Crown Crafts, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Note 9 - Income Taxes

Note 9 - Income Taxes

12 Months Ended

Mar. 29, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note

–

Income Taxes

The Company’s income tax provision for the fiscal years ended

March 29, 2020

and

March 31, 2019

is summarized below (in thousands):

	Fiscal year ended March 29, 2020
	Current			Deferred		Total
Income tax expense on current year income:
Federal	$	1,385		$	79	$	1,464
State		381			6		387
Foreign		10			-		10
Total income tax expense on current year income		1,776			85		1,861
Income tax expense (benefit) - discrete items:
Reserve for unrecognized tax benefits		(386	)		-		(386	)
Adjustment to prior year provision		(273	)		-		(273	)
Net excess tax benefit related to stock-based compensation		5			-		5
Income tax benefit - discrete items		(654	)		-		(654	)
Total income tax expense	$	1,122		$	85	$	1,207

	Fiscal year ended March 31, 2019
	Current		Deferred			Total
Income tax expense on current year income:
Federal	$	1,282	$	61		$	1,343
State		287		18			305
Foreign		11		-			11
Total income tax expense on current year income		1,580		79			1,659
Income tax expense (benefit) - discrete items:
Reserve for unrecognized tax benefits		87		-			87
Adjustment to prior year provision		85		(71	)		14
Net excess tax shortfall related to stock-based compensation		12		-			12
Income tax expense (benefit) - discrete items		184		(71	)		113
Total income tax expense	$	1,764	$	8		$	1,772

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of

March 29, 2020

and

March 31, 2019

are as follows (in thousands):

	March 29, 2020			March 31, 2019
Deferred tax assets:
Employee wage and benefit accruals	$	428		$	441
Accounts receivable and inventory reserves		188			129
Deferred rent		-			25
Operating lease liabilities		1,275			-
Intangible assets		-			184
State net operating loss carryforwards		713			710
Accrued interest and penalty on unrecognized tax liabilities		43			55
Stock-based compensation		165			148
Total gross deferred tax assets		2,812			1,692
Less valuation allowance		(713	)		(710	)
Deferred tax assets after valuation allowance		2,099			982

Deferred tax liabilities:
Prepaid expenses		(191	)		(175	)
Operating lease right of use assets		(1,212	)		-
Intangible assets		(18	)		-
Property, plant and equipment		(239	)		(283	)
Total deferred tax liabilities		(1,660	)		(458	)
Net deferred income tax assets	$	439		$	524

In assessing the probability that the Company’s deferred tax assets will be realized, management of the Company has considered whether it is more likely than

not

that some portion or all of the deferred tax assets will

not

be realized. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income during the future periods in which the temporary differences giving rise to the deferred tax assets will become deductible. The Company has also considered the scheduled inclusion into taxable income in future periods of the temporary differences giving rise to the Company’s deferred tax liabilities. The valuation allowance as of

March 29, 2020

and

March 31, 2019

was related to state net operating loss carryforwards that the Company does

not

expect to be realized. Based upon the Company’s expectations of the generation of sufficient taxable income during future periods, the Company believes that it is more likely than

not

that the Company will realize its deferred tax assets, net of the valuation allowance and the deferred tax liabilities.

Management evaluates items of income, deductions and credits reported on the Company’s various federal and state income tax returns filed and recognizes the effect of positions taken on those income tax returns only if those positions are more likely than

not

to be sustained. The Company applies the provisions of accounting guidelines that require a minimum recognition threshold that a tax benefit must meet before being recognized in the financial statements. Recognized income tax positions are measured at the largest amount that has a greater than

50%

likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The following table sets forth the reconciliation of the beginning and ending amounts of unrecognized tax liabilities for fiscal years

2020

and

2019

(in thousands):

	Fiscal Year
	2020			2019
Balance at beginning of period	$	1,194		$	1,017
Additions related to current year positions		58			87
Additions related to prior year positions		76			90
Revaluations due to change in enacted tax rates		-			-
Reductions for tax positions of prior years		-			-
Reductions due to lapses of the statute of limitations		(607	)		-
Payments pursuant to judgements and settlements		-			-
Balance at end of period	$	721		$	1,194

After considering all relevant information regarding the calculation of the state portion of its income tax provision, the Company believes that the technical merits of the tax position that the Company has taken with respect to state apportionment percentages would more likely than

not

be sustained. However, the Company also realizes that the ultimate resolution of such tax position could result in a tax charge that is more than the amount realized based upon the application of the tax position taken. Therefore, the Company’s measurement regarding the tax impact of the revised state apportionment percentages resulted in the Company recording discrete reserves for unrecognized tax liabilities during fiscal years

2020

and

2019

$58,000

and

$87,000,

respectively, in the accompanying consolidated statements of income.

