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, 2014

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. During the fourth quarter of fiscal year 2012, the Company reversed a substantial portion of the deferred tax asset valuation allowance in the amount of $3,518,000 after considering all available positive and negative evidence, including our historical operating results, current financial condition, and potential future taxable income. This represented a change in accounting estimate and increased our net income by that amount as well and contributed $0.28 per diluted share for the period. The total valuation allowance released during the year ended September 30, 2012 was approximately $5.1 million.

As of September 30, 2013, the Company’s remaining valuation allowance of approximately $975,000 related to state net operating loss carry forwards. During the fourth quarter of 2014, the Company reversed a portion of its remaining valuation allowance primarily related to the expiration of state net operating losses in 2014. The remaining valuation allowance balance as of September 30, 2014 of $848,000 relates entirely to state net operating loss carry forwards we do not expect to utilize. Approximately $50,000 of the valuation allowance is short-term and $798,000 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.

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

	September 30, 2014			September 30, 2013
Current deferred income tax assets (liabilities):
Inventories	$	292,675		$	262,162
Accrued expenses and reserves		297,336			657,125
Prepaid expenses		(42,722	)		(23,427	)
Net operating loss carry forwards and credits		1,752,291			3,813,429
		2,299,580			4,709,289
Valuation allowance		(50,145	)		(94,179	)
Net current deferred tax asset	$	2,249,435		$	4,615,110

Long-term deferred income tax assets (liabilities):
Intangibles	$	(30,028	)	$	(15,779	)
Property and equipment depreciation		18,091			86,292
Net operating loss carry forwards and credits		1,531,315			2,096,581
Stock based compensation		57,573			66,722
Accrued expenses and reserves		3,369			7,444
Goodwill		(626,018	)		(549,608	)
		954,302			1,691,652
Valuation allowance		(797,680	)		(881,079	)
Net long-term deferred tax asset	$	156,622		$	810,573

As of September 30, 2014 the current income tax receivable was approximately $127,000. As of September 30, 2013, the current income tax payable was approximately $81,000.

As of September 30, 2014, the Company had U.S. federal net operating loss (NOL) carry forwards of approximately $8.7 million. The U.S. federal net operating loss carry forwards will expire in 2023 through 2028 if not utilized. As of September 30, 2014, the Company had state net operating loss carry forwards of approximately $16.6 million. The state net operating loss carry forwards will expire in 2015 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, 2014. Our federal NOL carry forwards referenced above at September 30, 2014 include approximately $3.7 million of income tax deductions in excess of previously recorded tax benefits for equity based awards. Due to expiring state NOL’s, tax deductions in excess of previously recorded tax benefits will not be realized. 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 2014, these tax benefits are not reflected in the Company’s deferred tax assets presented above. The tax benefit of approximately $1,289,000 as of September 30, 2014 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, 2014			September 30, 2013			September 30, 2012
Federal statutory rate		34	%		34	%		34	%
State income taxes		1	%		1	%		1	%
Permanent differences		2	%		2	%		4	%
Change in valuation allowance		(1	%)		-			(115	%)
Expiration of state NOL’s		1	%		-			-
Tax rate		37	%		37	%		(76	%)

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

	September 30, 2014		September 30, 2013		September 30, 2012
Current:
Federal	$	115,049	$	180,706	$	87,193
State		46,303		58,421		25,439
		161,352		239,127		112,632
Deferred:
Federal		2,903,110		2,455,015		(3,088,076	)
State		116,516		109,030		(348,855	)
		3,019,626		2,564,045		(3,436,931	)
Income tax expense (benefit)	$	3,180,978	$	2,803,172	$	(3,324,299	)

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, 2014, 2013, or 2012.

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 1999. 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 in 2007 from March 31 to September 30.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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