Provision (Benefit) for Income Taxes

12 Months Ended

Jun. 30, 2022

Income Tax Disclosure [Abstract]

Provision (Benefit) for Income Taxes

Note 8. Provision (Benefit) for Income Taxes

A summary of the components of the provision (benefit) for income taxes for the years ended June 30, 2022 and 2021 is as follows:

	2022		2021
Current tax expense (benefit) - federal	$	313,705	$	(122,221	)
Current tax expense (benefit) - state		4,978		(37	)
Deferred tax expense (benefit)		9,271		(64,396	)
Provision (benefit) for income taxes	$	327,954	$	(186,654	)

Deferred income taxes reflect the impact of "temporary differences" between the amount of assets and liabilities for financial reporting purposes and such amounts measured by tax laws and regulations. These "temporary differences" are determined in accordance with ASC 740-10.

The combined U.S. federal and state effective income tax rates of 20.6% and 50.7%, for 2022 and 2021 respectively, differed from the statutory U.S. federal income tax rate for the following reasons:

	2022			2021
U.S. federal statutory income tax rate		21.0	%		21.0	%
Increase (reduction) in rate resulting from:
State franchise tax, net of federal income tax benefit		0.3			0.1
ESOP cost versus Fair Market Value		(1.3	)		1.3
Dividend on allocated ESOP shares		(3.1	)		25.9
Stock-based compensation		4.0			(6.7	)
Foreign Derived Intangible Income Deduction		—			—
Rate Differential on Net Operating Loss Carryback		(0.1	)		10.5
Other		(0.2	)		(1.4	)
Effective tax rate		20.6	%		50.7	%

24

Espey Mfg. & Electronics Corp.

Notes to Financial Statements

Note 8. Provision (Benefit) for Income Taxes, Continued

For the years ended June 30, 2022 and 2021 deferred income tax expense (benefit) of $9,271 and ($64,396), respectively, results from the changes in temporary differences for each year. The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of June 30, 2022 and 2021 are presented as follows:

	2022			2021
Deferred tax assets:
Accrued expenses	$	204,774		$	186,339
ESOP		14,237			2,190
Stock-based compensation		33,719			59,659
Inventory - effect of uniform capitalization		—			46,197
Total deferred tax assets	$	252,730		$	294,385
Deferred tax liability:
Property, plant and equipment - principally due to differences in depreciation methods	$	374,566		$	422,771
Inventory - effect of uniform capitalization		19,276			—
Prepaid expenses		36,716			40,171
Total deferred tax liability	$	430,558		$	462,942
Net deferred tax liability	$	(177,828	)	$	(168,557	)

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projection for future taxable income over the period in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these temporary differences without consideration of a valuation allowance.

As the result of the implementation of the FASB interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109, the Company recognized no material adjustments to unrecognized tax benefits. As of June 30, 2022 and 2021, the Company has no unrecognized tax benefits.

The Company recognizes interest and penalties in general and administrative expense. As of June 30, 2022 and 2021, the Company has not recorded any provision for accrued interest and penalties.

The Company is subject to taxation in the United States and various state jurisdictions. The federal tax returns are subject to audit for three years from date of filing unless the return was audited within that period. In general the majority of state statutes follow similar guidelines. As such, the Company’s tax returns for tax years ending June 30, 2022, 2021, and 2020 remain open to examination by the respective taxing authorities.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the economic uncertainty resulting from the COVID19 pandemic. The CARES Act includes many measures to assist companies, including temporary changes to income and non-income based laws, some of which were enacted as part of the Tax Cuts and Jobs Act of 2017 (“TCJA”). Some of the key changes include eliminating the 80% of taxable income limitation by allowing corporate entities to fully utilize NOLs to offset taxable income in 2018, 2019 and 2020, allowing NOLs originating in 2018, 2019 and 2020 to be carried back five years, enhanced interest deductibility, and retroactively clarifying the immediate recovery of qualified improvement property costs rather than over a 39-year recovery period. During the year ended June 30, 2021, the Company recorded an approximate $120,000 benefit relating to the NOL carryback provisions provided for in the CARES Act. The actual benefit received totaled $125,635. The Company will continue to monitor additional guidance issued and assess the impact that various provisions will have on its business.