NOTE 11 Income Taxes
The Company computes income tax expense using the liability method. Under this method, deferred income taxes are provided, to the extent considered realizable by management, for basis differences of assets and liabilities for financial reporting and income tax purposes.
The Company follows guidance issued by the FASB with respect to accounting for uncertainty in income taxes. A tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more-likely-than-not” test, no tax benefit is recorded.
The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the state of Florida. The Company’s income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not reflect any amounts for interest and penalties in its 2017 or 2016 statements of operations, nor are any amounts accrued for interest and penalties at November 4, 2017 and November 5, 2016.
The provision for income taxes for the years ended consists of the following:
| November 4, 2017 | November 5, 2016 | |||||||
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Current tax expense: |
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Federal |
$ | 1,689,446 | $ | 769,463 | ||||
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State |
287,699 | — | ||||||
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| 1,977,145 | 769,463 | |||||||
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Deferred tax (benefit) expense |
(118,878 | ) | 2,449,579 | |||||
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Provision for income taxes |
$ | 1,858,267 | $ | 3,219,042 | ||||
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The following table shows the reconciliation between the statutory federal income tax rate and the actual provision for income taxes for the years ended:
| November 4, 2017 | November 5, 2016 | |||||||
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Provision – federal statutory tax rate |
$ | 1,757,205 | $ | 3,122,640 | ||||
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Increase (decrease) resulting from: |
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State taxes, net of federal tax benefit |
187,606 | 253,435 | ||||||
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Permanent differences: |
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Stock option expirations |
3,910 | — | ||||||
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Other |
(90,454 | ) | (157,033 | ) | ||||
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Income tax expense |
$ | 1,858,267 | $ | 3,219,042 | ||||
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The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts and the related deferred tax assets and deferred tax liabilities are as follows:
| November 4, 2017 | November 5, 2016 | |||||||
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Deferred tax assets: |
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Allowance for doubtful accounts |
$ | 87,261 | $ | 87,261 | ||||
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Inventories |
339,954 | 440,988 | ||||||
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Accrued expenses |
192,427 | 156,260 | ||||||
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Stock-based compensation |
1,052 | 4,717 | ||||||
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Total deferred tax assets |
620,694 | 689,226 | ||||||
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Deferred tax liabilities: |
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Depreciation |
(80,858 | ) | (38,050 | ) | ||||
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Installment sale of Cypress Creek |
(547,348 | ) | (871,277 | ) | ||||
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Carrying value of investments |
(388,543 | ) | (295,834 | ) | ||||
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Amortization |
(58,810 | ) | (58,810 | ) | ||||
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Prepaid expenses |
(10,013 | ) | (9,011 | ) | ||||
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Net deferred tax assets (liabilities) |
$ | (464,878 | ) | $ | (583,756 | ) | ||
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These amounts are included in the accompanying consolidated balance sheets under the following captions:
| November 4, 2017 | November 5, 2016 | |||||||
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Current assets (liabilities): |
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Deferred tax assets |
$ | 619,642 | $ | 684,509 | ||||
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Deferred tax liabilities |
(10,013 | ) | (127,736 | ) | ||||
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Net current deferred tax assets |
609,629 | 556,773 | ||||||
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Non-current assets (liabilities): |
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Deferred tax assets |
9,012 | 11,030 | ||||||
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Deferred tax liabilities |
(1,083,519 | ) | (1,151,559 | ) | ||||
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Net non-current deferred tax liabilities |
(1,074,507 | ) | (1,140,529 | ) | ||||
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Net deferred tax liabilities |
$ | (464,878 | ) | $ | (583,756 | ) | ||
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In assessing the ability to realize a portion of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. For fiscal years 2017 and 2016, the Company determined that a valuation reserve for the Company’s deferred tax assets was not considered necessary as the deferred tax assets were fully realizable.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (H.R. 1) (the “Act”). The Act includes a number of changes in existing tax law impacting businesses including, among other things, a permanent reduction in the corporate income tax rate from 34% to 21%. The rate reduction took effect on January 1, 2018.
As of November 4, 2017, the Company had a net deferred tax liability totaling approximately $465,000. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company’s net deferred tax liability as of November 4, 2017 was determined based on the current enacted federal tax rate of 34% prior to the passage of the Act. As a result of the reduction in the corporate income tax rate to 21% from 34% under the Act, the Company will need to revalue its net deferred tax assets and liabilities as of January 31, 2018. The Company estimates that this will result in a reduction in its net deferred tax liability of approximately $150,000, which will reduce income tax expense in the first quarter of 2018.
The Company’s revaluation of its deferred tax assets is subject to further clarification of the new law that cannot be estimated at this time. As such, the Company is currently unable to make a final determination of the effect on annual earnings for the fiscal year ending 2018. Additionally, the Company is evaluating the other provisions of the Act and is unable to assess the effect on the Company at this time.