The Company’s policy is to accrue interest expense and penalties as appropriate on any estimated unrecognized tax liabilities as a charge to interest expense in the Company’s consolidated statements of income. During fiscal years

2020

and

2019,

the Company accrued

$76,000

and

$90,000,

respectively, for interest expense and penalties on the portion of the unrecognized tax liabilities that has been refunded to the Company but for which the relevant statute of limitations remained unexpired.

interest expense or penalties are accrued with respect to estimated unrecognized tax liabilities that are associated with state income tax overpayments that remain receivable.

December 2016,

the Company was notified by the FTB of its intention to examine the Company’s claims for refund made in connection with amended consolidated income tax returns that the Company had filed for the fiscal years ended

March 30, 2014,

March 31, 2013,

April 1, 2012

and

April 3, 2011.

July 31, 2019,

the FTB notified the Company that it would take

further action with regard to the fiscal years ended

March 31, 2013,

April 1, 2012

and

April 3, 2011.

In addition, on

January 7, 2020,

the Company’s California consolidated income tax return for the fiscal year ended

March 29, 2015

became closed to examination or other adjustment. Accordingly, the Company reversed the reserves for unrecognized tax liabilities that it had previously recorded for these fiscal years, which resulted in the recognition of a discrete income tax benefit of

$444,000

during the fiscal year ended

March 29, 2020

in the accompanying consolidated statements of income. The Company also reversed the interest expense and penalties that it had accrued in respect of the unrecognized tax liabilities for these fiscal years, which resulted in the recognition of a credit to interest expense of

$163,000

during the fiscal year ended

March 29, 2020.

As of

April 20, 2020,

the status of the Company’s claim for refund made in connection with the amended consolidated income tax return that the Company filed for the fiscal year ended

March 30, 2014

was

not

resolved. The ultimate resolution of this claim for refund could include administrative or legal proceedings. Although management believes that the calculations and positions taken on the amended consolidated income tax return and all other filed income tax returns are reasonable and justifiable, the outcome of this or any other examination could result in an adjustment to the position that the Company took on such income tax returns. Such adjustment could also lead to adjustments to

one

or more other state income tax returns, or to income tax returns for subsequent fiscal years, or both. To the extent that the Company’s reserve for unrecognized tax liabilities is

not

adequate to support the cumulative effect of such adjustments, the Company could experience a material adverse impact on its future results of operations. Conversely, to the extent that the calculations and positions taken by the Company on the filed income tax returns under examination are sustained, another reversal of all or a portion of the Company’s reserve for unrecognized tax liabilities could result in a favorable impact on its future results of operations.

During the fiscal year ended

March 29, 2020,

the Company recorded a discrete income tax benefit of

$274,000

to reflect the aggregate effect of certain tax credits claimed on amended and original consolidated federal income tax returns.

During the fiscal years ended

March 29, 2020

and

March 31, 2019,

the Company recorded discrete income tax charges of

$5,000

and

$12,000,

respectively, to reflect the effects of the excess tax benefits and tax shortfalls arising from the exercise of stock options and the vesting of non-vested stock during the periods.

The Company's provision for income taxes is based upon effective tax rates of

15.5%

and

26.1%

in fiscal years

2020

and

2019,

respectively. These effective tax rates are the sum of the top U.S. statutory federal income tax rate and a composite rate for state income taxes, net of federal tax benefit, in the various states in which the Company operates, plus the net effect of various discrete items.

The following table reconciles income tax expense on income from continuing operations at the U.S. federal income tax statutory rate to the net income tax provision reported for fiscal years

2020

and

2019

(in thousands):

	2020			2019
Federal statutory rate		21	%		21	%
Tax expense at federal statutory rate	$	1,631		$	1,426
State income taxes, net of Federal income tax benefit		306			241
Tax credits		(85	)		(11	)
Discrete items		(654	)		113
Other - net, including foreign		9			3
Income tax expense	$	1,207		$	1,772

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References + Details