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Income Taxes | 12 Months Ended
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Sep. 30, 2017
Income Taxes |
Income Taxes | 11. Income Taxes The components of income taxes are as follows:
|  | For the Fiscal Year Ended September 30, |
|  | 2017 |  | 2016 |  | 2015 |
Current provision (benefit): |  |  |  |  |  |  |
Federal |  | $ | 244,794 |  | $ | 77,244 |  | $ | (375,936 | )
State |  | 3,082 |  | (2,930 | ) | (10,146 | )
Total current provision (benefit) |  | 247,876 |  | 74,314 |  | (386,082 | )
Deferred provision: |  |  |  |  |  |  |
Federal |  | — |  | 493,989 |  | 2,598,050 |
State |  | 44 |  | 27 |  | 91,510 |
Total deferred provision |  | 44 |  | 494,016 |  | 2,689,560 |
Total current and deferred provision |  | $ | 247,920 |  | $ | 568,330 |  | $ | 2,303,478 |
Following is a reconciliation of the statutory federal rate to the Company’s effective income tax rate:
|  | For the Fiscal Year Ended September 30, |
|  | 2017 |  | 2016 |  | 2015 |
U.S. Federal statutory tax rate |  | 34.0 | % | 34.0 | % | 34.0 | %
State income taxes, net of federal benefit |  | (0.4 | )% | 0.2 | % | 0.0 | %
Permanent items |  | 0.2 | % | (0.2 | )% | (2.5 | )%
Research and development tax credits |  | 8.1 | % | (12.6 | )% | 17.4 | %
Valuation allowance |  | (35.9 | )% | (2.9 | )% | (110.0 | )%
Change in unrecognized tax benefits |  | (0.9 | )% | (0.1 | )% | (2.6 | )%
123R cancellations and forfeitures |  | 0.1 | % | 3.8 | % | (1.0 | )%
Effective income tax rate |  | 5.2 | % | 22.2 | % | (64.7 | )%
On December 19, 2014, the Tax Increase Prevention Act of 2014 was enacted, which retroactively extended the U.S. R&D Tax Credit through December 31, 2014. As a result, the Company’s effective income tax rate in fiscal year 2015 reflects an R&D Tax Credit for nine months from the fiscal year ended September 30, 2014 and three months ended December 31, 2014. On December 18, 2015, the Protecting Americans from Tax Hikes (PATH) Act was enacted, which retroactively and permanently extended the U.S. R&D Tax Credit. As a result, the Company’s effective income tax rate in fiscal year 2016 reflects an R&D Tax Credit for twelve months from the fiscal year ended September 30, 2015. The deferred tax effect of temporary differences giving rise to the Company’s deferred tax assets and liabilities consists of the components below:
|  | 2017 |  | 2016 |
|  | Non Current |  | Non Current |
Deferred tax assets: |  |  |  |  |
Reserves and accruals |  | $ | 1,275,427 |  | $ | 2,539,117 |
Research and development credit |  | 1,236,365 |  | 1,742,627 |
NOL carryforward - state |  | 1,208,592 |  | 1,206,476 |
Depreciation |  | (690,774 | ) | (725,018 | )
Stock options |  | 609,016 |  | 603,881 |
Other |  | — |  | — |
|  | 3,638,626 |  | 5,367,083 |
Less: Valuation allowance |  | (3,568,459 | ) | (5,297,757 | )
Total deferred tax assets |  | 70,167 |  | 69,326 |
Deferred tax liabilities: |  |  |  |  |
Depreciation |  | (137,909 | ) | (137,027 | )
Total deferred tax liabilities |  | (137,909 | ) | (137,027 | )
Net deferred tax liability |  | $ | (67,742 | ) | $ | (67,701 | )
At September 30, 2017 and 2016, respectively, the Company had state NOL carryforwards of $20.1 million, which begin to expire in varying amounts after the fiscal year ending September 30, 2026. The Company has federal R&D Tax Credit carryforwards of approximately $1,236,000 and $1,262,000 in fiscal 2017 and 2016, respectively, which begin to expire in varying amounts after fiscal year ending September 30, 2030. In fiscal 2016, the Company had state R&D Tax Credit carryforwards of $480,000 (net of federal impact), which begin to expire in varying amounts after the fiscal year ending September 30, 2023. In fiscal 2017, all state R&D tax credits were sold and the resultant gain of $669,000 was recognized in other income on the Consolidated Statements of Operations. Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be verified objectively, and significant management judgment is required in determining any valuation allowances recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if valuation allowances are required by considering available evidence, including historical and projected taxable income and tax planning strategies which are both prudent and feasible. ASC Topic 740 requires the consideration of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. The change in the valuation allowance for the period ended September 30, 2017 and September 30, 2016 was approximately $1.7 million and $0.1 million, respectively. The Company will continue to maintain the balance of the valuation allowance until an appropriate level of profitability is sustained to warrant a conclusion that it is no longer more likely than not that a portion of these net deferred tax assets will not be realized in future periods. There is currently no assurance of such future income before taxes. The Company believes that its estimate of future taxable income is inherently uncertain, and if its current or future operations generate losses, further adjustments to the valuation allowance are possible. Following is a reconciliation of beginning and ending balances of total amounts of gross unrecognized tax benefits:
|  | For the Fiscal Year Ended September 30, |
|  | 2017 |  | 2016 |  | 2015 |
Balance at beginning of year |  | $ | 615,000 |  | $ | 615,000 |  | $ | 526,000 |
Unrecognized tax benefits related to prior years |  | — |  | (2,000 | ) | — |
Unrecognized tax benefits related to current year |  | 18,000 |  | 26,000 |  | 125,000 |
Decrease in unrecognized tax benefits due to the lapse of applicable statute of limitations |  | (63,000 | ) | (24,000 | ) | (36,000 | )
Balance at end of year |  | $ | 570,000 |  | $ | 615,000 |  | $ | 615,000 |
The total liabilities associated with the unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate were $570,000, $615,000 and $615,000 at September 30, 2017, 2016 and 2015, respectively. It is not anticipated that the balance of unrecognized tax benefits at September 30, 2017 will change significantly over the next twelve months. The balance of unrecognized tax benefits as reflected in the table above at September 30, 2017 are recorded on the balance sheet as a reduction to deferred tax assets. The Company’s policy is to recognize interest accrued and, if applicable, penalties related to unrecognized tax benefits in income tax expense for all periods presented. At September 30, 2017, the Company currently has no unrecognized tax benefits against which interest has been accrued, and there is no accrual recorded for penalties. For the fiscal year ended September 30, 2017, 2016 and 2015, the Company recognized (benefit) expense of $0, $(3,000) and $(2,000), respectively, for interest (net of federal impact) within income tax expense. The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of related tax laws and regulations and require significant judgment to apply. The Company’s federal income tax returns for the fiscal years ended September 30, 2014 and thereafter are open years subject to examination by the Internal Revenue Service (“IRS”). The Company files income tax returns in various state jurisdictions, as appropriate, with varying statutes of limitation. During fiscal year 2012, the IRS examined the Company’s income tax return for the year ended September 30, 2010, and no adjustments resulted from this examination. There are no state income tax examinations in process at this time.

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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://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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