Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Sep. 29, 2019

Note 13 — Income Taxes

The income tax provision for the years ended September 29, 2019 and September 30, 2018 include the following:

	(Thousands)
	2019			2018
Current income tax expense:
Federal 2019	$	279		$	167
Federal 2018 Tax Adjustment		(15	)		—
		264			167
Deferred income tax provision (benefit):
Federal		(1,414	)		—

Provision for (Benefit from) income taxes, net	$	(1,150	)	$	167

As of September 29, 2019, we reviewed the deferred tax assets and determined it was more likely than not that we would be able to utilize at least ($1.4) million of the $2.4 million deferred tax asset balance. Our assumptions were based on the last three years earning trend as well as anticipated future earnings expected with the increases in U.S defense and Foreign Military market spending projections. Release of the ($1.4) million against the valuation allowance resulted in the recognition of a tax benefit for the twelve months ended September 29, 2019 and a net valuation allowance of $1.0 million against the deferred tax asset.

The income tax provision for Optex Systems as of September 29, 2019 differs from those computed using the statutory federal tax rate in the respective years due to the following permanent differences:

	2019			%			2018			%

Tax provision (benefit) at statutory federal rate ⁽¹⁾	$	949			21		$	378			24
Nontaxable expenses		(281	)		(6	)		(20	)		(1	)
True up of deferred balance		-			-			(377	)		(24	)
Rate change		-			-			1,894			120
Other		79			2			(26	)		(1	)
2018 Federal Income Tax adjustment		(15	)		-			-			-
Change in Deferred Tax Valuation Allowance		(1,882	)		(42	)		(1,682	)		(107	)
Provision for (Benefit from) income taxes, net	$	(1,150	)		(25	)	$	167			11

(1)

Due the Company fiscal period beginning date of October 2, 2017 and the effective date of January 1, 2018 of the statutory rate change from 34% to 21%, the Company is required to use a weighted average statutory rate for the fiscal year period. The statutory rate for the fiscal year period ended September 29, 2019 is 21.0%.

Deferred income taxes recorded in the balance sheets result from differences between financial statement and tax reporting of income and deductions. A summary of the composition of the deferred income tax assets (liabilities) follows:

	(Thousands)
	Deferred Tax Asset
	As of September 29, 2019			As of September 30, 2018

Stock Options	$	88		$	139
Inventory Reserve		150			351
Unicap		39			31
Deferred Compensation		31			46
Fixed assets		(13	)		(23	)
Goodwill Amortization		398			498
Intangible Asset Amortization		226			283
Net Operating Losses		1,407			1,451
Other		99			117
Subtotal	$	2,425		$	2,893
Valuation allowance		(1,011	)		(2,893	)
Net deferred asset (liability)	$	1,414		$	-0-

The Company has a net loss carryforward of $6.7 million as of September 29, 2019 as compared to a net loss carryforward of $6.9 million as of September 30, 2018. Due to an IRS section 382 change in control limitation which was effective during the fiscal year ended 2017, it is anticipated that the company may only realize $2.8 million of the current net operating loss carryforward for a net tax benefit of $0.6 million over the next eighteen years.

As the result of the application of the FASB ASC 740-10, Optex Systems Holdings has no unrecognized tax benefits. By statute, the tax years ended in September 29, 2019, September 30, 2018 and October 1, 2017 are open to examination by the major taxing jurisdictions to which the Optex Systems Holdings is subject.

During the twelve months ended September 29, 2019 the Company paid $360 thousand in income taxes, and has a net tax refund due related to the fiscal year 2019 tax year of ($75) thousand included in prepaid expenses. There were $144 thousand in income taxes paid during the fiscal year ended September 30, 2018 and had an outstanding accrued tax liability of $22 thousand as of the fiscal year 2018 period.