11. Income Taxes

In March 2020, the CARES Act was signed into law providing numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of NOLs. The CARES Act amends the NOL provisions of the Tax Act, allowing for the carryback of losses arising in tax years beginning before December 31, 2017, to each of the two taxable years preceding the taxable year of loss. Approximately $1,500,000 of pre-tax NOL was carried back two years to fully offset taxable income. This carryback frees up previously utilized R&D credits, resulting in an estimated increase in R&D credit carryforward of $196,000. The carryback created approximately $16,000 of AMT tax, which was refunded. The cash impact of this carryback was $309,412.

The components of income taxes are as follows:


	For the Fiscal Year Ended September 30,
	2020		2019		2018

Current provision (benefit):
Federal	$	(309,401)	$	—	$	(3,440)
State		481		1,749		5,239

Total current provision		(308,920)		1,749		1,799

Deferred provision
Federal		—		—		61,799
State		38		56		53

Total deferred provision		38		56		61,852

Total current and deferred provision	$	(308,882)	$	1,805	$	63,651

Following is a reconciliation of the statutory federal rate to the Company’s effective income tax rate:


	For the Fiscal Year Ended September 30,
	2020		2019		2018

U.S. Federal statutory tax rate	21.00	%	21.0	%	24.3	%
Rate change due to tax reform	0.0	%	0.0	%	(9.0)	%
State income taxes, net of federal benefit	(2.2)	%	(0.9)	%	1.9	%
Permanent items	(6.3)	%	0.8	%	(0.1)	%
Research and development tax credits	(10.6)	%	(0.8)	%	1.3	%
Valuation allowance	(15.2)	%	(20.2)	%	(20.3)	%
Change in unrecognized tax benefits	2.2	%	0.2	%	0.9	%
123R cancellations and forfeitures	0.0	%	0.0	%	(0.8)	%
Tax Law Changes: CARES Act	0.3	%	0.0	%	0.0	%
Other	0.4	%	0.0	%	0.0	%
Effective income tax rate	(10.4)	%	0.1	%	(1.8)	%

On December 22, 2017, the U.S. government enacted the Tax Act, which made broad and complex changes to the U.S. tax code, including, but not limited to the reduction of the U.S. federal corporate tax rate from 34 percent to 21 percent.

The deferred tax effect of temporary differences giving rise to the Company’s deferred tax assets and liabilities consists of the components below:


	As of September 30,
	2020		2019		2018
	Non Current		Non Current		Non Current
Deferred tax assets:
Reserves and accruals	$	698,233	$	690,148	$	730,015
Research and development credit		1,589,247		1,331,170		1,318,977
NOL carryforwards -fed/state		2,192,018		2,590,791		2,982,246
Depreciation		(807,522)		(826,724)		(863,796)
Stock options		5,296		348,624		345,608
		3,677,272		4,134,009		4,513,050
Less: Valuation allowance		(3,471,164)		(3,922,620)		(4,296,553)
Total deferred tax assets		206,108		211,389		216,497

Deferred tax liabilities:
Depreciation		(335,797)		(341,040)		(346,091)
Total deferred tax liabilities		(335,797)		(341,040)		(346,091)
Net deferred tax (liability) asset	$	(129,689)	$	(129,651)	$	(129,594)

At September 30, 2020 and 2019, the Company had state NOL carryforwards of approximately $24,392,000 and $24,009,000, respectively, which begin to expire in varying amounts after the fiscal year ending September 30, 2026. The Company has federal R&D Tax Credit carryforwards of approximately $1,589,000 and $1,331,000 in fiscal 2020 and 2019, respectively, which begin to expire in varying amounts after fiscal year ending September 30, 2029.

Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be verified objectively, and significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if valuation allowances are required by considering available evidence, including historical and projected taxable income and tax planning strategies which are both prudent and feasible. ASC Topic 740 requires the consideration of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. The change in the valuation allowance for the period ended September 30, 2020 and September 30, 2019 was approximately $451,000 and $375,000, respectively.

The Company will continue to maintain the balance of the valuation allowance until an appropriate level of profitability is sustained to warrant a conclusion that it is no longer more likely than not that a portion of these net deferred tax assets will not be realized in future periods. There is currently no assurance of such future income before taxes. The Company believes that its estimate of future taxable income is inherently uncertain, and if its current or future operations generate losses, further adjustments to the valuation allowance are possible.

Following is a reconciliation of beginning and ending balances of total amounts of gross unrecognized tax benefits:


	For the Fiscal Year Ended September 30,
	2020		2019		2018
Balance at beginning of year	$	546,000	$	540,000	$	570,000
Unrecognized tax benefits related to prior years		39,000		—		52,000
Unrecognized tax benefits related to current year		37,000		6,000		11,000
Decrease in unrecognized tax benefits due to the lapse of applicable statute of limitations		(7,000)		—		(93,000)

Balance at end of year	$	615,000	$	546,000	$	540,000

The total liabilities associated with the unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate were $ 615,000, $546,000 and $540,000 at September 30, 2020, 2019 and 2018, respectively. It is not anticipated that the balance of unrecognized tax benefits at September 30, 2020 will change significantly over the next twelve months. The balance of unrecognized tax benefits as reflected in the table above at September 30, 2020 are recorded on the balance sheet as a reduction to deferred tax assets.

The Company’s policy is to recognize interest accrued and, if applicable, penalties related to unrecognized tax benefits in income tax expense for all periods presented. At September 30, 2020, the Company currently has no unrecognized tax benefits against which interest has been accrued, and there is no accrual recorded for penalties.

For the fiscal years ended September 30, 2020, 2019 and 2018, the Company recognized expense of $0, $0 and $0, respectively, for interest (net of federal impact) within income tax expense.

The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of related tax laws and regulations and require significant judgment to apply. The Company’s federal income tax returns for the fiscal years ended September 30, 2016 and thereafter are open years subject to examination by the Internal Revenue Service. The Company files income tax returns in various state jurisdictions, as appropriate, with varying statutes of limitation. There are no state income tax examinations in process at this time.