NOTE 6 - INCOME TAXES

The provision for income tax expense consists of:


	Year Ended September 30,
	2018		2017
Current:
Federal	$	1,441,000	$	2,381,000
State		127,000		50,000

Total current		1,568,000		2,431,000

Deferred:
Federal		631,000		1,238,000
State		126,000		91,000

Total deferred		757,000		1,329,000

Income tax expense	$	2,325,000	$	3,760,000

A reconciliation of the federal statutory tax rate to the total tax provision is as follows:


	Year Ended September 30,
	2018			2017
Federal income taxes computed at the statutory rate		24.3	%		34.0	%
State income taxes, net of federal benefit		1.4	%		1.2	%
Change in current tax rate		(3.0	%)		—
Change in deferred tax rate		(2.3	%)		—
Research & development tax refunds & credits		(1.8	%)		(2.1	%)
Dividend received deduction		(0.9	%)		(0.9	%)
Domestic production activities deduction		(1.2	%)		(2.8	%)
Incentive stock options		(1.0	%)		—
Other, net		0.1	%		1.5	%

Effective income tax rate		15.6	%		30.9	%

Deferred income tax assets and liabilities consist of the following:


	September 30,
	2018			2017
Deferred Tax Assets:
Accrued liabilities and reserves	$	218,000		$	351,000
Allowance for doubtful accounts		71,000			73,000
Inventory		494,000			778,000
R&D tax credits carryforwards		87,000			155,000
Stock-based compensation		104,000			95,000
Net operating losses carryforwards		57,000			58,000
Other		—			48,000

Gross Deferred Income Tax Assets		1,031,000			1,558,000

Deferred and Other Tax Liabilities:
Domestic international sales corporation		(543,000	)		(839,000	)
Percentage of completion		(1,717,000	)		(1,114,000	)
Property and equipment		(904,000	)		(694,000	)
Unrealized gain on investments		(75,000	)		(332,000	)
Unrecognized tax benefits		(150,000	)		(150,000	)
Other		—			(30,000	)

Gross Deferred and Other Income Tax Liabilities		(3,389,000	)		(3,159,000	)

Net Deferred and Other Income Tax Assets (Liabilities)	$	(2,358,000	)	$	(1,601,000	)

Total income taxes paid in fiscal 2018 and 2017 were $2,775,000 and $1,918,000, respectively.

Accounting principles generally accepted in the United States of America (“GAAP”) prescribes a comprehensive model for the financial recognition, measurement, classification, and disclosure of uncertain tax positions. GAAP contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Significant judgment is required in evaluating the Company’s uncertain tax position and determining the Company’s provision for taxes. Although the Company believes the reserves of unrecognized tax benefits (“UTB’s”) are reasonable, no assurance can be given that the final outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provision and accruals. The Company adjusts these reserves in light of changing facts and circumstances. As of September 30, 2018 and 2017, the Company had UTB’s of $150,000. There were no additional accruals of UTB’s during fiscal years ended September 30, 2018 and 2017.

The Company recognizes interest and penalties accrued related to UTB’s as a component of income tax expense. There were no additional accruals of interest expense nor penalties during fiscal years ended September 30, 2018 and 2017. It is reasonably possible that the amount of the UTB’s with respect to certain unrecognized tax positions will increase or decrease during the next 12 months. The Company does not expect the change to have a material effect on its results of operations or its financial position. The only expected potential reason for change would be the normal expiration of the statute of limitations or the ultimate results stemming from any examinations by taxing authorities. If recognized, the entire amount of UTB’s would have an impact on the Company’s effective tax rate.

The effective income tax rate for fiscal 2018 was 15.6% versus 30.9% in fiscal 2017 due primarily to changes in the corporate income tax rate.

As of September 30, 2017, the Company had no federal research and development tax credits (“R&D Credits”) carryforwards. In fiscal 2018, $249,000 of new credits were generated, all of which were used. There are no R&D Credits carryforwards as of September 30, 2018.

As of September 30, 2017, the Company had $155,000 in Florida state research and development tax credits (“Florida R&D Credits”) carryforwards. The Company received additional Florida R&D Credits of $25,000 in fiscal 2018 and used $93,000, leaving $87,000 of Florida R&D Credits carryforwards as of September 30, 2018. The $87,000 of Florida R&D Credits, which are included in net deferred and other income tax liabilities of $(2,358,000) at September 30, 2018, expire in fiscal 2022.

The Company files U.S. federal income tax returns, as well as Florida and Iowa income tax returns. The Company’s U.S. federal income tax returns filed for tax years prior to fiscal year ended September 30, 2015 are generally no longer subject to examination by taxing authorities due to the expiration of the statute of limitations.