EACO CORP

Note 7. Income Taxes

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

	Year Ended August 31,
	2017		2016
Current:
Federal	$	2,142,000	$	2,226,000
State		119,000		362,000
Foreign		(32,000)		28,000
		2,229,000		2,616,000
Deferred:
Federal		(88,000)		(273,000)
State		32,000		90,000
Foreign		118,000		—
		62,000		(183,000)
Total	$	2,291,000	$	2,433,000

Income taxes for the years ended August 31, 2017 and 2016 differ from the amounts computed by applying the federal statutory corporate rates of 34% to the pre-tax income from operations. The differences are reconciled as follows:

	Year Ended August 31,
	2017		2016
Current:
Expected income tax benefit at statutory rate	$	2,112,000	$	2,234,000
Increase (decrease) in taxes due to:
State tax, net of federal benefit		297,000		303,000
Permanent differences		25,000		29,000
Change in deferred tax asset valuation allowance		(4,000)		(121,000)
Other, net		(139,000)		(12,000)
Income tax expense	$	2,291,000	$	2,433,000

The components of deferred taxes at August 31, 2017 and 2016 are summarized below:

	August 31,
	2017		2016
Deferred tax assets:
Net operating loss	$	508,000	$	518,000
Allowance for doubtful accounts		3,000		8,000
Accrued expenses		395,000		381,000
Accrued workers’ compensation		18,000		25,000
Inventory reserve		936,000		852,000
Unrealized losses on investment		(223,000)		(167,000)
Excess of tax over book depreciation		(113,000)		(147,000)
Other		43,000		198,000
Total deferred tax assets		1,567,000		1,668,000
Valuation allowance		(508,000)		(518,000)
Total deferred tax assets	$	1,059,000	$	1,150,000

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.

As a result of the merger with Bisco, 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, 2016 and 2017 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 forecasted taxable income for Bisco of $7 million and $6.4 million for the years ended August 31, 2016 and 2017, respectively. 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 FASBInterpretation 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, 2016 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, 2017, the Company has not recognized liabilities for penalty and interest as the Company does not have any liability for unrecognized tax benefits.

The Company is subject to taxation in the US, Canada and various states. The Company’s tax years for 2012, 2013, 2014 and 2015 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.