Income Taxes

12 Months Ended

Aug. 31, 2018

Note 7. Income Taxes

The following summarizes the Company’s provision for income taxes on income from operations:

	Years Ended August 31,
	2018			2017
Current:
Federal	$	2,249,000		$	2,142,000
State		660,000			119,000
Foreign		(35,000	)		(32,000	)
		2,874,000			2,229,000
Deferred:
Federal		401,000			(88,000	)
State		(82,000	)		32,000
Foreign		(22,000	)		118,000
		297,000			62,000
Total	$	3,171,000		$	2,291,000

Income taxes for the years ended August 31, 2018 and 2017 differ from the amounts computed by applying the federal blended and statutory corporate rates of 25.4% for 2018 and 34% for 2017 to the pre-tax income from continuing operations. The differences are reconciled as follows:

	Years Ended August 31,
	2018			2017
Current:
Expected income tax benefit at statutory rate	$	2,601,000		$	2,112,000
Increase (decrease) in taxes due to:
State tax, net of federal benefit		546,000			297,000
Permanent differences		28,000			25,000
Change in deferred tax asset valuation allowance		1,000			(4,000	)
Other, net		(5,000	)		(139,000	)
Income tax expense	$	3,171,000		$	2,291,000

The components of deferred taxes at August 31, 2018 and 2017 are summarized below:

	August 31,
	2018			2017
Deferred tax assets (liabilities):
Net operating loss	$	508,000		$	508,000
Allowance for doubtful accounts		(5,000	)		3,000
Accrued expenses		209,000			395,000
Accrued workers’ compensation		7,000			18,000
Inventory reserves		708,000			936,000
Unrealized losses on investment		(7,000	)		(223,000	)
Excess of tax over book depreciation		(235,000	)		(113,000	)
Other		26,500			43,000
Total deferred tax assets		1,211,500			1,567,000
Valuation allowance		(509,000	)		(508,000	)
Total deferred tax assets	$	702,500		$	1,059,000

The Company records net deferred tax assets to the extent management believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance.

In 2010, management concluded that certain deferred tax assets would be realized, primarily the pre-merger net operating loss carryforwards (“NOLs”) of the Company. Management reviewed the positive and negative evidence available at August 31, 2017 and 2018 and determined that EACO’s state net operating losses did not meet the more likely than not threshold required to be recognized. As such, a valuation allowance was retained on these deferred tax assets.

Management considered the forecast of pre-tax income and strong history of pre-tax earnings and taxable income, and determined that a valuation allowance was not necessary for EACO’s remaining deferred tax assets.

The Company follows ASC 740 “Income Taxes” formerly FASB Interpretation No. 48, an interpretation of FASB Statement No. 109 (“ASC 740”). ASC 740 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in the tax return. The Company did not recognize any additional liability for unrecognized tax benefit as a result of the implementation. The Company has no liability for unrecognized tax benefit related to tax positions for either the August 31, 2018 year end or the August 31, 2017 year end.

The Company will recognize interest and penalty related to unrecognized tax benefits and penalties as income tax expense. As of August 31, 2018, the Company has not recognized liabilities for penalty and interest as the Company does not have any liability for unrecognized tax benefits.

The Tax Cuts and Jobs Act (the “Jobs Act”) was enacted on December 22, 2017. The Jobs Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. We have completed our accounting for the tax effects of enactment of the Jobs Act and have determined no additional tax liability due to offsetting foreign tax credits. For the federal corporate rate differential, we recognized an amount of $184,000, which is included as a component of income tax expense from continuing operations. The Company is subject to taxation in the US, Canada and various states. The Company’s tax years for 2013, 2014, 2015 and 2016 are subject to examination by the taxing authorities. With few exceptions, the Company is no longer subject to U.S. federal, state, local or foreign examinations by taxing authorities for years before 2012.

The Internal Revenue Service is currently examining the Company’s federal tax return for the year ended August 31, 2016. The Company does not expect the examination to be completed within the next couple of months. Therefore, the Company does not anticipate any significant changes to its taxable income.