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Income Taxes

12 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

10. Income Taxes

The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, and includes, among other items, a reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Our federal corporate income tax rate for fiscal 2018 was 24.5% percent and represents a blended income tax rate for the current fiscal year. For fiscal 2019, our federal corporate income tax rate was 21%.

Additionally, for the fiscal year ended September 30, 2018, in accordance with FASB ASC Topic 740, we remeasured our deferred tax balances to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The remeasurement resulted in a $8.8 million one-time adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet as of September 30, 2018 and a corresponding income tax benefit reflected in our consolidated statements of earnings for the fiscal year ended September 30, 2018. We recorded no remeasurement adjustment related to SEC Staff Accounting Bulletin No. 118.

Income tax expense (benefit) consisted of the following (in thousands):

		Years Ended September 30,
		2019				2018				2017
Current
Federal		$	3,005			$	2,438			$	2,989
State and local			1,037				1,219				1,097
Total current income tax expense			4,042				3,657				4,086

Deferred
Federal			913				(8,096	)			1,545
State and local			(92	)			1,321				728
Total deferred income tax expense (benefit)			821				(6,775	)			2,273

Total income tax expense (benefit)		$	4,863			$	(3,118	)		$	6,359

The Company and its subsidiaries do not operate in tax jurisdictions outside of the United States.

Income tax expense (benefit) differs from the “expected” income tax expense computed by applying the U.S. federal statutory rate to earnings before income taxes for the years ended September 30 as a result of the following (in thousands):

		Years Ended September 30,
		2019				2018				2017
Computed expected income tax expense		$	5,080			$	4,371			$	4,979
State income taxes, net of federal benefit			672				804				291
Deferred taxes on subsidiaries acquired/sold			-				709				-
Permanent differences			45				85				108
Change in deferred tax liability rate			-				(8,832	)			1,329
Reserve for uncertain tax position			-				-				406
Tax credits			(900	)			(808	)			(564	)
Other			(34	)			553				(190	)
Total income tax expense (benefit)		$	4,863			$	(3,118	)		$	6,359

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):

		September 30,
		2019				2018
Deferred tax assets:
Patron tax		$	621			$	948
Capital loss carryforwards			420				763
			1,041				1,711
Deferred tax liabilities:
Intangibles			(14,491	)			(13,110	)
Property and equipment			(8,024	)			(7,206	)
Other			(184	)			(947	)
			(22,699	)			(21,263	)
Net deferred tax liability		$	(21,658	)		$	(19,552	)

Included in the Company’s deferred tax liabilities at September 30, 2019 and 2018 is approximately $19.3 million and $17.3 million, respectively, representing the tax effect of indefinite-lived intangible assets from club acquisitions which are not deductible for tax purposes. These deferred tax liabilities will remain in the Company’s consolidated balance sheet until the related clubs are sold or impaired.

The Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. We recognize accrued interest related to unrecognized tax benefits as a component of accrued liabilities. We recognize penalties related to unrecognized tax benefits as a component of selling, general and administrative expenses, and recognize interest accrued related to unrecognized tax benefits in interest expense. During the year ended September 30, 2019 and 2018, the Company has accrued $0 and $165,000, respectively, (all related to previous years’ taxes) in uncertain state tax positions. In fiscal 2018, the Company released $700,000 of uncertain tax positions due to a settlement with New York state. In fiscal 2019, the Company released the remaining amount accrued when the examination was closed.

The following table shows the changes in the Company’s uncertain tax positions (in thousands):

		Years Ended September 30,
		2019				2018				2017
Balance at beginning of year		$	165			$	865			$	240
Additions for tax positions of prior years			-				-				625
Decrease related to settlements with taxing authorities			-				(700	)			-
Reduction due to lapse from closed examination			(165	)			-				-

Balance at end of year		$	-			$	165			$	865

The full balance of uncertain tax positions, if recognized, would affect the Company’s annual effective tax rate, net of any federal tax benefits. The Company does not expect any changes that will significantly impact its uncertain tax positions within the next twelve months.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. Fiscal year ended September 30, 2016 and subsequent years remain open to tax examination. The Company’s federal income tax returns for the years ended September 30, 2015, 2014 and 2013 have been examined by the Internal Revenue Service with no changes. These years are now under examination for payroll taxes. The Company is also being examined for state income taxes, the outcome of which may occur within the next twelve months.