Note 10 - Income Taxes

12 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

10. INCOME TAXES

The components of income tax expense (benefit) for fiscal 2013, 2012 and 2011 are as follows (amounts in thousands):

	2013		2012			2011
From continuing operations:
Current:
Federal	$	-	$	52		$	128
State		12		(14	)		3
Foreign		1,251		1,215			611
		1,263		1,253			742
Deferred:
Federal		-		-			-
State		-		-			-
Non - U.S.		99		(71	)		169
		99		(71	)		169
Total operations	$	1,362	$	1,182		$	911

Deferred income taxes reflect the tax impact of carryforwards and temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Cumulative carryforwards and temporary differences giving rise to the net deferred income tax liability at September 30 are as follows (amounts in thousands):

	September 30,
	2013			2012
Deferred tax assets:
Accrued employee compensation	$	115		$	107
Reserves		270			273
Other assets		17			17
Non-Qualified Stock Compensation		1,236			1,236
Net operating loss and credit carryforwards		38,824			32,628
		40,462			34,261
Deferred tax liabilities:
Property, plant and equipment		(14,024	)		(12,255	)
Prepaid expenses		(124	)		(162	)
		(14,148	)		(12,417	)
Total deferred taxes		26,314			21,844
Less: valuation allowance		(26,634	)		(22,137	)
Net deferred tax liability	$	(320	)	$	(293	)
Classification of deferred taxes:
Current deferred tax asset (included in other current assets)	$	168		$	180
Long-term deferred tax liability		(488	)		(473	)
	$	(320	)	$	(293	)

In the consolidated balance sheets, these deferred tax assets and liabilities are classified as either current or non-current based on the classification of the related liability or asset for financial reporting. A deferred tax asset or liability that is not related to an asset or liability for financial reporting, including deferred taxes related to carryforwards, is classified according to the expected reversal date of the temporary differences as of the end of the year.

The provision for income taxes differs from the amount using the statutory federal income tax rate (34%) as follows (amounts in thousands):

	2013			2012			2011
At statutory rate:
Income tax (benefit) expense on income (loss) from operations	$	2,243		$	8,172		$	(905	)
Increases (decreases):
Effect of lower foreign statutory rates		(3,425	)		(4,540	)		(175	)
Change in valuation allowance on net operating loss		4,294			(1,782	)		(395	)
State taxes, net of federal benefit		(43	)		(22	)		33
Local taxes, non-U.S.		1,045			1,018			611
Change of uncertain tax positions		16			(71	)		(46	)
Reflection of tax rate change – non-U.S.		(641	)		(2,506	)		1,748
Fair market value of warrants		-			(32	)		(422	)
R&D credits		(67	)		(33	)		(186	)
Mexico inflationary adjustment		(772	)		921			560
True up for Mexico inflationary adjustment		(1,397	)		-			-
Other		109			57			88
	$	1,362		$	1,182		$	911

The change in valuation allowance is impacted by the expected realization of deferred assets related to tax carryforwards and temporary differences. In fiscal 2013, the Company recorded a true-up to our provision to reflect tax deductions related to inflation adjustments which were recorded on our tax returns, but not reflected in the provision. The true-up relates to an annual inflation adjustment deduction allowed by Mexico, which consists of determining the monetary gain or loss, derived from the effect of the inflation on debits and credits, including assets related to net operating loss carryforwards. The incremental deferred tax assets related to these losses are offset by a full valuation allowance.

The consolidated income (loss) from continuing operations before income taxes by domestic and foreign sources for the years ended September 30, 2013, 2012 and 2011 was as follows (amounts in thousands):

	2013			2012			2011
Domestic	$	(8,474	)	$	(996	)	$	3,041
Foreign		15,072			25,030			(5,704	)
Income (Loss) from operations before income taxes	$	6,598		$	24,034		$	(2,663	)

The Company currently has domestic net operating loss carryforwards of approximately $70.5 million available to offset future tax liabilities, which expire between 2021 and 2030. Included in the net operating loss carry-forwards are stock option deductions of approximately $19.9 million. The benefits of these tax deductions, referred to as excess tax benefits, will be credited to additional paid-in capital upon being realized or recognized. The Company has recorded a full valuation allowance against its deferred tax asset because it is more likely than not that the value of the deferred tax asset will not be realized.

The Company currently has a foreign net operating loss carryforward of approximately $89.6 million. $43.5 million expires between 2017 and 2022 and $46.1 million has unlimited carryforward. Though the Hungarian loss carryforward does not expire, utilization is limited to 50% of the taxable income generated thus extending the anticipated carryforward period of these net operating losses.

Income tax expense was $1.4 million for fiscal 2013 compared to a tax expense of $1.2 million for fiscal 2012. During fiscal 2013, income tax expense of $1.1 million was incurred related to the local Hungarian municipality tax and $0.1 million was incurred related to Hungarian federal taxes. Our utilization of Hungarian tax loss carryforward in Hungary is limited to only 50% of taxable income in fiscal 2013 and beyond. Local and federal alternative minimum taxes in the U.S. and Mexico were $0.2 million. During fiscal 2012, income tax expense of $1.1 million was incurred related to the local Hungarian municipality tax. An additional income tax expense of $0.1 million was recorded during fiscal 2011 related to increasing the valuation allowance against the deferred tax asset for the Hungarian subsidiary. Local and federal alternative minimum taxes in the U.S. and Mexico were $0.2 million.

In September 2013, the U.S. Treasury issued final Internal Revenue Code 263(A) Tangible Property Regulations (“TPR”) addressing the tax consequences associated with the acquisition, production, improvement and disposition of tangible property.  The TPR are effective for tax years beginning on or after January 1, 2014, which for the Company is its year beginning October 1, 2014.   Because these are non-discretionary, required regulations, taxpayers must reflect the impact of these regulations in the period in which they were issued.  Some sections of the TPR (in particular, the repairs/improvements sections) may potentially require taxpayers to reflect a “cumulative effect adjustment” to currently deduct historically capitalized items that would have been eligible to be treated as currently deductible for tax purposes when applying the TPR, net of accumulated depreciation deductions claimed to date.  As of the date of the filing of these financial statements, the U.S. Treasury Department has not yet issued transitional guidance in the form of Revenue Procedures that would clarify how the TPR will be adopted, and whether or not such a cumulative effect adjustment would, in fact, be required as it relates to repairs and improvements.  

Our U.S. operations have a significant deferred tax asset related to a net operating loss (“NOL”) carryforward.  Any cumulative effect adjustment identified at this point would simply result in a reclass from the noncurrent deferred tax item for property, plant and equipment to a noncurrent deferred tax item for the cumulative effect adjustment related to the TPR. Because of Zoltek’s full valuation allowance position on deferred tax assets related to the U.S. operations, there would be no impact to the income statement or to the classification on the balance sheet related to the potential deduction of repairs and improvements.  As a result, although the Company is required to recognize the impact of enacted legislation, because the changes do not impact the income statement or balance sheet, we have not reflected the changes in the gross deferred balances in the footnote.  Once the U.S. Treasury Department issues transitional guidance Revenue Procedures related to the TPR, we will consider that guidance to determine any impact to our balances.