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Note 8 - Income Taxes
 12 Months Ended
Sep. 30, 2023
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

8.

INCOME TAXES

 

Under the provisions of ASC 740, the deferred tax assets and liabilities of the Company were revalued in fiscal 2018 to reflect the reduction in the corporate federal income tax rate.  As a result of the revaluation, the excess deferred income taxes of the regulated operations of Roanoke Gas were reclassified to a regulatory liability.  The excess deferred taxes related to the depreciable property are being returned to customers over the remaining weighted average useful life of the property with a corresponding reduction in income tax expense. The excess deferred taxes related to the other regulatory basis differences are being collected from customers over a five-year period.

 

During fiscal 2022, the Company engaged an outside firm to conduct a study of its activities that would qualify for the Research and Development ("R&D") credit under 26 U.S. Code § 41 - Credit for increasing research activities.  Upon completion of the 2022 study, the Company filed for the R&D tax credit on its fiscal 2021 federal income tax return.  The total credits claimed on the fiscal 2021 income tax return amounted to $659,920.  The Company deferred the tax credits as a regulatory liability because they related to utility plant.  These credits are being amortized over the 20-year tax-life of the related utility plant.  The Company recognized $129,600 and $165,652 of amortization as reduction of income tax expense on the consolidated statements of income in fiscal 2023 and 2022, respectively, related to the federal R&D tax credits.  The Company has not yet completed a study of R&D activities for fiscal 2023 given the IRS audits in process, as discussed further below. Additionally, during fiscal 2023, the Company received refunds for the 2020 and 2021 tax years, neither of which are subject to the IRS audits.

 

During fiscal 2022, the Company also applied for a Virginia State tax credit related to the R&D study for its fiscal 2021 tax year. The total credits claimed on the fiscal 2022 tax return were $58,065. Consistent with the treatment of the federal tax credits, the Company deferred the tax credits as a regulatory liability, which are being amortized over the 20-year tax-life of the related utility plant.  The Company recognized $2,020 and $5,212 of amortization as a reduction of income tax expense on the consolidated statements of income in fiscal 2023 and 2022, respectively, related to the state R&D tax credits. The Company did not apply for a Virginia State tax credit related to R&D for fiscal 2023 given the IRS audits in process, as discussed further below.

 

In accordance with the SCC settlement agreement in relation to the Company’s non-gas rate application, the amortization of the R&D tax credit was halted effective August 1, 2023. After resolution of the IRS audits, the Company will proceed with refunding the R&D tax credits, net of related fees, to customers through a mechanism to be approved by the SCC. As part of the settlement, the Company grossed up the tax credit consistent with treatment of the excess deferred taxes, thereby creating a deferred tax asset of $990,219 as of September 30, 2023.

 

During fiscal 2023, the Company engaged an outside firm to conduct a study of its RNG facility to determine eligibility for the Federal Energy Investment Tax Credit under 26 U.S. Code § 48 – Energy credit (“RNG tax credit”).  Upon completion of the study, the Company determined a credit in the amount of $1,892,164 to be claimed on the fiscal 2023 tax return. Similar to the treatment of the R&D tax credits, the Company deferred the RNG tax credit as a regulatory liability, which is being amortized over the 20-year tax-life of the related asset. Further, as part of the SCC order approving the RNG project and corresponding rates charged to customers, any tax credits attributable to the RNG project are to be used to reduce the cost to customers through the RNG Rider. Accordingly, the Company grossed up the RNG tax credit consistent with treatment of the excess deferred taxes, thereby creating a deferred tax asset of $655,862, which is also being amortized over the 20-year tax-life of the related asset.  The Company recognized $74,265 of amortization as part of income tax expense on the consolidated statement of income in fiscal 2023 related to the federal RNG tax credit.

