Clearfield, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Note D - Income Taxes

Note D - Income Taxes

12 Months Ended

Sep. 30, 2015

NOTE D – INCOME TAXES

Realization of net operating loss carry-forward and other deferred tax temporary differences are contingent upon future taxable earnings. The Company’s deferred tax assets were reviewed for expected utilization by assessing the available positive and negative factors surrounding its recoverability.

As of September 30, 2014, the Company’s remaining valuation allowance of approximately $848,000 related to state net operating loss carry forwards. During the fourth quarter of 2015, the Company reversed a portion of its remaining valuation allowance primarily related to the expiration of state net operating losses in 2015. The remaining valuation allowance balance as of September 30, 2015 of $659,000 relates entirely to state net operating loss carry forwards we do not expect to utilize. Approximately $35,000 of the valuation allowance is short-term and $624,000 is long-term, against its remaining deferred tax assets. The Company will continue to assess the assumptions used to determine the amount of our valuation allowance and may adjust the valuation allowance in future periods based on changes in assumptions of estimated future income and other factors. If the valuation allowance is reduced, we would record an income tax benefit in the period the valuation allowance is reduced. If the valuation allowance is increased, we would record additional income tax expense.

The valuation allowance activity for the years ended September 30, 2015, 2014 and 2013 is as follows:

Year Ended		Balance at Beginning of Year		Income Tax Benefit			Reversal for State NOL Expiration			Balance at End of Year
	September 30, 2015	$	847,826	$	(53,836	)	$	(135,182	)	$	658,808
	September 30, 2014		975,258		-			(127,432	)		847,826
	September 30, 2013		975,258		-			-			975,258

Significant components of deferred income tax assets and liabilities are as follows at:

	September 30, 2015			September 30, 2014
Current deferred income tax assets (liabilities):
Inventories	$	309,791		$	292,675
Accrued expenses and reserves		261,452			297,336
Prepaid expenses		(42,304	)		(42,722	)
Net operating loss carry forwards and credits		652,533			1,752,291
		1,181,472			2,299,580
Valuation allowance		(34,573	)		(50,145	)
Net current deferred tax asset	$	1,146,899		$	2,249,435

Long-term deferred income tax assets (liabilities):
Intangibles	$	(39,819	)	$	(30,028	)
Property and equipment depreciation		(726,035	)		18,091
Net operating loss carry forwards and credits		938,168			1,531,315
Stock-based compensation		49,926			57,573
Accrued expenses and reserves		25,887			3,369
Goodwill		(706,779	)		(626,018	)
		(458,652	)		954,302
Valuation allowance		(624,235	)		(797,680	)
Net long-term deferred tax (liability) asset	$	(1,082,887	)	$	156,622

As of September 30, 2015 and 2014, the current income tax receivable was approximately $48,000 and $127,000, respectively.

As of September 30, 2015, t

he Company had U.S. federal net operating loss (“NOL”) carry forwards of approximately $5.4 million. The U.S. federal net operating loss carry forwards will expire in 2023 through 2028 if not utilized.

As of September 30, 2015, t

he Company had state net operating loss carry forwards of approximately $13.8 million. The state net operating loss carry forwards will expire in 2016 through 2022 if not utilized.

The Company completed an Internal Revenue Code Section 382 analysis of the loss carry forwards in 2009 and determined then that all of the Company’s loss carry forwards are utilizable and not restricted under Section 382. The Company has not updated its Section 382 analysis subsequent to 2009 and does not believe there have been any events subsequent to 2009 that would impact the analysis.

Deferred tax assets relating to equity compensation have been reduced to reflect tax deductions in excess of previously recorded tax benefits through the year ended September 30, 2015. Our federal NOL carry forwards referenced above at September 30, 2015 include approximately $5.3 million of income tax deductions in excess of previously recorded tax benefits for equity based awards. Although the additional tax deductions are reflected in NOL carry forwards referenced above, the related tax benefit will not be recognized until the deductions reduce taxes payable.

Accordingly, since the tax benefit does not reduce the Company’s current taxes payable in 2015, these tax benefits are not reflected in the Company’s deferred tax assets presented above. The tax benefit of approximately $1,869,000 as of September 30, 2015 related to these excess deductions will be reflected as a credit to additional paid-in capital when recognized.

The following is a reconciliation of the federal statutory income tax rate to the consolidated effective tax rate as a percent of pre-tax income for the following years ended:

	September 30, 2015			September 30, 2014			September 30, 2013
Federal statutory rate		34	%		34	%		34	%
State income taxes		1	%		1	%		1	%
Permanent differences		1	%		2	%		2	%
Change in valuation allowance		(3	%)		(1	%)		-
Expiration of state NOL’s		2	%		1	%		-
Tax rate		35	%		37	%		37	%

Components of the income tax expense are as follows for the years ended:

	September 30, 2015			September 30, 2014		September 30, 2013
Current:
Federal	$	67,373		$	115,049	$	180,706
State		65,820			46,303		58,421
		133,193			161,352		239,127
Deferred:
Federal		2,377,590			2,903,110		2,455,015
State		(35,545	)		116,516		109,030
		2,342,045			3,019,626		2,564,045
Income tax expense	$	2,475,238		$	3,180,978	$	2,803,172

The Company is required to recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not

threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applies the interpretation to all tax positions for which the statute of limitations remained open. The Company had no liability for unrecognized tax benefits and did not recognize any interest or penalties during the years ended September 30, 2015, 2014, or 2013.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, income tax examinations by tax authorities for fiscal years ending prior to 2000. We are generally subject to U.S. federal and state tax examinations for all tax years since 1999 due to our net operating loss carryforwards and the utilization of the carryforwards in years still open under statute. The Company changed its fiscal year end in 2007 from March 31 to September 30.