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INCOME TAXES | 12 Months Ended
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Jan. 02, 2021
INCOME TAXES |
8. INCOME TAXES | 8. INCOME TAXES Deferred income taxes are provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and those for income tax reporting purposes. Deferred income tax (assets) liabilities relate to:
|  | 2020 |  |  | 2019 |
Property, plant and equipment |  | $ | 4,460,316 |  |  | $ | 4,638,141 |
Right of Use Asset |  |  | 3,014,148 |  |  |  | 2,933,189 |
Intangible assets |  |  | 8,913,638 |  |  |  | 9,236,711 |
Other |  |  |  |  |  |  | 380,336 |
Foreign Withholding Tax |  |  | 250,432 |  |  |  | 315,747 |
Total deferred income tax liabilities |  |  | 16,638,534 |  |  |  | 17,504,124 |
Other postretirement benefits |  |  | (279,776 | ) |  |  | (239,348 | )
Inventories |  |  | (1,091,887 | ) |  |  | (1,422,472 | )
Allowance for doubtful accounts |  |  | (120,150 | ) |  |  | (123,172 | )
Accrued compensation |  |  | (399,057 | ) |  |  | (311,125 | )
Lease Obligation |  |  | (3,014,148 | ) |  |  | (2,933,189 | )
Pensions |  |  | (7,761,369 | ) |  |  | (6,804,275 | )
Foreign Tax Credit |  |  | (976,000 | ) |  |  | (400,078 | )
Other |  |  | (97,072 | ) |  |  | -- |
Total deferred income tax assets |  |  | (13,739,459 | ) |  |  | (12,233,659 | )
Net deferred income tax (assets) liabilities |  | $ | 2,899,075 |  |  | $ | 5,270,465 |
Income before income taxes consists of:
|  | 2020 |  |  | 2019 |
Domestic |  | $ | 5,196,096 |  |  | $ | 12,537,168 |
Foreign |  |  | 829,516 |  |  |  | 3,668,803 |
|  | $ | 6,025,612 |  |  | $ | 16,205,971 |
8. INCOME TAXES (continued) The provision for income taxes follows:
|  | 2020 |  |  | 2019 |
Current: |  |  |  |  |  |
Federal |  | $ | (503,106 | ) |  | $ | 2,783,481 |
Foreign |  |  | 1,096,839 |  |  |  | 1,001,270 |
State |  |  | 223,978 |  |  |  | 489,921 |
Deferred: |  |  |  |  |  |  |  |
Federal |  |  | (46,555 | ) |  |  | (756,206 | )
Foreign |  |  | (65,315 | ) |  |  | (225,014 | )
State |  |  | (85,751 | ) |  |  | (353,623 | )
|  | $ | 620,090 |  |  | $ | 2,939,829 |
A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows:
|  | 2020 |  |  | 2019 |
|  | Amount |  |  | Percent |  |  | Amount |  |  | Percent |
Income taxes using U.S. federal statutory rate |  | $ | 1,265,378 |  |  |  | 21 | % |  | $ | 3,403,254 |  |  |  | 21 | %
State income taxes, net of federal benefit |  |  | 96,742 |  |  |  | 1 |  |  |  | 117,276 |  |  |  | 1 |
Impact on Foreign Repatriation Tax Reform |  |  | 139,765 |  |  |  | 2 |  |  |  | -- |  |  |  | 0 |
Impact of foreign subsidiaries on effective tax rate |  |  | 165,210 |  |  |  | 3 |  |  |  | (239,823 | ) |  |  | (2 | )
Impact of Research & Development tax credit |  |  | (188,944 | ) |  |  | (3 | ) |  |  | (411,090 | ) |  |  | (3 | )
Uncertain tax positions reserve |  |  | (926,101 | ) |  |  | (15 | ) |  |  | 0 |  |  |  | 0 |
Other—net |  |  | 68,040 |  |  |  | 1 |  |  |  | 70,212 |  |  |  | 1 |
|  | $ | 620,090 |  |  |  | 10 | % |  | $ | 2,939,829 |  |  |  | 18 | %
Total income taxes paid were $3,755,475 in 2020 and $3,197,984 in 2019. Pursuant to SAB 118, the company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts and as such has adjusted for the finalization of the tax impacts in the fourth quarter of 2018. The change primarily related to deferred taxes. Under accounting standards (ASC 740), a deferred tax liability is not recorded for the excess of the financial reporting (book) basis over the tax basis of an investment in a foreign subsidiary if the indefinite reinvestment criteria are met. Effective for foreign earnings after December 30, 2017, if such earnings are distributed in the form of cash dividends, the Company would not be subject to additional U.S. income taxes but could be subject to foreign income and withholding taxes. A provision has not been made for additional U.S. federal and foreign taxes at January 2, 2021 on approximately $7,712,164 of undistributed earnings of foreign subsidiaries because the Company intends to reinvest these funds indefinitely. It is not practicable to estimate the unrecognized deferred tax liability for withholding taxes on these undistributed earnings. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The list of changes is comprehensive. The changes include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, ASU 2019-12 requires that entities recognize franchise tax based on an incremental method, requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination, and removes the requirement to allocate the current and deferred tax provision among entities in standalone financial statement reporting. The ASU also now requires that an entity reflect enacted changes in tax laws in the annual effective rate, and other Codification adjustments have been made to employee stock ownership plans. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company will adopt ASU 2019-12 in the first interim period of 2021. 8. INCOME TAXES (continued) On March 27, 2020, the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (the “CARES Act”) became law. The CARES Act includes a variety of economic and tax relief measures intended to stimulate the economy, including loans for small businesses, payroll tax credits/deferrals, and corporate income tax relief. We are analyzing the following components of the CARES Act to determine their effect on our income tax provision:
