Note 13 — Income Taxes

The income tax provision for the years ended October 3, 2021 and September 27, 2020 include the following:

 Schedule of Income Tax Provision

As of October 3, 2021, Optex Systems Inc. has a net carrying value of $1.3 million in deferred tax assets represented by deferred tax assets of $2.1 million and a deferred tax asset valuation allowance of ($0.8) 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. As of October 3, 2021, and September 27, 2020, 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 recent orders and increased backlog as of October 3, 2021. During the twelve months ended October 3, 2021, the Company recognized ($0.04) million in tax benefits to deferred tax assets. During the twelve months ended September 27, 2020, the Company recognized $0.2 million in tax expenses from 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 October 3, 2021 differs from those computed using the statutory federal tax rate in the respective years due to the following permanent differences:

 Schedule of Effective Income Tax Rate Reconciliation

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:

 Schedule of Deferred Income Taxes

The Company has a net loss carryforward of $7.9 million as of October 3, 2021 as compared to a net loss carryforward of $6.5 million as of September 27, 2020. 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 $4.0 million of the current net operating loss carryforward for a net tax benefit of $0.8 million through fiscal year ending in 2037. For the year ended October 3, 2021, the Company realized a ($1.4) million net operating tax loss which is not subject to the IRS section 382 limitation and is available for a tax loss carryback up to five years.

The Company applied FASB ASC 740-10 and has no unrecognized tax benefits. By statute, the tax years ended October 3, 2021, September 27, 2020 and September 29, 2019 are open to examination by the major taxing jurisdictions to which the Optex Systems Holdings is subject.

During the twelve months ended October 3, 2021 the Company paid $48 thousand in income taxes, and has a net tax refund due related to the fiscal year 2021 tax year of ($48) thousand included in prepaid expenses. During the twelve months ended September 27, 2020 the Company paid $289 thousand in income taxes, and had a net tax refund due related to the fiscal year 2020 tax year of ($20) thousand included in prepaid expenses. There were additional tax benefit adjustments of $40 thousand due to changes from the provisional 2020 rates as compared to the federal income tax report associated with research and development tax credits and other adjustments.