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Note 8 - Income Tax Provision
 12 Months Ended
Oct. 31, 2021
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

Note 8 – Income tax provision

 

The provision (benefit) for income taxes for the fiscal years ended October 31, 2021 and 2020 consists of the following (in thousands):

 

  

2021

  

2020

 

Current:

        

Federal

 $401  $279 

State

  189   143 
   590   422 
         

Deferred:

        

Federal

  323   (593)

State

  123   (196)
   446   (789)
         
  $1,036  $(367)

 

Income tax at the federal statutory rate is reconciled to our actual net provision (benefit) for income taxes as follows (in thousands, except percentages):

 

  

2021

  

2020

 
      

% of Pretax

      

% of Pretax

 
  

Amount

  

Income

  

Amount

  

Income

 
                 

Income taxes at federal statutory rate

 $1,516   21.0% $(94)  21.0%

State tax provision, net of federal tax benefit

  246   3.4%  (41)  9.2%

Nondeductible differences:

                

Stock options

  (86)  -1.2%  (123)  27.5%

PPP loan forgiveness

  (588)  -8.1%  -   0.0%

Meals and entertainment

  1   0.0%  2   -0.4%

Parking disallowance

  4   0.1%  5   -1.1%

R&D credits

  (51)  -0.7%  (152)  33.9%

Foreign derived intangible income

  (15)  -0.2%  (5)  1.1%

ASC 740-10 Liability

  29   0.4%  27   -6.0%

Penalties

  -   0.0%  11   -2.5%

Other

  (20)  -0.3%  3   -0.7%
  $1,036   14.4% $(367)  82.0%

 

Our total deferred tax assets and deferred tax liabilities at October 31, 2021 and 2020 are as follows (in thousands):

 

  

2021

  

2020

 
         

Deferred Tax Assets:

        

Deferred deduction of expenses related to PPP Loan

 $-  $706 

Reserves

  383   344 

Accrued vacation

  241   149 

Stock-based compensation awards

  144   100 

Uniform capitalization

  134   92 

Lease liability

  366   381 

Other

  77   35 

Total deferred tax assets

  1,345   1,807 
         

Deferred Tax Liabilities:

        

Amortization / intangible assets

  (487)  (479)

Change in ROU assets

  (357)  (359)

Depreciation / equipment and furnishings

  (112)  (135)

Total deferred tax liabilities

  (956)  (973)
         

Total net deferred tax assets (liabilities)

 $389  $834 

 

Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax bases of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We have evaluated the available evidence supporting the realization of its gross deferred tax assets, including the amount and timing of future taxable income, and have determined it is more likely than not that the assets will be realized in future tax years.

 

The provision (benefit) for income taxes was $1.0 million or 14.4% and $(0.4) million or 82.0% of income before income taxes for fiscal 2021 and 2020, respectively. The fiscal 2021 effective tax rate differed from the statutory federal rate of 21% primarily as a result of the benefit from non-taxable PPP Loan forgiveness income, research and development tax credits and tax benefits associated with share-based compensation.

 

The Company recognizes the benefit of tax positions taken or expected to be taken in its tax returns in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by authorities. Recognized tax positions are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement.

 

A reconciliation of the beginning and ending balance to total uncertain tax positions in fiscal years ended October 31, 2021 and 2020 are as follows:

 

  

2021

  

2020

 

Balance, at beginning of year

 $107  $80 

Increase for tax positions related to the current year

  44   32 

Increase for tax positions related to prior years

  (1)  - 

Increase for interest and penalties

  2   6 

Statute of limited expirations

  (11)  (11)

Balance, at end of year

 $141  $107 

 

We had gross unrecognized tax benefits of $102,000 and $96,000 attributable to U.S. federal and California research tax credits as of October 31, 2021 and 2020, respectively. During fiscal 2021, the increase in our gross unrecognized tax benefit was primarily related to claiming additional federal and California research tax credits. The uncertain tax benefit is recorded as income taxes payable in our consolidated balance sheet. We recognize interest and penalties related to uncertain tax positions in income tax expense. We recognized expense of approximately $13,000 and $11,000 during the years ended October 31, 2021 and 2020, respectively. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, it is possible that certain changes may occur within the next twelve months, but we do not anticipate that our accrual for uncertain tax positions will change by a material amount over the next twelve-month period.

 

We are subject to taxation in the United States and state jurisdictions. Our tax years for October 31, 2018 and forward are subject to examination by the United States and October 31, 2017 and forward with state tax authorities.

 

On March 27, 2020, the CARES Act was signed into law in the United States. The CARES Act includes modifications to Internal Revenue Code and provides for relief to U.S. Corporations through programs such as employee retention credit, payroll tax deferral and modifications to certain income tax provisions such as temporary five-year net operating loss carryback provisions and a modification of interest deduction limitations. The Company carried back its net operating loss for the fiscal year ended October 31, 2020, resulting in a $35,000 income tax benefit.