Annual report pursuant to Section 13 and 15(d)

Note 9 - Income Taxes

v3.19.3
Note 9 - Income Taxes
12 Months Ended
Sep. 28, 2019
Notes to Financial Statements  
Income Tax Disclosure [Text Block]
Note 
9—Income
Taxes
 
The Tax Cuts and Jobs Act of
2017
(the “New Tax Legislation”) was enacted on
December 22, 2017,
which significantly revised the U.S. corporate income tax code by, among other things, lowering federal corporate income tax rates, implementing a modified territorial tax system and imposing a repatriation tax, ("transition tax"), on deemed repatriated cumulative earnings of foreign subsidiaries which will be paid over
eight
years. In addition, new taxes were imposed related to foreign income, including a tax on global intangible low-taxed income (“GILTI”) as well as a limitation on the deduction for business interest expense (“Section
163
(j)"). GILTI is the excess of the shareholder’s net controlled foreign corporations, ("CFC") net tested income over the net deemed tangible income.  The Section
163
(j) limitation does
not
allow the amount of deductible interest to exceed the sum of the taxpayer's business interest income,
30%
of the taxpayer’s adjusted taxable income, and the taxpayer’s floor plan financing interest expense for the year. We have included in our calculation of our effective tax rate the estimated impact of GILTI and Section
163
(j) which were effective for us beginning fiscal year
2019.
We have elected to account for the tax on GILTI as a period cost and, therefore, do
not
record deferred taxes related to GILTI on our foreign subsidiaries.
 
In the quarter ended
December 30, 2017,
when the New Tax Legislation was enacted, we made reasonable estimates of the effects of the expense associated with the
one
-time transition tax and with remeasuring net deferred tax liabilities at a lower federal corporate tax rate.  We recorded
$10.7
million as provisional amounts in fiscal year
2018.
 Our provisional assessment of the impacts of the New Tax Legislation were finalized during the
first
quarter of fiscal year
2019.
 
The provision for income taxes consists of the following (in thousands):
 
   
Period ended
 
   
September 28, 2019
   
September 29, 2018
 
Current:
               
Federal
  $
732
    $
4,629
 
State
   
(3
)    
16
 
Foreign
   
132
     
121
 
Total current
  $
861
    $
4,766
 
Deferred:
               
Federal
  $
(304
)   $
5,927
 
State
   
(80
)    
(233
)
Total deferred
   
(384
)    
5,694
 
Provision for income taxes
  $
477
    $
10,460
 
 
For financial reporting purposes our income before provision for income taxes includes the following components (in thousands):
 
   
Period ended
 
   
September 28, 2019
   
September 29, 2018
 
United States, net of loss attributable to non-controlling interest
  $
(2,695
)   $
156
 
Foreign
   
11,040
     
11,534
 
    $
8,345
    $
11,690
 
 
Our effective income tax rate on operations for fiscal year
2019
was
5.5%
compared to a rate of
89.5%
in the prior year. Excluding the additional
$10.7
million of expense related to the New Tax Legislation, the adjusted effective tax rate was a benefit of
1.7%
in fiscal year
2018.
The change in the federal statutory rate from
34%
to
21%
as a result of the New Tax Legislation was effective as of
December 22, 2017,
part way through our fiscal year
2018.
As such, the blended federal statutory tax rate for fiscal year
2018
was
24.3%.
 
We benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates that are lower than those in the United States. However, changes in the mix of U.S. taxable income compared to profits in tax-free or lower-tax jurisdictions can have a significant impact on our overall effective tax rate.  In addition, the future impact of the New Tax Legislation
may
differ from historical amounts, possibly materially, due to, among other things, changes in interpretations and assumptions made regarding the New Tax Legislation, guidance that
may
be issued and actions we
may
take as a result of the New Tax Legislation.
 
A reconciliation between actual provision for income taxes and the provision for income taxes computed using the federal statutory income tax rate of
21.0%
for fiscal year
2019
and
24.3%
for fiscal year
2018
is as follows (in thousands):
 
   
Period ended
 
   
September 28, 2019
   
September 29, 2018
 
Income tax expense at the statutory rate of 21.0% and 24.3%
  $
1,831
    $
2,861
 
State income tax (benefits expense, net of federal income tax benefit
   
(82
)    
16
 
New Tax Legislation:
               
Impact of federal rate change
   
     
624
 
Federal transition tax
   
109
     
10,039
 
GILTI inclusion
   
1,040
     
 
Impact of state rate changes
   
     
(236
)
Impact of foreign earnings in tax-free zone
   
(2,186
)    
(2,676
)
Nondeductible amortization and other permanent differences
   
(140
)    
(163
)
Other
   
(95
)    
(5
)
Provision for income taxes
  $
477
    $
10,460
 
 
Significant components of our deferred tax assets and liabilities are as follows (in thousands):
 
   
September 28, 2019
   
September 29, 2018
 
Deferred tax assets:
               
State net operating loss carryforwards
  $
2,190
    $
1,870
 
Alternative minimum tax credit carryforward
   
     
397
 
Inventories and reserves
   
2,960
     
3,277
 
Accrued compensation and benefits
   
1,789
     
1,881
 
Receivable allowances and reserves
   
345
     
371
 
Other
   
1,093
     
67
 
Gross deferred tax assets
  $
8,377
    $
7,863
 
Less valuation allowance — state net operating loss carryforwards
   
(516
)    
(493
)
Net deferred tax assets
  $
7,861
    $
7,370
 
                 
Deferred tax liabilities:
               
Depreciation
   
(4,611
)    
(5,459
)
Goodwill and intangibles
   
(3,183
)    
(2,529
)
Other
   
(72
)    
(140
)
Gross deferred tax liabilities
  $
(7,866
)   $
(8,128
)
Net deferred tax liabilities
  $
(5
)   $
(758
)
 
As of
September 28, 2019,
we had state net operating losses ("NOLs") of approximately
$46.6
million, with deferred tax assets of
$2.2
million related to these state NOLs, and related valuation allowances against them of approximately
$0.5
million. These state net loss carryforwards expire at various intervals from
2020
through
2037.
Our deferred tax asset related to state net operating loss carryforwards is reduced by a valuation allowance to result in net deferred tax assets we consider more likely than
not
to be realized.
 
For both federal and state purposes, the ultimate realization of deferred tax assets depends upon the generation of future taxable income or tax planning strategies during the periods in which those temporary differences become deductible or when the carryforwards are available.
 
ASC
740,
Income Taxes
(“ASC
740”
) requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more-likely-than-
not
(i.e., a likelihood of more than
fifty
percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than
50%
likely of being realized upon ultimate settlement. Accrued interest and penalties related to unrecognized tax benefits would also be recorded. We did
not
have any material unrecognized tax benefits as of
September 
28,
2019
 or
September 29, 2018.
 
We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. Tax years
2015,
2016,
2017
and
2018,
according to statute and with few exceptions, remain open to examination by various federal, state, local, and foreign jurisdictions.