Note 7. Income Taxes

The following summarizes the Company’s provision for income taxes on income from operations:


	Years Ended August 31,
	2019		2018
Current:
Federal	$	2,911,000	$	2,249,000
State		803,000		660,000
Foreign		271,000		(35,000)
		3,985,000		2,874,000
Deferred:
Federal		(378,000)		401,000
State		(89,000)		(82,000)
Foreign		22,000		(22,000)
		(445,000)		297,000
Total	$	3,540,000	$	3,171,000

Income taxes for the years ended August 31, 2019 and 2018 differ from the amounts computed by applying the federal blended and statutory corporate rates of 21% for 2019 and 25% for 2018 to the pre-tax income. The differences are reconciled as follows:


	Years Ended August 31,
	2019			2018
Current:
Expected income tax provision at statutory rate		21.0	%		25.7	%
Increase (decrease) in taxes due to:
State tax, net of federal benefit		5.2	%		5.4	%
Permanent differences		0.3	%		0.3	%
Change in deferred tax asset valuation allowance		(0.7)	%		—
Other, net		1.4	%		(0.1)	%
Income tax expense		27.3	%		31.3	%

The components of deferred taxes at August 31, 2019 and 2018 are summarized below:


	August 31,
	2019		2018
Deferred tax assets (liabilities):
Net operating loss	$	421,000	$	508,000
Allowance for doubtful accounts		3,000		(5,000)
Accrued expenses		270,000		209,000
Accrued workers’ compensation		1,000		7,000
Inventory adjustments		887,000		708,000
Unrealized losses on investment		92,000		(7,000)
Excess of tax over book depreciation		(206,000)		(235,000)
Other		71,800		26,500
Total deferred tax assets		1,539,800		1,211,500
Valuation allowance		(421,000)		(509,000)
Total deferred tax assets	$	1,118,500	$	702,500

The Company records net deferred tax assets to the extent management believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance. Net deferred tax assets are included in other assets in the noncurrent assets in the accompanying consolidated balance sheets.

In 2010, management concluded that certain deferred tax assets would not be realized, primarily the pre-merger net operating loss carryforwards (“NOLs”) of the Company. Management reviewed the positive and negative evidence available at August 31, 2019 and 2018 and determined that the capital losses, unrealized losses and EACO’s state net operating losses did not meet the more likely than not threshold required to be recognized. As such, a valuation allowance was retained on these deferred tax assets.

On January 1, 2007, the Company adopted ASC 740 “Income Taxes” formerly FASB Interpretation No. 48, an interpretation of FASB Statement No. 109 (“ASC 740”). ASC 740 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in the tax return. The Company did not recognize any additional liability for unrecognized tax benefit as a result of the implementation. The Company has no liability for unrecognized tax benefit related to tax positions for either fiscal 2019 or fiscal 2018.

The Company will recognize interest and penalty related to unrecognized tax benefits and penalties as income tax expense. As of August 31, 2019, the Company has not recognized liabilities for penalty and interest as the Company does not have any liability for unrecognized tax benefits.

The 2018 Tax Cuts and Jobs Act (TCJA) shifted the US international tax regime from a worldwide system to a quasi-territorial system. Besides introducing a new federal corporate tax rate of 21%, the TCJA imposed an income inclusion for federal income tax purposes under IRC Section 951A on net “intangible” income derived from “specified foreign corporations”, also known as Global Intangible Low-Taxed Income (GILTI). Beginning for tax year 2018 until 2025, a deduction under IRC Section 250 is allowed for the lesser of 50% of the GILTI inclusion or U.S. federal taxable income, whichever is less. This deduction effectively taxes GILTI inclusions at an effective tax rate 10.5% for federal purposes, before claiming allowable indirect foreign tax credits against GILTI inclusions. GILTI inclusions generally apply where “specified foreign corporation” income is taxed at an effective rate below 90% of the U.S. federal tax rate (i.e., an 18.9% effective tax rate). After tax year 2025, the allowable deduction under IRC Section 250 will be reduced to 37.5% of the GILTI inclusion after tax year 2025. For the tax year ended August 31, 2019 (i.e., tax year 2018), the Company's GILTI inclusion was calculated to be approximately $1.1 million; however, with the Section 250 deduction of about $546,000, and $206,000 of allowable indirect foreign tax credit, the net effect of the GILTI was offset for the 2018 tax year. It should also be noted that new high tax exception to GILTI was not considered since the IRS issued new regulations in late June 2019, which were not finalized yet by August 2019. The Company is making an election to treat GILTI as period cost.

The TCJA provided for an additional deduction of 37.5% of U.S. export sales under IRC Section 250, which is for Foreign-Derived Intangible Income (FDII). The deduction is only allowable for U.S. C-Corporations and effectively taxes export sales at an effective rate of 13.125% from tax years 2018 through 2025. After 2025, the FDII deduction is reduced to 21.875%. For the tax year ended August 31, 2019, EACO’s FDII deduction was calculated to be approximately $61,500 based on the Company’s direct export sales, which is a permanent deduction that reduces the current year federal taxable income.

It should also be noted that the provisions mentioned above do not apply generally to state income taxation, only for federal income tax purposes.

The Company is subject to taxation in the US, Canada and various states. The Company’s tax years for 2015, 2016, 2017 and 2018 are subject to examination by the taxing authorities. With few exceptions, the Company is no longer subject to state, local or foreign examinations by taxing authorities for years before 2015.

The Internal Revenue Service concluded the examination for the Company's federal tax return for the year ending in August 31, 2016 year. The Internal Revenue Service concluded and issued a no change report for the August 31, 2016 federal tax return dated February 13, 2019. Accordingly, for federal returns, the Company is generally not subject to examination for years 2016 and before.