Note 6 - Income Taxes

12 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 6 – INCOME TAXES

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

	September 30,			September 30,			September 30,
(In thousands)	2022			2021			2020
Current:
Federal	$	13,230		$	5,154		$	1,966
State		1,532			440			175
Foreign		48			-			-
Current income tax expense		14,810			5,594			2,142
Deferred:
Federal		(509	)		(234	)		(252	)
State		6			47			(26	)
Foreign		165			-			-
Deferred income tax expense		(334	)		(187	)		(280	)
Income tax expense	$	14,472		$	5,407		$	1,862

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

	September 30,			September 30,			September 30,
	2022			2021			2020
Federal statutory rate		21.0	%		21.0	%		21.0	%
State income taxes		2.1	%		2.2	%		2.0	%
Foreign income taxes		0.4	%		-			-
Permanent differences		4.6	%		-			-
Change in valuation allowance		-			-			(0.5%	)
Expiration and utilization of state NOL’s		-			-			0.4	%
Research and development credits		(0.5%	)		(0.7%	)		(2.5%	)
Excess tax expense (benefits) from stock-based compensation		(4.9%	)		(1.5%	)		(0.1%	)
Effective Tax rate		22.7	%		21.0	%		20.3	%

As of September 30, 2022 and 2021, the current income tax payable was approximately $1,791,000, and $933,000, respectively. Current income tax payable amounts are included in accrued expenses in the Company’s consolidated balance sheets.

As of September 30, 2022 and 2021, the Company had no U.S. federal net operating loss (“NOL”) carry-forwards. The state NOL carryforwards of $769,000 at September 30, 2020 were fully utilized during fiscal 2021 resulting in no state NOL carryforwards at September 30, 2022. In addition, as of September 30, 2022, the Company had Minnesota research and development tax credits of $292,000. As of September 30, 2021, the Company had Minnesota research and development tax credits of $300,000. The Company has not recorded a valuation allowance on these research and development related deferred tax assets as the Company believes it is more likely than not they will be utilized before they begin to expire in fiscal year 2031.

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

	September 30,			September 30,
(In thousands)	2022			2021
Deferred income tax assets (liabilities):
Intangibles	$	(102	)	$	(92	)
Property and equipment depreciation		(1,068	)		(381	)
Net operating loss carry forwards and credits		256			300
Stock-based compensation		416			231
Inventories		813			519
Prepaid expenses		(163	)		(48	)
Accrued expenses and reserves		1,020			519
Foreign currency translation		180			-
Unrealized loss on investments		365			-
Goodwill		(1,077	)		(683	)
Net deferred tax asset	$	640		$	365

Realization of NOL carryforwards and other deferred tax temporary differences are contingent upon future taxable earnings. The deferred tax assets and deferred tax liabilities are not netted due to being within different tax jurisdictions. The Company’s deferred tax assets were reviewed for expected utilization by assessing the available positive and negative factors surrounding their recoverability. As of September 30, 2022 and 2021, no valuation allowance was deemed necessary as the Company determined it was more likely than not that the Company’s deferred tax assets will be realized.

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, 2022 or 2021.

The Company is subject to income taxes in the U.S. federal and various state and foreign jurisdictions.  Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply.  Clearfield, Inc. is generally subject to U.S. federal examination for all tax years after 2017 and state examinations for all tax years after 2013 due to unexpired research and development credit carryforwards still open under statute. Nestor is generally subject to Finland examination for all tax years after 2018.