Annual report pursuant to Section 13 and 15(d)

Note 10 - Income Taxes

v3.21.1
Note 10 - Income Taxes
 12 Months Ended
Mar. 28, 2021
Notes to Financial Statements  
Income Tax Disclosure [Text Block]
Note
10
–
Income Taxes
 
The Company's income tax provision for the fiscal years ended
March 28, 2021
and
March 29, 2020
is summarized below (in thousands):
 
   
Fiscal year ended March 28, 2021
  
   
Current
    
Deferred
    
Total
  
Income tax expense on current year income:
                        
Federal
   $
1,631
     $
(216
 )   $
1,415
  
State
    
479
      
(51
 )    
428
  
Foreign
    
10
      
-
      
10
  
Total income tax expense on current year income
    
2,120
      
(267
 )    
1,853
  
Income tax expense (benefit) - discrete items:
                        
Reserve for unrecognized tax benefits
    
(145
 )    
-
      
(145
 )
Adjustment to prior year provision
    
(54
 )    
-
      
(54
 )
Net excess tax benefit related to stock-based compensation
    
(12
 )    
-
      
(12
 )
Income tax benefit - discrete items
    
(211
 )    
-
      
(211
 )
Total income tax expense
   $
1,909
     $
(267
 )   $
1,642
  
 
   
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
  
 
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of
March 28, 2021
and
March 29, 2020
are as follows (in thousands):
 
   
March 28, 2021
    
March 29, 2020
  
Deferred tax assets:
                
Employee wage and benefit accruals
   $
532
     $
428
  
Accounts receivable and inventory reserves
    
234
      
188
  
Operating lease liabilities
    
1,100
      
1,275
  
Intangible assets
    
172
      
-
  
State net operating loss carryforwards
    
736
      
713
  
Accrued interest and penalty on unrecognized tax liabilities
    
28
      
43
  
Stock-based compensation
    
195
      
165
  
Total gross deferred tax assets
    
2,997
      
2,812
  
Less valuation allowance
    
(736
 )    
(713
 )
Deferred tax assets after valuation allowance
    
2,261
      
2,099
  
                 
Deferred tax liabilities:
                
Prepaid expenses
    
(452
 )    
(191
 )
Operating lease right of use assets
    
(1,015
 )    
(1,212
 )
Intangible assets
    
-
      
(18
 )
Property, plant and equipment
    
(88
 )    
(239
 )
Total deferred tax liabilities
    
(1,555
 )    
(1,660
 )
Net deferred income tax assets
   $
706
     $
439
  
 
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 28, 2021
and
March 29, 2020
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
2021
and
2020
(in thousands):
 
   
Fiscal Year
  
   
2021
    
2020
  
Balance at beginning of period
   $
721
     $
1,194
  
Additions related to current year positions
    
88
      
58
  
Additions related to prior year positions
    
56
      
76
  
Revaluations due to change in enacted tax rates
    
-
      
-
  
Reductions for tax positions of prior years
    
-
      
-
  
Reductions due to lapses of the statute of limitations
    
(341
 )    
(607
 )
Additions pursuant to judgements and settlements
    
106
      
-
  
Balance at end of period
   $
630
     $
721
  
 
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
2021
and
2020
of
$88,000
and
$58,000,
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
2021
and
2020,
the Company accrued
$56,000
and
$76,000,
respectively, for interest expense and penalties on the portion of the unrecognized tax liabilities for which the relevant statute of limitations remained unexpired.
 
In
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.
On
July 31, 2019,
the FTB notified the Company that it would take
no
further action with regard to the fiscal years ended
March 31, 2013,
April 1, 2012
and
April 3, 2011.
Also, on
January 7, 2020
and
January 10, 2021,
the Company's California consolidated income tax returns for the fiscal years ended
March 29, 2015
and
April 3, 2016,
respectively, 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 discrete income tax benefits of
$233,000
and
$444,000
during the fiscal years ended
March 28, 2021
and
March 29, 2020,
respectively, 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
$108,000
and
$163,000
during the fiscal years ended
March 28, 2021
and
March 29, 2020,
respectively.
 
On
March 3, 2021,
the Company and the FTB entered into the Settlement Agreement to settle 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.
Under the terms of the Settlement Agreement, the FTB will make a payment to the Company in the amount of
30%
of the amount of the claim for refund of
$448,000,
or
$134,000,
plus interest of approximately
$7,000.
Other than the recognition of the interest portion of the settlement as interest income, the resolution of this claim for refund had
no
effect on the Company's consolidated statements of income for the fiscal year ended
March 28, 2021.
 
In
August 2020,
the Company was notified by the FTB of its intention to examine the Company's California consolidated income tax returns for the fiscal years ended
March 31, 2019,
April 1, 2018
and
April 2, 2017.
Further, in
February 2021,
the Company was notified by the U.S. Internal Revenue Service of its intention to examine the Company's original and amended federal consolidated income tax returns for the fiscal year ended
April 2, 2017.
The ultimate resolution of these examinations 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 years ended
March 28, 2021
and
March 29, 2020,
the Company recorded discrete income tax benefits of
$74,000
and
$274,000,
respectively, 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 28, 2021
and
March 29, 2020,
the Company recorded a discrete income tax benefit of
$12,000
and a discrete income tax charge of
$5,000,
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
21.3%
and
15.5%
in fiscal years
2021
and
2020,
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
2021
and
2020
(in thousands):
 
   
Fiscal Year
  
   
2021
    
2020
  
Federal statutory rate
    
21
 %    
21
 %
Tax expense at federal statutory rate
   $
1,622
     $
1,631
  
State income taxes, net of Federal income tax benefit
    
338
      
306
  
Tax credits
    
(135
 )    
(85
 )
Discrete items
    
(211
 )    
(654
 )
Other - net, including foreign
    
28
      
9
  
Income tax expense
   $
1,642
     $
1,207