EDUCATIONAL DEVELOPMENT CORP Income Taxes Disclosure
9. INCOME TAXES
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. The tax effects of significant items comprising our net deferred tax assets and liabilities are as follows:
| February 28, | ||||||||
| 2026 | 2025 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for credit losses | $ | 29,600 | $ | 30,300 | ||||
| Inventory overhead capitalization | 182,700 | 115,000 | ||||||
| Inventory valuation allowance | 96,900 | 116,200 | ||||||
| Inventory valuation allowance – noncurrent | 217,300 | 198,200 | ||||||
| Allowance for sales returns | 27,200 | 27,200 | ||||||
| Research and development capitalization | - | 457,600 | ||||||
| Net operating loss carryforward (1) | 109,300 | 1,141,200 | ||||||
| Disallowed interest (2) | 2,001,300 | 1,655,500 | ||||||
| Accruals | 12,100 | 136,500 | ||||||
| Total deferred tax assets | 2,676,400 | 3,877,700 | ||||||
| Deferred tax liabilities: | ||||||||
| Property, plant, and equipment | (1,121,600 | ) | (1,341,600 | ) | ||||
| Total deferred tax liabilities | (1,121,600 | ) | (1,341,600 | ) | ||||
| Valuation allowance (3) | (1,554,800 | ) | - | |||||
| Net deferred tax assets | $ | - | $ | 2,536,100 | ||||
| (1) | The Company’s net operating loss (“NOL”) carryforward was generated from losses incurred in fiscal 2025. The Company’s NOL can be carried forward indefinitely but are limited to an 80% maximum offset of taxable income. |
| (2) | The Company’s disallowed interest was generated from interest expense that was not deductible for tax purposes due to a maximum allowable deduction of 30% of taxable income. The disallowed interest is carried forward to be deducted against future income, subject to the 30% limitation. |
| (3) | In evaluating the need for a valuation allowance and the realizability of deferred tax assets, the Company utilized the framework contained in ASC 740, “Income Taxes,” pursuant to which management analyzed all positive and negative evidence available at the balance sheet date to determine whether all or some portion of the deferred tax assets will not be realized. Under this guidance, a valuation allowance must be established for deferred tax assets when it is more likely than not that they will not be realized. In conclusion, management placed significant emphasis on guidance in ASC 740, which includes that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome. Based upon available evidence, it was concluded on a more-likely-than-not basis that certain deferred tax assets were not realizable as of February 28, 2026. Accordingly, a valuation allowance has been recorded to offset these deferred tax assets. |
The reconciliation of taxes at the federal statutory rate to our provision for income taxes for the year ended February 28, 2026 was as follows:
| February 28, 2026 | ||||||||
| Amount | Percentage | |||||||
| U.S. federal statutory income tax rate | $ | 1,122,800 | 21.0 | % | ||||
| Tax credits | ||||||||
| Research and development | (60,000 | ) | (1.1 | )% | ||||
| Nontaxable or nondeductible items | 9,400 | 0.2 | % | |||||
| U.S. state and local income taxes, net of federal benefit | 326,500 | 6.1 | % | |||||
| Changes in valuation allowance | 1,554,800 | 29.1 | % | |||||
| Other | 68,100 | 1.2 | % | |||||
| Effective tax rate | $ | 3,021,600 | 56.5 | % | ||||
The components of income tax expense (benefit) are as follows:
| Year Ended February 28, | ||||||||
| 2026 | 2025 | |||||||
| Current: | ||||||||
| Federal (1) | $ | 187,800 | $ | - | ||||
| State and local (1) | 129,000 | - | ||||||
| 316,800 | - | |||||||
| Deferred: | ||||||||
| Federal | 2,452,200 | (1,439,500 | ) | |||||
| State and local | 252,600 | (151,900 | ) | |||||
| 2,704,800 | (1,591,400 | ) | ||||||
| Total income tax expense (benefit) | $ | 3,021,600 | $ | (1,591,400 | ) | |||
| (1) | The Company incurred losses in fiscal 2025, resulting in a net operating loss carryforward and reclassification from current to deferred. |
The following reconciles our expected income tax rate to the U.S. federal statutory income tax rate:
| Year Ended February 28, | ||||||||
| 2026 | 2025 | |||||||
| U.S. federal statutory income tax rate | 21.0 | % | 21.0 | % | ||||
| U.S. state and local income taxes–net of federal benefit | 6.1 | % | 6.6 | % | ||||
| Valuation allowance | 29.1 | % | - | % | ||||
| Other | 0.3 | % | (4.4 | )% | ||||
| Total income tax expense | 56.5 | % | 23.2 | % | ||||
We file our tax returns in the U.S. and certain state jurisdictions in which we have nexus. We are no longer subject to income tax examinations by tax authorities for the fiscal years before 2020.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2026 | May 19, 2026 | Showing above |
| 2025 | May 19, 2025 | |
| 2024 | May 21, 2024 | |
| 2023 | May 17, 2023 | |
| 2022 | May 5, 2022 | |
| 2021 | May 13, 2021 | |
| 2020 | May 26, 2020 | |
| 2019 | May 29, 2019 | |
| 2018 | May 29, 2018 | |
| 2017 | May 30, 2017 | |
| 2016 | May 26, 2016 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.