096, which reduced our effective tax rate 13.7% to 16.3% for the quarter and resulted in an increase in basic and diluted earnings per share of $0.03 and $0.04, respectively. The net tax benefit recognized during the year ended September 30, 2016 was $675,183, which reduced our effective tax rate 6.2% to 26.4% for the year and resulted in an increase in basic and diluted earnings per share of $0.05. Statements of cash flows – The standard requires that excess tax benefits from stock-based employee awards be reported as operating activities in the Company’s Statements of Cash Flows. Previously, these cash flows were included as hypothetical inflows/outflows in both operating and financing activities. The Company elected to apply this change on a prospective basis, resulting in an increase in net cash provided by operating activities and a decrease in net cash used by financing activities of $348,000, $741,000, and $1,786,000 for the three months ended December 31, 2015, the six months ended March 31, 2016, and the nine months ended June 30, 2016, respectively, compared to the previously filed Form 10 -Qs. Statements of shareholders’ equity – The standard requires that as of the beginning of the annual period of adoption, previously unrecognized excess tax benefits be recognized on a modified retrospective basis and record a deferred tax asset for the balance with an offsetting adjustment to retained earnings. The Company recognized additional deferred tax assets and adjusted retained earnings in the amount of $1,864,980 on October 1, 2015. In recording stock-based compensation expense, the new standard allows companies to make a policy election as to whether they will include an estimate of awards expected to be forfeited or whether they will account for forfeitures as they occur. We have elected to include an estimate of forfeitures in the computation of our stock-based compensation expense. As this treatment is consistent with the Company’s previous practice, this election had no impact on our financial statements. The new standard requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the consolidated statements of cash flows. As this treatment is consistent with the Company’s previous practice, this election had no impact on our financial statements. Realization of net operating loss carry-forward and other deferred tax temporary differences are contingent upon future taxable earnings. The Company’s deferred tax assets were reviewed for expected utilization by assessing the available positive and negative factors surrounding its recoverability. As of September 30, 2017, the Company’s remaining valuation allowance of approximately $159,000 related to state net operating loss carry forwards. As a result of recording the impact of the Tax Cuts and Jobs Act (the “Tax Reform Act”) on its deferred assets and liabilities, the Company recorded an increase in its valuation allowance against state net operating losses carried forward of approximately $32,000 in the first quarter of 2018. D uring the fourth quarter of 2018, the Company reversed approximately $86,000 of its remaining valuation allowance. This consisted of decreasing the valuation allowance for the expiration and utilization of state net operating losses in 2018 of approximately $133,000 and increasing the valuation allowance by approximately $47,000 for future expected NOL utilization based on updated profitability estimates and the Federal rate change due to the Tax Reform Act. The remaining valuation allowance balance as of September 30, 2018 of $105,000 relates entirely to state net operating loss carry forwards we do not expect to utilize. The Company will continue to assess the assumptions used to determine the amount of our valuation allowance and may adjust the valuation allowance in future periods based on changes in assumptions of estimated future income and other factors. If the valuation allowance is reduced, we would record an income tax benefit in the period the valuation allowance is reduced. If the valuation allowance is increased, we would record additional income tax expense. The valuation allowance activity for the years ended September 30, 2018, 2017, and 2016 is as follows:
Year Ended |  |  | Balance at Beginning of Year |  |  |  | Income Tax Expense (Benefit) |  |  |  | Reversal for State NOL Expiration and Utilization |  |  |  | Balance at End of Year |
September 30, 2018 |  | $ | 159,154 |  |  | $ | 79,377 |  |  | $ | (133,673 | ) |  | $ | 104,858 |
September 30, 2017 |  |  | 322,404 |  |  |  | (32,154 | ) |  |  | (131,096 | ) |  |  | 159,154 |
September 30, 2016 |  |  | 658,808 |  |  |  | (78,044 | ) |  |  | (258,360 | ) |  |  | 322,404 |
Significant components of deferred income tax assets and liabilities are as follows at:
|  |  | September 30, 2018 |  |  |  | September 30, 2017 |
Long-term deferred income tax assets (liabilities): |  |  |  |
Intangibles |  | $ | (70,467 | ) |  | $ | (90,085 | )
Property and equipment depreciation |  |  | (552,119 | ) |  |  | (948,653 | )
Net operating loss carry forwards and credits |  |  | 464,274 |  |  |  | 551,125 |
Stock-based compensation |  |  | 151,558 |  |  |  | 209,645 |
Inventories |  |  | 400,111 |  |  |  | 503,632 |
Prepaid expenses |  |  | (60,806 | ) |  |  | (48,847 | )
