Income Taxes

12 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

NOTE 6 - INCOME TAXES

The fiscal 2018 comparative amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 2 to the Consolidated Financial Statements.

The provision for income tax expense consists of:

	Year Ended September 30,
	2019		2018
Current:
Federal	$	2,297,000	$	1,483,000
State		148,000		130,000
Total current		2,445,000		1,613,000
Deferred:
Federal		52,000		631,000
State		131,000		126,000
Total deferred		183,000		757,000
Income tax expense	$	2,628,000	$	2,370,000

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

	Year Ended September 30,
	2019			2018
Federal income taxes computed at the statutory rate		21.0	%		24.3	%
State income taxes, net of federal benefit		1.6	%		1.4	%
Change in current tax rate		—			(2.9	%)
Change in deferred tax rate		—			(2.3	%)
Research & development tax refunds & credits		(1.9	%)		(1.8	%)
Dividend received deduction		(0.6	%)		(0.9	%)
Domestic production activities deduction		—			(1.2	%)
Incentive stock options		0.2	%		(1.0	%)
Other, net		0.2	%		0.1	%
Effective income tax rate		20.5	%		15.7	%

Deferred income tax assets and liabilities consist of the following:

	September 30,
	2019			2018
Deferred Tax Assets:
Accrued liabilities and reserves	$	344,000		$	218,000
Allowance for doubtful accounts		104,000			71,000
Inventory		98,000			212,000
R&D tax credits carryforwards		—			87,000
Stock-based compensation		82,000			104,000
Net operating losses carryforwards		7,000			57,000
Gross Deferred Income Tax Assets		635,000			749,000
Deferred and Other Tax Liabilities:
Domestic international sales corporation		(464,000	)		(543,000	)
Percentage of completion		(2,048,000	)		(1,717,000	)
Property and equipment		(1,080,000	)		(904,000	)
Unrealized gain on investments		(265,000	)		(75,000	)
Unrecognized tax benefits		(150,000	)		(150,000	)
Gross Deferred and Other Income Tax Liabilities		(4,007,000	)		(3,389,000	)
Net Deferred and Other Income Tax Assets (Liabilities)	$	(3,372,000	)	$	(2,640,000	)

Total income taxes paid in fiscal 2019 and 2018 were $1,150,000 and $2,775,000, respectively.

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, 2019 and 2018, the Company had UTB’s of $150,000. There were no additional accruals of UTB’s during fiscal years ended September 30, 2019 and 2018.

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, 2019 and 2018. 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 income tax rate.

The effective income tax rate for fiscal 2019 was 20.5% versus 15.7% in fiscal 2018.

In fiscal 2018, the Company generated $249,000 of federal research and development credits (“R&D Credits”), all of which were used. In fiscal 2019, the Company generated $241,000 of R&D Credits, all of which were used. There were no R&D Credits carryforwards as of September 30, 2019.

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, which are included in net deferred and other income tax liabilities of $(3,091,000) at September 30, 2018. The Company did not receive any additional Florida R&D Credits in fiscal 2019. The Company used the $87,000 of Florida R&D Credits carryforwards from fiscal 2018 in fiscal 2019. There were no Florida R&D Credits carryforwards at September 30, 2019.

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, 2016 are generally no longer subject to examination by taxing authorities due to the expiration of the statute of limitations.