Income Taxes

12 Months Ended

Aug. 31, 2021

Income Taxes

Income Taxes

Note 7—Income Taxes

The Company has applied the U.S. statutory Federal rate of 21%, enacted as part of the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017, for fiscal years end August 31, 2021, 2020 and 2019.

In fiscal 2019, the Company began recognizing an additional component of total Federal tax expense, the tax on Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Act, which became applicable to the Company in fiscal 2019. The Company elected to account for GILTI as a period cost, and therefore included GILTI expense in the effective tax rate calculation. This provision did not have a material effect on the effective tax rate for the years ended August 31, 2021, 2020 and 2019.

The Company concluded that the Base Erosion and Anti Abuse Tax (“BEAT”) provision of the Tax Act, which also became applicable to the Company in fiscal 2019, had no effect on our effective tax rate for fiscal 2021, 2020 or 2019.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, included a technical correction to the Tax Act which will allow accelerated deductions for qualified improvement property. The Company is currently evaluating the impact of the CARES Act, but at present does not expect that the qualified improvement property correction nor other provisions of the CARES Act would result in a material tax benefit to us in future periods. The CARES Act had no material effect on the effective tax rate for fiscal 2021 and 2020.

In July 2020, the United States Internal Revenue Service (“IRS”) released final regulations (TD 9901) that ease documentation standards and provide greater flexibility for taxpayers claiming the deduction for Foreign-Derived Intangible Income (“FDII”). During fiscal 2021, the Company’s effective tax rate included an FDII deduction benefit of $665. Also during fiscal 2021, the Company favorably resolved multiple uncertain tax positions and established international management fee and other transactions which resulted in $933 of tax benefit and $791 of tax expense, respectively.

Domestic and foreign pre-tax income for the years ended August 31, 2021, 2020 and 2019 was:

	Year Ended August 31,
	2021		2020		2019
United States	$	52,182	$	42,027	$	37,088
Foreign		6,412		3,293		6,465
	$	58,594	$	45,320	$	43,553

The provision (benefit) for income taxes for the years ended August 31, 2021, 2020 and 2019 was:

	Year Ended August 31,
	2021		2020		2019
Current:
Federal	$	11,677	$	9,157	$	9,880
State		782		1,813		1,699
Foreign		2,123		962		1,575
Total current income tax provision		14,582		11,932		13,154
Deferred:
Federal		(832)		(520)		(1,699)
State		(124)		(184)		(529)
Foreign		48		(65)		(84)
Total deferred income tax benefit		(908)		(769)		(2,312)
Total income tax provision	$	13,674	$	11,163	$	10,842

The provision (benefit) for income taxes differs from the amount computed by applying the Federal statutory income tax rate to income before income taxes. The Company’s combined federal, state and foreign effective tax rate as a percentage of income before taxes for fiscal 2021, 2020 and 2019, net of offsets generated by federal, state and foreign tax benefits, was 23.3%, 24.6% and 24.9%, respectively. The following is a reconciliation of the effective income tax rate with the U.S. Federal statutory income tax rate for the years ended August 31, 2021, 2020 and 2019:

	Year Ended August 31,
	2021		2020		2019
Federal statutory rates	21.0	%	21.0	%	21.0	%
Adjustment resulting from the tax effect of:
State and local taxes, net of federal benefit	2.3	%	3.0	%	2.1	%
Foreign tax rate differential	(0.3)	%	0.0	%	0.1	%
Adjustment to uncertain tax position	0.1	%	(1.1)	%	1.0	%
Transaction costs not deductible	0.0	%	0.5	%	0.0	%
Research credit generated	(0.1)	%	(0.1)	%	(0.3)	%
Stock Compensation	(0.3)	%	(0.3)	%	(0.4)	%
Permanent items	1.1	%	0.9	%	1.1	%
GILTI and Subpart F, net of foreign tax credit	0.3	%	0.3	%	0.6	%
Other	(0.4)	%	0.4	%	(0.4)	%
Change in valuation allowance	0.0	%	0.0	%	0.1	%
Deferred income tax remeasurement	0.1	%	0.0	%	0.0	%
Foreign Derived Intangible Income	(1.1)	%	0.0	%	0.0	%
Performance-based earnout contingency	0.6	%	0.0	%	0.0	%
Effective income tax rate	23.3	%	24.6	%	24.9	%

The following table summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities:

	As of August 31,
	2021		2020
Deferred tax assets:
Allowance for doubtful accounts	$	320	$	309
Inventories		520		994
Accruals		966		504
Warranty reserve		6		14
Pension accrual		2,386		2,749
Deferred compensation		545		391
Foreign currency loss on previously taxed income		96		96
Loan finance costs		3		7
Restricted stock grants		327		823
Non-qualified stock options		347		211
Lease liability		2,328		2,354
Foreign net operating loss, net of valuation allowance		192		247
Other		41		572
		8,077		9,271
Deferred tax liabilities:
Prepaid liabilities		(18)		(16)
Foreign intangibles		(3,156)		—
Right-of-use asset		(2,280)		(2,693)
Depreciation and amortization		(659)		(1,633)
		(6,113)		(4,342)
Net deferred tax assets (liabilities)	$	1,964	$	4,929

As of August 31, 2021, the Company had $599 of gross foreign operating loss carry forwards to offset future taxable income, the net balance of which was included within deferred income taxes. The net operating losses will begin to expire in fiscal year ending August 31, 2025.

Chase Corporation is required to apply a valuation allowance to reduce the deferred tax assets reported if based on the weight of the evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of August 31, 2021, the Company determined that a valuation allowance was not needed.

Consistent with the Company’s practice prior to the passage of the Tax Act, we do not currently take the position that undistributed foreign subsidiaries’ earnings are considered to be permanently reinvested.

A summary of the Company’s adjustments to its uncertain tax positions, included within long-term accrued income taxes on the consolidated balance sheet, in fiscal years ended August 31, 2021, 2020 and 2019 are as follows:

	2021		2020		2019
Balance, at beginning of the year	$	1,941	$	2,324	$	1,889
Increase for tax positions related to the current year		—		101		55
Increase (decrease) for tax positions related to prior years		1,180		(609)		300
Decreases for settlement of uncertain tax positions		(705)		—		—
Increase for interest and penalties		208		125		106
Decrease for lapses of statute of limitations		(434)		—		(26)
Balance, at end of year	$	2,190	$	1,941	$	2,324

The unrecognized tax benefits mentioned above include an aggregate of $487 of accrued interest and penalty balances related to uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. An increase in accrued interest and penalty charges of approximately $208, net of Federal tax expense, was recorded as a tax expense during the current fiscal year. The Company anticipates that its accrual for uncertain tax positions could change by approximately $510 over the next twelve-month period due to statute of limitations expiration.

The Company is subject to U.S. Federal income tax, as well as to income tax of multiple state, local and foreign tax jurisdictions. The statute of limitations for all material U.S. Federal, state, and local tax filings remains open for fiscal years subsequent to 2017. For foreign jurisdictions, the statute of limitations remains open in the U.K and France for fiscal years subsequent to 2017.