 

The details of income tax expense (benefit) are as follows: 

 

  

Years Ended September 30

 
  

2023

  

2022

 

Current income taxes:

        

Federal

 $2,935,052  $2,494,942 

State

  650,238   523,571 

Total current income taxes

  3,585,290   3,018,513 

Deferred income taxes:

        

Federal

  (223,862)  (11,160,425)

State

  262,103   (3,097,869)

Total deferred income taxes

  38,241   (14,258,294)

Amortization of R&D tax credits:

        

Federal

  (129,600)  (165,652)

State

  (2,020)  (5,212)

Total amortization of R&D tax credits

  (131,620)  (170,864)

Total income tax expense (benefit)

 $3,491,911  $(11,410,645)

 

Income tax expense for the years ended September 30, 2023 and 2022 differed from amounts computed by applying the U.S. federal income tax rate to earnings before income taxes due to the following:

 

  

Years Ended September 30

 
  

2023

  

2022

 

Income (loss) before income taxes

 $14,791,193  $(43,143,247)

Corporate federal income tax rate

  21%  21%

Income tax expense (benefit) computed at the federal statutory rate

 $3,106,151  $(9,060,082)

State income taxes, net of federal income tax expense (benefit)

  720,749   (2,033,695)

Net amortization of excess deferred taxes on regulated operations

  (162,228)  (162,228)

Amortization of R&D tax credits

  (131,620)  (170,864)

Net amortization of RNG tax credits

  (58,669)  — 

Other, net

  17,528   16,224 

Total income tax expense (benefit)

 $3,491,911  $(11,410,645)

 

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows:

 

  

September 30

 
  

2023

  

2022

 

Deferred tax assets:

        

Allowance for credit losses

 $39,938  $95,564 

Accrued pension and postretirement medical benefits

  591,841   486,745 

Regulatory effect of change in federal income tax rate

  2,655,951   2,708,809 

Accrued paid time off

  149,087   150,075 

Cost of gas held in storage

  752,989   702,040 

Deferred compensation

  1,020,512   993,079 

Accrued gas cost

  —   125,888 

MVP impairment

  14,180,759   14,180,759 

Regulatory effect on tax credits

  1,662,400   — 

Other

  263,971   124,034 

Total gross deferred tax assets

  21,317,448   19,566,993 

Deferred tax liabilities:

        

Utility property

  19,426,513   19,074,085 

MVP investment

  1,288,104   1,366,157 

Interest rate swaps

  1,188,533   1,235,126 

Accrued gas cost

  259,162   — 

Total gross deferred tax liabilities

  22,162,312   21,675,368 

Net deferred tax asset

  1,163,594   1,057,079 

Net deferred tax liability

 $2,008,458  $3,165,454 

 

Deferred tax assets and liabilities are recorded on the consolidated balance sheets on a net basis by taxing jurisdictions. As of September 30, 2023 and 2022, the Company's consolidated balance sheets included net deferred tax liabilities of $2,008,458 and $3,165,454, respectively, in deferred credits and other non-current liabilities and net deferred tax assets of $1,163,594 and $1,057,079, respectively, in other non-current assets.

 

ASC 740 provides for the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recognized in the financial statements. The Company has evaluated its tax positions and accordingly has not identified any significant uncertain tax positions.  The Company’s policy is to classify interest associated with uncertain tax positions as interest expense in the financial statements. Penalties are netted against other income.

 

The Company files a consolidated federal income tax return and state income tax returns in Virginia and West Virginia, and thus subject to examinations by federal and state tax authorities.  The IRS is currently examining the Company's 2018 and 2019 federal tax returns. The Company does not have any indication at this time of the outcome. The Company believes its income tax assets and liabilities are fairly stated as of September 30, 2023 and 2022; however, these assets and liabilities could be adjusted as a result of this examination.  With the amendment of the federal returns for fiscal 2017, 2018 and 2019, these years will remain open for IRS examination for one more year. Aside from these exceptions, the federal returns and the state returns for Virginia for the tax years ended prior to September 30, 2018 are no longer subject to examination.  The state returns for West Virginia prior to September 30, 2020 are no longer subject to examination.