| · | Net operating losses arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years, which may result in refunds of prior period corporate income tax. The Company had taxable income in 2018 and 2019, thus we would only benefit from this item of CARES Act relief to the extent we incur a tax net operating loss in 2020 that can be carried back. As of October 3, 2020, a tax net operating loss is not expected for taxable year 2020. In addition, this item of CARES Act relief increased the positive evidence supporting utilization of our gross deferred tax assets due to available income in carryback years; this did not change our overall assessment as we do not have a valuation allowance recorded against our deferred tax assets.
| · | Furthermore, for taxable years beginning before 2021, net operating loss carryforwards and carrybacks to that year may offset 100% of taxable income in the year. Previously, net operating losses generated through 2017 could offset 100% of taxable income, while losses generated after 2017 could only offset 80% of taxable income. The Company had taxable income in 2018 and 2019 and would carry back a loss generated in 2020 if applicable, leaving minimal opportunity to benefit from this item of CARES Act relief.
| · | For taxable years beginning in 2019 and 2020, the interest deduction limitation is increased from 30% to 50% of “adjusted taxable income” (taxable income without interest, tax depreciation and tax amortization) plus interest income. Furthermore, the Company may choose to use the 2019 adjusted taxable income (instead of 2020) in determining the 2020 interest expense limitation. The Company was not subject to an interest limitation in 2019 and therefore expects to use the 2019 adjusted taxable income if needed to avoid or reduce an interest expense limitation in 2020.
| · | A technical correction to the Tax Cuts and Jobs Act permits bonus depreciation and a 15-year straight-line recovery period on qualified improvement property placed in service after December 31, 2017. Prior to this technical correction, such property placed in service after 2017 was subject to the 39-year straight-line recovery period and was ineligible for bonus depreciation. To the extent the Company has eligible improvements in 2020, the Company can claim bonus depreciation which would reduce taxes payable and increase the deferred tax liability for fixed assets.
| · | Other CARES Act corporate income tax provisions will not significantly impact the Company, including alternative minimum tax refunds and increases in the charitable contributions deduction limitation.
The Company will also continue to assess the effect of state level tax relief provisions as enacted, such as state net operating loss rule changes and conformity to the federal interest, depreciation and charitable contribution deduction changes. A reconciliation of the beginning and ending amount of unrecognized tax benefits are as follows:
|  | 2020 |  |  | 2019 |
Balance at beginning of year |  | $ | 2,407,382 |  |  | $ | 299,722 |
Increase (decrease) for positions taken during the current period |  |  | (28,637 | ) |  |  | 137,927 |
Increase (decrease) for positions taken during the prior period |  |  | -- |  |  |  | 2,039,117 |
Increase (decrease) resulting from the expiration of the statute of limitations |  |  | (1,300,436 | ) |  |  | (69,384 | )
Balance at end of year |  | $ | 1,078,309 |  |  | $ | 2,407,382 |
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2016 and non-U.S. income tax examinations by tax authorities prior to 2014. Included in the balance at January 2, 2021, are $653,204 of unrecognized tax benefits that would affect the annual effective tax rate. In 2020, the Company recognized accrued interest related to unrecognized tax benefits in income tax expense. The Company had approximately $56,105 of accrued interest at January 2, 2021. The total amount of unrecognized tax benefits could increase or decrease within the next twelve months for a number of reasons, including the closure of federal, state and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under ASC 740. The Company believes that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months.

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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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