Ascent Industries Co. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2017

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows at the respective year ends:



	2017			2016
Deferred income tax assets:
Sale leaseback deferred gain	$	1,382,270		$	2,387,309
Inventory valuation reserves	209,745			379,005
Allowance for doubtful accounts	7,944			28,556
Inventory capitalization	943,203			1,780,957
Environmental reserves	124,029			199,191
Interest rate swap	—			15,185
Warranty accrual	8,132			62,035
Deferred compensation	36,617			60,745
Accrued bonus	483,238			337,028
Accrued expenses	24,749			77,629
State net operating loss carryforwards	2,069,258			1,724,843
Other	479,338			389,530
Total deferred income tax assets	5,768,523			7,442,013
Valuation allowance	(2,087,860		)	(1,790,051		)
Total net deferred income tax assets	3,680,663			5,651,962
Deferred income tax liabilities:
Tax over book depreciation and amortization	3,971,816			6,946,812
Prepaid expenses	174,322			211,300
Interest rate swap	87,016			—
Other	83,419			103,342
Total deferred income tax liabilities	4,316,573			7,261,454
Deferred income taxes	$	(635,910	)	$	(1,609,492	)

Significant components of the provision for income taxes from continuing operations are as follows:



	2017			2016			2015
Current:
Federal	$	1,067,490		$	(980,495	)	$	1,415,142
State	106,832			190,230			233,626
Total current	1,174,322			(790,265		)	1,648,768
Deferred:
Federal	(1,043,384		)	(1,329,302		)	(47,530		)
State	6,201			(78,433		)	197,762
Total deferred	(1,037,183		)	(1,407,735		)	150,232
Total	$	137,139		$	(2,198,000	)	$	1,799,000

Tax benefit from discontinued operations amounted to $51,000 and $651,000 for the fiscal years ended 2016 and 2015, respectively. The Company did not have any discontinued operations for 2017.

The reconciliation of income tax computed at the U. S. federal statutory tax rates to income tax expense is:



	2017					2016					2015
	Amount			%		Amount			%		Amount			%
Tax at U.S. statutory rates	$	502,690		34.0	%	$	(3,125,382	)	34.0	%	$	(2,880,574	)	34.0	%
State income taxes, net of federal tax benefit	65,546			4.4	%	(48,842		)	0.5	%	285,426			(3.4	)%
State valuation allowance	8,498			0.6	%	95,961			(1.0	)%	94,068			(1.1	)%
Life insurance cash surrender value	—			—	%	503,700			(5.5	)%	—			—	%
Earn-out adjustments	—			—	%	—			—	%	(857,061		)	10.1	%
Manufacturing exemption	(116,980		)	(7.9	)%	—			—	%	(187,604		)	2.2	%
Stock option compensation	226			—	%	45,929			(0.5	)%	94,637			(1.1	)%
Uncertain tax positions	—			—	%	—			—	%	(139,000		)	1.6	%
Rate change effects	(380,961		)	(25.8	)%	—			—	%	—			—	%
Goodwill impairment	—			—	%	—			—	%	5,405,302			(63.8	)%
Other, net	58,120			4.0	%	330,634			(3.6	)%	(16,194		)	0.3	%
Total	$	137,139		9.3	%	$	(2,198,000	)	23.9	%	$	1,799,000		(21.2	)%

Income tax payments of $2,576,515, $991,888 and $2,250,558 were made in 2017, 2016 and 2015, respectively. The Company had state net operating loss carryforwards at the end of fiscal years 2017 and 2016 of $49,711,027 and $49,676,851, respectively. These losses will expire between the years of 2018 and 2037. A valuation allowance has been set up against $49,612,725 of these state net operating loss carryforwards because it is not more likely than not that the losses will be realized in the foreseeable future. The portion of the valuation allowance for the net operating loss carryforwards was $2,064,674 and $1,724,843 at December 31, 2017 and December 31, 2016, respectively. In addition, a $23,186 valuation allowance was established at December 31, 2017 for other deferred tax assets. This resulted in a valuation allowance increase of $297,809 all related to continuing operations.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company is no longer subject to U.S. federal examinations for years before 2014 or state income tax examinations for years before 2013. The Company completed its 2012 and 2013 federal income tax return examination by the Internal Revenue Service during the second quarter of 2015.

The Company had no uncertain tax position activity during 2017 or 2016. The Company's continuing practice is to recognize interest and/or penalties related to income tax matters in the provision for income taxes. The Company had no accruals for uncertain tax positions including interest and penalties at the end of 2017.

On December 22, 2017, the Tax Cuts and Jobs Act (“The Act”) was signed into law by the President of the United States, enacting significant changes to the Internal Revenue Code effective January 1, 2018. The Act includes a number of provisions including, but not limited to, a permanent reduction of the U.S. corporate tax rate from 35 percent to 21 percent, eliminating the deduction for domestic production activities, limiting the tax deductibility of interest expense, accelerating the expensing of certain business assets and reducing the amount of executive pay that could qualify as a tax deduction. Many effects of The Act are international in nature, such as the one-time transition tax, base erosion anti-abuse tax and the global intangible low-taxed income tax, and thus would not pertain to the Company as it has no international operations. The Company's net deferred tax liability as of December 31, 2017 was determined based on the new permanently enacted corporate income tax rate of 21 percent. As a result, the 2017 income tax provision was reduced by $380,961 for a one-time non-cash revaluation adjustment of the net deferred tax liabilities.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of The Act. The Company's revaluation of its deferred tax assets and liabilities is provisional and subject to further clarification of the new law, including but not limited to US state conformity that cannot be estimated at this time and measurement of underlying tax basis in certain business assets. The ultimate impact may differ from provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, and additional regulatory guidance that may be issued. Further guidance may be forthcoming from federal and state agencies, which could result in additional adjustments. The accounting is expected to be completed no later than the filing of the 2017 U.S. corporate income tax return in 2018.