Accrued expenses and reserves |  |  | 250,787 |  |  |  | 404,649 |
Goodwill |  |  | (583,415 | ) |  |  | (866,388 | )
Gross long-term deferred tax liability |  |  | (77 | ) |  |  | (284,922 | )
Valuation allowance |  |  | (104,858 | ) |  |  | (159,154 | )
Net long-term deferred tax liability |  | $ | (104,935 | ) |  | $ | (444,076 | )
As of September 30, 2018, the current income tax payable was approximately $464,000 and as of September 30, 2017, the current income tax receivable was $409,000. Current income tax payable amounts are included in Accrued Expenses and current income tax receivable amounts are included in Other Current Assets in the Company’s balance sheets. During the quarter ended December 31, 2015, the Company early adopted ASU 2015 - 17 to present balance sheet classification of deferred income taxes as noncurrent. This adoption was applied prospectively and therefore, prior periods were not retrospectively adjusted. As of September 30, 2018, the Company had no U.S. federal net operating loss (“NOL”) carry-forwards and approximately $3,468,000 state NOLs. The U.S. federal NOL carry forward amounts were fully utilized in fiscal year 2016. The state NOL carry forward amounts expire in fiscal years 2019 through 2022 if not utilized. In addition, as of September 30, 2018, the Company has Minnesota research and development and alternative minimum tax credits of $198,000 and $50,000, respectively. The Company has not recorded a valuation allowance on these deferred tax assets as the Company believes it is more likely than not they will be utilized before they begin to expire in fiscal year 2030. The Company completed an Internal Revenue Code Section 382 analysis of the loss carry forwards in 2009 and determined then that all of the Company’s loss carry forwards are utilizable and not restricted under Section 382. The Company has not updated its Section 382 analysis subsequent to 2009 and does not believe there have been any events subsequent to 2009 that would impact the analysis. Under ASU No. 2016 - 09, an entity recognizes all excess tax benefits and tax deficiencies relating to stock-based compensation as income tax expense or benefit in the statement of earnings. This change eliminates the notion of the “APIC” pool and related prior year disclosures for excess tax deductions not reflected in the Company’s deferred tax asset presentation. The following is a reconciliation of the federal statutory income tax rate to the effective tax rate as a percent of pre-tax income for the following years ended:
|  |  | September 30, 2018 |  |  |  | September 30, 2017 |  |  |  | September 30, 2016 |
Federal statutory rate |  |  | 24 | % |  |  | 34 | % |  |  | 34 | %
Federal rate change |  |  | (5 | %) |  |  | - |  |  |  | - |
State income taxes |  |  | 2 | % |  |  | 1 | % |  |  | 1 | %
Permanent differences |  |  | - |  |  |  | (1 | %) |  |  | - |
Change in valuation allowance |  |  | (3 | %) |  |  | (4 | %) |  |  | (3 | %)
Expiration and utilization of state NOL’s |  |  | 4 | % |  |  | 3 | % |  |  | 2 | %
Research and development credits |  |  | (1 | %) |  |  | (1 | %) |  |  | (1 | %)
Excess tax expense (benefits) from stock-based compensation |  |  | 2 | % |  |  | (1 | %) |  |  | (7 | %)
Tax rate |  |  | 23 | % |  |  | 31 | % |  |  | 26 | %
Components of the income tax expense are as follows for the years ended:
|  |  | September 30, 2018 |  |  |  | September 30, 2017 |  |  |  | September 30, 2016 |
Current: |  |  |  |  |  |
Federal |  | $ | 1,472,512 |  |  | $ | 1,627,125 |  |  | $ | 428,638 |
State |  |  | 120,034 |  |  |  | 78,552 |  |  |  | 106,623 |
Current income tax expense |  |  | 1,592,546 |  |  |  | 1,705,677 |  |  |  | 535,261 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | (463,798 | ) |  |  | 8,680 |  |  |  | 2,434,294 |
State |  |  | 124,657 |  |  |  | 23,617 |  |  |  | (93,523 | )
Deferred income tax expense |  |  | (339,141 | ) |  |  | 32,297 |  |  |  | 2,340,771 |
Income tax expense |  | $ | 1,253,405 |  |  | $ | 1,737,974 |  |  | $ | 2,876,032 |
The Company is required to recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applies the interpretation to all tax positions for which the statute of limitations remained open. The Company had no liability for unrecognized tax benefits and did not recognize any interest or penalties during the years ended September 30, 2018, 2017, or 2016. The Company is subject to income taxes in the U.S. federal jurisdiction, and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, income tax examinations by tax authorities for fiscal years ending prior to 2003. We are generally subject to U.S. federal and state tax examinations for all tax years since 2002 due to our net operating loss carryforwards and the utilization of the carryforwards in years still open under statute. During the year ended September 30, 2018, the Company was examined by the U.S. Internal Revenue Service for fiscal year 2016. This examination resulted in no adjustments. The Company changed its fiscal year end in 2007 from March 31 to September 30.

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- 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. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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