Note 7—Income Taxes

On December 22, 2017 (fiscal 2018), President Trump signed into law the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The Tax Act impacted the U.S. statutory Federal tax rate that the Company will use going forward, reducing it from 35% to 21%. As the Company has an August 31 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory Federal rate of 25.7% for our fiscal year ended August 31, 2018, and a rate of 21% for fiscal 2019 and 2020.

To transition to the reduced U.S. corporate tax rate, we were required to make an adjustment to our net U.S. deferred tax assets. During fiscal 2018, predominantly in the three months ended February 28, 2018 (the second fiscal quarter of 2018), the Company recorded initial provisional adjustments to the U.S. deferred tax assets and liabilities and uncertain tax positions resulting in a net discrete tax expense of $681 recorded to the consolidated statement of operations. This net discrete tax expense recorded in fiscal 2018 is the result of the following: (a) a $379 tax benefit resulting from the remeasurement and reclassification of our then existing deferred tax liability related to unrepatriated foreign earnings to accrued income tax balance (discussed in more detail below); (b) a $917 tax expense for the remeasurement of the remaining net U.S. deferred tax assets in recognition of the new lower Federal rate; and (c) a $143 tax expense recorded as the result of remeasuring the Federal benefit on our uncertain tax positions. During fiscal 2019, no additional transitional adjustments were made related to the adoption of the Tax Act in the quarters ended November 30, 2018, May 31, 2019 and August 31, 2019, and only immaterial adjustments were made in the quarter ended February 28, 2019. During fiscal 2020, no additional transitional adjustments were made.

The Tax Act includes a transition tax or “toll charge,” which is a one-time tax charge on unrepatriated foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. During fiscal 2018, the Company recorded a provisional transition tax adjustment associated with its accumulated unrepatriated foreign earnings reducing long-term deferred tax liabilities by $2,298 and increasing short and long-term accrued income taxes by $153 and $1,766, respectively (the short-term payable representing eight percent of the total amount due, the amount payable within the first year as per the Tax Act). The difference between the decrease in the deferred tax liabilities for unrepatriated foreign earnings and the increase in accrued income taxes, $379, was recorded as a discrete tax benefit in fiscal 2018. During fiscal 2019 (prior year), the Company paid the entire long-term and short-term toll charge balances that had been accrued at August 31, 2018.

Under the guidance set forth in the SEC's Staff Accounting Bulletin No. 118 (“SAB 118”), the Company may record provisional amounts for the impact of the Tax Act. For the second quarter of fiscal 2018, the Company made a provisional and reasonable estimate of the effects of the Tax Act on its existing deferred tax balances, including a provisional adjustment for the toll charge, and made provisional adjustments to these initially recorded amounts in the third and fourth quarters of fiscal 2018. The Company made complete and final adjustments during the quarter ended February 28, 2019 (the second quarter of fiscal 2019), which were not material in nature.

In fiscal 2019, the Company began recognizing an additional component of total Federal tax expense, the tax on Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Act, which became applicable to the Company in fiscal 2019. The Company elected to account for GILTI as a period cost, and therefore included GILTI expense in the effective tax rate calculation. This provision did not have a material effect on the effective tax rate for the years ended August 31, 2020 and 2019.

The Company concluded that the Base Erosion and Anti Abuse Tax (“BEAT”) provision of the Tax Act, which also became applicable to the Company in fiscal 2019, had no effect on our effective tax rate for fiscal 2019 or 2020. Additionally, the Company has deferred the application of Foreign-Derived Intangible Income (“FDII”) for 2019 and 2020, in anticipation of further guidance and the establishment of industry standards by the U.S. Treasury Department and trade associations.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, included a technical correction to the Tax Act which will allow accelerated deductions for qualified improvement property. The Company is currently evaluating the impact of the CARES Act, but at present does not expect that the qualified improvement property correction nor other provisions of the CARES Act would result in a material tax benefit to us in future periods. The CARES Act had no material effect on the effective tax rate for fiscal 2020.

Domestic and foreign pre‑tax income for the years ended August 31, 2020, 2019 and 2018 was:


	Year Ended August 31,
	2020		2019		2018
United States	$	42,027	$	37,088	$	48,962
Foreign		3,293		6,465		8,003
	$	45,320	$	43,553	$	56,965

The provision (benefit) for income taxes for the years ended August 31, 2020, 2019 and 2018 was:


	Year Ended August 31,
	2020		2019		2018
Current:
Federal	$	9,157	$	9,880	$	12,872
State		1,813		1,699		1,662
Foreign		962		1,575		1,761
Total current income tax provision		11,932		13,154		16,295

