Income Taxes

12 Months Ended

Aug. 31, 2021

Income Taxes

Income Taxes

Note 7. Income Taxes

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

	Years Ended August 31,
	2021		2020
Current:
Federal	$	2,489,000	$	1,436,000
State		868,000		664,000
Foreign		(62,000)		129,000
		3,295,000		2,229,000
Deferred:
Federal		(2,000)		1,423,000
State		—		(478,000)
Foreign		—		—
		(2,000)		945,000
Total	$	3,293,000	$	3,174,000

Income taxes for the years ended August 31, 2021 and 2020 differ from the amounts computed by applying the federal blended and statutory corporate rates of 21% for both 2021 and 2020 to the pre-tax income. The differences are reconciled as follows:

	Years Ended August 31,
	2021			2020
Current:
Expected income tax provision at statutory rate		21.0	%		21.0	%
Increase (decrease) in taxes due to:
State tax, net of federal benefit		4.6	%		5.4	%
Permanent differences		(0.3)	%		0.4	%
Change in deferred tax asset valuation allowance		—			(3.8)	%
Prior year provisions and Payable True Up		—			6.4	%
Other, net		2.9	%		(0.5)	%
Income tax expense		28.2	%		28.9	%

The components of deferred taxes at August 31, 2021 and 2020 are summarized below:

	August 31,
Deferred tax assets (liabilities):	2021		2020
Net operating loss	$	357,000	$	405,000
Capital Loss		49,000		—
Allowance for doubtful accounts		(14,000)		1,000
Accrued expenses		383,000		262,000
Accrued workers’ compensation		(23,000)		(5,000)
Inventory adjustments		994,000		944,000
Unrealized losses on investment		(7,000)		54,000
Excess of tax over book depreciation		(957,000)		(850,000)
ROU Asset		(2,941,000)		—
ROU Liability		2,968,000		—
Other		62,000		63,000
		871,000		874,000
Valuation allowance		––		—
Total deferred tax assets, net	$	871,000		874,000

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, management 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 within 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 determined that the capital losses, unrealized losses and EACO’s stated 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. During the year ended August 31, 2020, the Company exercised a tax planning strategy to support that such assets could be utilized, and the valuation allowance was, accordingly, released. No valuation allowance was recognized as of August 31, 2021 and August 31, 2020.

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 had no liability for unrecognized tax benefit related to tax positions for either fiscal 2021 or fiscal 2020.

The Company will recognize interest and penalties related to unrecognized tax benefits as income tax expense. As of August 31, 2021, 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, 2021 (i.e., tax year 2020), the Company’s GILTI inclusion was calculated to be $0 as the Canadian subsidiary generated a loss for the 2020 tax year.

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, 2021, EACO’s FDII deduction was calculated to be approximately $64,000 based on the Company’s direct export sales, which is a permanent deduction that reduces the current year federal taxable income.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act provides tax relief and tax incentives to business, including provisions relating to net operating loss carryback, refundable payroll tax credits, OASDI payroll tax deferral, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The Company did not apply for SBA Paycheck Protection Program loan based on the advice of its legal counsel due to stable cash flow and available cash from the Company’s line of credits. The Company has taken advantage of the Employee Retention Credit (ERC), which is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2022. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. The estimated amount of the refundable tax credit for fiscal year 2021 is $5,392,754and the ERC was applied against and reduced the payroll tax expense.

Finally, 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 Internal Revenue Service concluded an examination for the Company’s federal tax return for the year ending August 31, 2016. The Internal Revenue Service concluded and issued a no change report for the August 31, 2016 federal tax return dated February 13, 2019. As of August 31, 2021, tax years 2018, 2019, and

2020 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 2017.