Note H - Income Taxes

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

H.   INCOME TAXES:

The following table summarizes the provision for income taxes from continuing operations:

	For Years Ended December 31 (in thousands)
	2020			2019			2018
Current:
Federal	$	12,932		$	11,453		$	10,996
State		1,816			537			1,575
		14,748			11,990			12,571
Deferred:
Federal		(1,210	)		(179	)		(280	)
State		(508	)		(45	)		159
		(1,718	)		(224	)		(121	)
Total tax provision	$	13,030		$	11,766		$	12,450

The effective rate of the provision for income taxes on earnings from continuing operations before income taxes as shown in the Consolidated Statements of Comprehensive Income differs from the applicable statutory federal income tax rate for the following reasons:

	Percent of Pre-tax Income
	2020			2019			2018
Statutory rate		21.0	%		21.0	%		21.0	%
State tax, net of federal benefit		1.7	%		0.7	%		2.6	%
Tax exempt interest and dividends		(0.1	%)		(0.1	%)		(0.6	%)
Other		(0.9	%)		0.9	%		0.8	%
Effective rate		21.7	%		22.5	%		23.8	%

Deferred tax assets and liabilities are recorded based on the differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes.  The tax effects of the cumulative temporary differences resulting in deferred tax assets and liabilities are as follows at December 31:

	(In thousands)
	2020		2019
Deferred tax assets
Insurance (primarily product liability)	$	978	$	947
Vacation		813		662
Inventory		754		642
State NOL and tax credit carryforwards		825		-
Product recall		610		-
Deferred payroll taxes		414		-
Deferred compensation		203		162
Environmental		214		227
Other		330		200
Subtotal		5,141		2,840
Less: valuation allowance		(520)		-
Total deferred tax assets		4,621		2,840
Deferred tax liabilities
Goodwill and other intangibles		1,585		1,391
Depreciation		1		131
Deferred revenue		41		37
Total deferred tax liabilities		1,627		1,559
Net deferred tax assets	$	2,994	$	1,281

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets.  The Company believes it is more likely than not that the benefit from certain state NOL and tax credit carryforwards will not be realized.  A significant factor of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2020.  Such objective evidence limits the ability to consider subjective evidence, such as projections for future growth. 

On the basis of this evaluation, as of December 31, 2020, a valuation allowance of $520,000 has been provided on the deferred tax assets related to these state NOL and tax credit carryforwards, which will expire between 2034 and 2040.  The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for growth. 

The Company establishes tax reserves in accordance with FASB ASC 740, Income Taxes.  As of December 31, 2020, the carrying amount of the Company’s gross unrecognized tax benefits included in current liabilities for federal and state income taxes was $2,521,000 which, if recognized, would affect the Company’s effective income tax rate.

The following is a reconciliation of the Company’s unrecognized tax benefits for the years ended December 31, 2020 and 2019:

	(In thousands)
	2020			2019
Balance at January 1	$	2,237		$	320
Increases for tax positions taken related to the current year		944			453
Increases for tax positions taken related to prior years		46			1,519
Decreases for tax positions taken related to prior years		-			-
Lapse of statute of limitations		(706	)		(55	)
Settlements		-			-
Balance at December 31	$	2,521		$	2,237

It is the Company’s practice to include tax related interest expense, interest income, and penalties in tax expense.  During the years ended December 31, 2020, 2019 and 2018, the Company accrued approximately $142,000, $298,000 and $14,000 in interest expense, respectively.

The Company is subject to U.S. federal income tax as well as income taxes of multiple states.  Tax years 2017 through 2019 are currently open for examination.  During 2018, the state of Wisconsin completed its audits of the tax years 2013 through 2016.  During June of 2016, the Internal Revenue Service completed its audits of the tax years 2012 and 2013.  For all states in which it does business, the Company is subject to state audit statutes.