Deferred:
Federal		(520)		(1,699)		(2,214)
State		(184)		(529)		(263)
Foreign		(65)		(84)		4
Total deferred income tax benefit		(769)		(2,312)		(2,473)

Total income tax provision	$	11,163	$	10,842	$	13,822

The provision (benefit) for income taxes differs from the amount computed by applying the Federal statutory income tax rate to income before income taxes. The Company’s combined federal, state and foreign effective tax rate as a percentage of income before taxes for fiscal 2020, 2019 and 2018, net of offsets generated by federal, state and foreign tax benefits, was 24.6%, 24.9% and 24.3%, respectively. The following is a reconciliation of the effective income tax rate with the U.S. Federal statutory income tax rate for the years ended August 31, 2020, 2019 and 2018:


	Year Ended August 31,
	2020		2019		2018
Federal statutory rates	21.0	%	21.0	%	25.7	%
Adjustment resulting from the tax effect of:
State and local taxes, net of federal benefit	3.0	%	2.1	%	1.9	%
Domestic production deduction	0.0	%	0.0	%	(1.6)	%
Foreign tax rate differential	0.0	%	0.1	%	(0.3)	%
Adjustment to uncertain tax position	(1.1)	%	1.0	%	1.1	%
Transaction costs not deductible	0.5	%	0.0	%	0.0	%
Research credit generated	(0.1)	%	(0.3)	%	(0.2)	%
Stock Compensation	(0.3)	%	(0.4)	%	(3.4)	%
Permanent items	0.9	%	1.1	%	0.9	%
Tax effect of undistributed earnings	0.3	%	0.6	%	(0.8)	%
Other	0.4	%	(0.4)	%	(0.8)	%
Change in valuation allowance	0.0	%	0.1	%	0.1	%
Deferred income tax remeasurement	0.0	%	0.0	%	1.7	%

Effective income tax rate	24.6	%	24.9	%	24.3	%

The following table summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities:


	As of August 31,
	2020		2019
Deferred tax assets:
Allowance for doubtful accounts	$	309	$	432
Inventories		994		1,193
Accruals		504		541
Warranty reserve		14		22
Pension accrual		2,749		2,623
Deferred compensation		391		300
Foreign currency loss on previously taxed income		96		96
Loan finance costs		7		34
Restricted stock grants		823		456
Non-qualified stock options		211		258
Right-of-use asset		2,354		—
Foreign net operating loss, net of valuation allowance		247		—
Other		572		353
		9,271		6,308
Deferred tax liabilities:
Prepaid liabilities		(16)		(8)
Lease liability		(2,693)		—
Depreciation and amortization		(1,633)		(2,496)
		(4,342)		(2,504)
Net deferred tax assets (liabilities)	$	4,929	$	3,804

As of August 31, 2020, the Company had $727 of gross foreign operating loss carry forwards to offset future taxable income, the net balance of which was included within deferred income taxes. The net operating losses will begin to expire in fiscal year ending August 31, 2027.

Chase Corporation is required to apply a valuation allowance to reduce the deferred tax assets reported if based on the weight of the evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of August 31, 2020, the Company determined that a valuation allowance was not needed.

Consistent with the Company’s practice prior to the passage of the Tax Act, we do not currently take the position that undistributed foreign subsidiaries’ earnings are considered to be permanently reinvested.

A summary of the Company’s adjustments to its uncertain tax positions, included within long-term accrued income taxes on the consolidated balance sheet, in fiscal years ended August 31, 2020, 2019 and 2018 are as follows:


	2020		2019		2018
Balance, at beginning of the year	$	2,324	$	1,889	$	1,257
Increase for tax positions related to the current year		101		55		47
(Decrease) increase for tax positions related to prior years		(609)		300		595
Increase for interest and penalties		125		106		71
Decrease for lapses of statute of limitations		—		(26)		(81)
Balance, at end of year	$	1,941	$	2,324	$	1,889

The unrecognized tax benefits mentioned above include an aggregate of $1,002 of accrued interest and penalty balances related to uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. An increase in accrued interest and penalty charges of approximately $125, net of Federal tax expense, was recorded as a tax expense during the current fiscal year. The Company does not anticipate that its accrual for uncertain tax positions will change by a material amount over the next twelve-month period, as it does not expect to settle any potential disputed items with the appropriate taxing authorities nor does it expect the statute of limitations to expire for any material items.

The Company is subject to U.S. Federal income tax, as well as to income tax of multiple state, local and foreign tax jurisdictions. The statute of limitations for all material U.S. Federal, state, and local tax filings remains open for fiscal years subsequent to 2016. For foreign jurisdictions, the statute of limitations remains open in the U.K. for fiscal years subsequent to 2016 and in France for fiscal years subsequent to 2019.