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Note 8 - Income Tax Provision (Benefit)
 12 Months Ended
Oct. 31, 2023
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

Note 8 – Income tax provision (benefit)

 

The provision (benefit) for income taxes for the fiscal years ended October 31, 2023 and 2022 consists of the following (in thousands):

 

   

2023

    

2022

  

Current:

                

Federal

   $ (501 )   $ 1,252  

State

     6       225  
      (495 )     1,477  
                 

Deferred:

                

Federal

     (438 )     (1,054 )

State

     (239 )     (284 )
      (677 )     (1,338 )
                 
    $ (1,172 )   $ 139  

 

 

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

 

   

2023

    

2022

  
           

% of Pretax

            

% of Pretax

  
   

Amount

    

Loss

    

Amount

    

Income

  
                                 

Income taxes at federal statutory rate

   $ (893 )     21.0 %   $ 333       21.0 %

State tax provision, net of federal tax benefit

     (212 )     5.0 %     60       3.8 %

Nondeductible differences:

                                

Stock options

     88       -2.1 %     19       1.2 %

Permanent differences

     15       -0.4 %     5       0.3 %

R&D credits

     (238 )     5.6 %     (219 )     -13.6 %

Foreign derived intangible income

     -       0.0 %     (68 )     -4.3 %

ASC 740-10 Liability

     13       -0.3 %     (7 )     -0.4 %

Section 481(a) adjustment

     -       0.0 %     142       8.9 %

Return-to-provision adjustments

     (69 )     1.6 %     (126 )     -7.9 %

Other

     124       -2.9 %     -       0.0 %
    $ (1,172 )     27.5 %   $ 139       9.2 %

 

 

Our total deferred tax assets and deferred tax liabilities at October 31, 2023 and 2022 are as follows (in thousands):

 

   

2023

    

2022

  
                 

Deferred Tax Assets:

                

Reserves

   $ 497     $ 404  

Accrued vacation

     275       294  

Stock-based compensation awards

     213       168  

Uniform capitalization

     208       173  

Lease liability

     5,177       4,169  

State taxes

     21       72  

Other

     -       36  

Capitalized Section 174 Costs

     864       -  

Credits

     128       -  

163(j) interest carryforward

     118       -  

Net operating loss carryforwards

     73       -  

Total deferred tax assets

     7,574       5,316  
                 

Deferred Tax Liabilities:

                

Amortization / intangible assets

     (192 )     (29 )

Change in right-of-use assets

     (3,942 )     (3,335 )

Depreciation / equipment and furnishings

     (822 )     (136 )

Total deferred tax liabilities

     (4,956 )     (3,500 )

Valuation allowance

     (124 )     -  

Total net deferred tax assets (liabilities)

   $ 2,494     $ 1,816  

 

Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis 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 has determined it is more likely than not that the federal and combined state deferred tax assets will be realized in future tax years, but it is not more likely than not that the separate state deferred tax assets will be realized in future tax years. As such, a valuation allowance has been recorded against the separate state deferred tax assets. The change in valuation allowance was $0.1 million and $0.0 million for fiscal 2023 and 2022, respectively.

 

At October 31, 2023, the Company has gross United States federal and state net operating loss (NOL) carryforwards of $0.3 million and $0.2 million, respectively. The federal NOL carryforwards will carry forward indefinitely. The state NOL carryforwards of $0.2 million will begin to expire in 2043 unless previously utilized. At October 31, 2023, the Company also has IRC 163(j) interest carryforwards of $0.6 million, which will carry forward indefinitely. At October 31, 2023, the Company also has state research and development credit carryforwards of $0.2 million. The state credit carryforwards of $0.2 million will begin to expire in 2029 unless previously utilized and the remainder will carry forward indefinitely.

 

The provision (benefit) for income taxes was ($1.2) million or 27.5% and $0.1 million or 9.2% of income before income taxes for fiscal 2023 and 2022, respectively. The fiscal 2023 effective tax rate differed from the statutory federal rate of 21% primarily as a result of the tax benefit from research and development tax credits, the change in valuation allowance and state taxes.

 

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, 2023 and 2022 are as follows:

 

   

2023

    

2022

  

Balance, at beginning of year

   $ 121     $ 128  

Increase for tax positions related to the current year

     78       50  

Increase (decrease) for tax positions related to prior years

     2       (29 )

Increase for interest and penalties

     -       -  

Statute of Limitations Expirations

     (23 )     (28 )

Balance, at end of year

   $ 178     $ 121  

 

We had gross unrecognized tax benefits of $178,000 and $121,000 attributable to U.S. federal and California research tax credits as of October 31, 2023 and 2022 respectively. During fiscal 2023, the increase in our gross unrecognized tax benefit was primarily related to increased federal and California research tax credits being generated. The uncertain tax benefit of $40,000 is recorded as a reduction to deferred tax assets and the remainder is recorded in income taxes payable in our consolidated balance sheet and if recognized in the future would impact our effective tax rate. We recognize interest and penalties related to uncertain tax positions in income tax expense. We recognized expense of approximately $20,000 and $13,000 during the years ended October 31, 2023 and 2022 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, 2020 and forward are subject to examination by the United States and October 31, 2019 and forward with state tax authorities.