Note 13 — Income Taxes

The income tax provision for the years ended September 27, 2020 and September 29, 2019 include the following:

As of September 27, 2020, Optex Systems Inc. has a net carrying value of $1.2 million in deferred tax assets represented by deferred tax assets of $2.2 million and a deferred tax asset valuation allowance of ($1.0) million against those assets. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2010 through 2016 which may not be fully recognized due to an IRS Section 382 limitation related to a change in control occurring in fiscal year 2018. Due to historical losses, our valuation allowance reserve was set at 100% of the deferred tax asset for the years 2014 through 2018 for a net carrying value of zero. As of September 27, 2020, and September 29, 2019, we reviewed the deferred tax assets and determined it was more likely than not that we would be able to utilize a substantial portion of the deferred tax asset balance against future earnings. Our assumptions were based on the previous three years earnings trend as well as anticipated future earnings expected with the increases in U.S defense and Foreign Military market spending. In the twelve months ended December 29, 2019, The Company released $1.8 million against the valuation allowance which resulted in the recognition of a tax benefit. During the twelve months ended September 27, 2020, we recognized an additional $0.05 million in tax benefits from the deferred tax assets. We will continue to review the deferred tax assets and related valuation reserves in accordance with ASC 740 on an annual basis.

The income tax provision for Optex Systems as of September 27, 2020 differs from those computed using the statutory federal tax rate in the respective years due to the following permanent differences:

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:

The Company has a net loss carryforward of $6.5 million as of September 27, 2020 as compared to a net loss carryforward of $6.7 million as of September 29, 2019. 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 $2.6 million of the current net operating loss carryforward for a net tax benefit of $0.6 million over the next sixteen 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 30, 2020, September 29, 2019 and September 30, 2018 are open to examination by the major taxing jurisdictions to which the Optex Systems Holdings is subject.

During the twelve months ended September 30, 2020 the Company paid $289 thousand in income taxes, and has a net tax refund due related to the fiscal year 2020 tax year of ($20) thousand included in prepaid expenses. During the twelve months ended September 29, 2019 the Company paid $360 thousand in income taxes, and had a net tax refund due related to the fiscal year 2019 tax year of ($75) thousand included in prepaid expenses. There were additional tax adjustments of $59 thousand due to changes from the provisional 2019 rates as compared to the federal income tax report associated with research and development tax credits and other adjustments.