Income Taxes

12 Months Ended

Aug. 27, 2017

Income Tax Disclosure [Abstract]

Income Taxes

6. INCOME TAXES

Income taxes consisted of the following:

	Years Ended
	August 27, 2017			August 28, 2016			August 30, 2015
Current:
Federal	$	(12,055	)	$	(187,241	)	$	102,448
State		9,690			9,500			10,821
		(2,365	)		(177,741	)		113,269
Deferred:
Federal		(478,531	)		(200,433	)		(44,441	)
State		(9,136	)		(169,122	)		(54,112	)
		(487,667	)		(369,555	)		(98,553	)
Total	$	(490,032	)	$	(547,296	)	$	14,716

A reconciliation of the federal income tax provision at the statutory rate with actual taxes provided on earnings from continuing operations is as follows:

	Years Ended
	August 27, 2017			August 28, 2016			August 30, 2015
Ordinary federal income tax statutory rate		(34.0	)%		(34.0	)%		34.0	%
Income tax credits		(4.4	)		(107.1	)		(27.0	)
Domestic production activities deduction		(.2	)		(6.1	)		(6.5	)
State income taxes net of federal tax effect		1.0			1.0			1.0
Effective rate		(37.6	%)		(146.2	)%		1.5	%

Deferred income taxes are provided for the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities. Temporary differences comprising the net deferred taxes on the balance sheet are as follows:

	August 27, 2017			August 28, 2016
Deferred Tax Assets
Accrued liabilities	$	127,765		$	61,977
Inventory		71,013			122,871
Tax credit carryforwards		710,198			717,856
Stock option expense		363,632			323,728
Other		16,456			7,346
		1,289,064			1,233,778
Less: valuation allowance		(27,473	)		(21,212	)
Net deferred tax assets		1,261,591	)		1,212,566	)
Deferred Tax Liabilities
Tax depreciation and amortization greater than book		(2,176,659	)		(2,615,301	)
Net deferred taxes	$	(915,068	)	$	(1,402,735	)

The Company’s effective tax rate in its year ended August 27, 2017 was a negative (37.6%) as compared to a negative (146.2%) for the year ended August 28, 2016 and 1.5% for the year ended August 30, 2015, respectively. During fiscal 2016, the Company hired an outside consulting firm to conduct an analysis to determine if certain activities the Company performs qualifies for the Research & Development tax credit (R&D credit) as defined by Internal Revenue Code Section 41. As a result of the analysis, the Company determined that it is performing activities that qualify for the R&D credit, and during the fiscal year 2016 recognized tax benefits related to R&D tax credits from several prior years which lowered the overall effective tax rate. In addition, during the Company’s fiscal 2016 second quarter, the Federal R&D tax credit law was retroactively renewed for calendar year 2015 and also made permanent going forward. Since for calendar year 2015 the law was enacted retroactively, any effects are recognized as a component of income tax expense or benefit from continuing operations in the financial statements in the interim period that the law was enacted, which in this case was the Company’s fiscal 2016 second quarter. The Company believes that it has recognized R&D tax benefits for all prior years to the extent possible.

As of August 27, 2017, the Company has federal alternative minimum tax credit carryforwards of approximately $347,000 and approximately $209,000 in federal R&D tax credit carryforwards. The Company also has $254,000 in state R&D tax credit carryforwards and $23,000 in state alternative minimum tax credit carry forwards. The R&D tax credit carryforwards that are related to state jurisdictions begin to expire starting in 2018. The federal R&D tax credits begin to expire in 2033 while the alternative minimum tax credit carry forwards do not expire.

The Company files income tax returns in the U.S. federal and various state jurisdictions. The Company classifies interest and penalties arising from unrecognized income tax positions in income tax expense if they occur. At August 27, 2017 and August 28, 2016, the Company had no accrued interest or penalties related to uncertain tax positions.

As previously discussed, the Company has R&D tax credits related to state jurisdictions. These credits can be carried forward for fifteen years before they expire. The Company applies the accounting standard for recognition of deferred tax assets pursuant to a more-likely-than-not threshold. The Company believes that it is more likely than not that some of its’ state R&D tax credits will expire before they can be utilized. Due to this, the Company established a valuation allowance of $27,473 at August 27, 2017. The Company also applies the more-likely-than-not accounting standard for uncertain tax positions to determine the recognition and derecognition of uncertain tax positions. Once the more-likely-than-not threshold is met, the amount of benefit to be recognized is the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such a change. Below is a summary of uncertain tax positions:

Uncertain tax positions at August 31, 2014	$	-
Increase for tax positions related to prior years		30,000
Uncertain tax positions at August 30, 2015		30,000
Increase for tax positions related to prior years		3,778
Uncertain tax positions at August 28, 2016		33,778
Increases for tax positions related to prior years		182
Uncertain tax positions at August 27, 2017	$	33,960

The Company does not believe there will be significant changes to the estimates in the next 12-month period. Due to the complexity of some of these uncertainties, the ultimate settlement may result in payments that are different from our current estimate of tax liabilities, resulting in the recognition of additional charges or benefits to income tax expense.

The Company incurred the following research and development expenses for the following years ended:

August 27, 2017	$	999,000
August 28, 2016	$	994,000
August 30, 2015	$	942,000

The research and development expenses consist primarily of engineering costs associated with the startup of new parts and programs and the development and testing of improvements on existing parts and programs. With each new part or program that the Company secures, the Company has to develop the methods to manufacture these parts. Once the methods have been established, they need to be tested and proven on the manufacturing floor. In many cases, these tests result in the methods being refined or overhauled based on the experiences from the manufacturing floor.