INSTEEL INDUSTRIES INC Income Taxes Disclosure

(10) Income Taxes

 

The components of the provision for income taxes are as follows:

 

		Year Ended
		September 27,				September 28,				September 30,
(Dollars in thousands)		2025				2024				2023
Provision for income taxes:
Current:
Federal		$	12,257			$	1,425			$	8,320
State			1,276				362				782
			13,533				1,787				9,102
Deferred:
Federal			(782	)			3,843				335
State			34				352				(97	)
			(748	)			4,195				238
Income taxes		$	12,785			$	5,982			$	9,340
Effective income tax rate			23.8	%			23.7	%			22.4	%

 

The reconciliation between income taxes computed at the federal statutory rate and the provision for income taxes is as follows:

 

		Year Ended
(Dollars in thousands)		September 27, 2025								September 28, 2024								September 30, 2023
Provision for income taxes at federal statutory rate		$	11,299				21.0	%		$	5,310				21.0	%		$	8,768				21.0	%
State income taxes, net of federal tax benefit			1,080				2.0				518				2.0				548				1.3
Stock-based compensation			29				0.1				68				0.3				(55	)			(0.1	)
Valuation allowance			(38	)			(0.1	)			146				0.6				(29	)			(0.1	)
Nondeductible expenses and other, net			415				0.8				(60	)			(0.2	)			108				0.3
Provision for income taxes		$	12,785				23.8	%		$	5,982				23.7	%		$	9,340				22.4	%

 

The components of deferred tax assets and liabilities are as follows:

 

		September 27,				September 28,
(In thousands)		2025				2024
Deferred tax assets:
Defined benefit plans		$	2,682			$	2,765
Accrued expenses and asset reserves			2,342				1,406
Stock-based compensation			1,650				1,423
R & E Capitalization			335				226
Operating lease liabilities			873				378
State net operating loss carryforwards and tax credits			3				3
Valuation allowance			(112	)			(149	)
Deferred tax assets			7,773				6,052
Deferred tax liabilities:
Plant and equipment			(15,374	)			(15,090	)
Prepaid insurance			(1,112	)			(1,240	)
Right-of-use assets			(881	)			(381	)
Goodwill			(1,474	)			(976	)
Deferred tax liabilities			(18,841	)			(17,687	)
Net deferred tax liability		$	(11,068	)		$	(11,635	)

 

As of September 27, 2025 and September 28, 2024, we recorded net deferred tax liabilities (net of valuation allowances) of $11.1 million and $11.6 million, respectively, in other liabilities on our consolidated balance sheet. We have $3.1 million of state NOLs that effectively expire in 2031 due to state tax rate reductions.

 

The realization of our deferred tax assets is entirely dependent upon our ability to generate future taxable income in applicable jurisdictions. GAAP requires that we periodically assess the need to establish a reserve against our deferred tax assets to the extent we no longer believe it is more likely than not that they will be fully realized. As of September 27, 2025, we recorded a valuation allowance of $112,000 pertaining to various deferred tax assets that were not expected to be utilized. The valuation allowance is subject to periodic review and adjustment based on changes in facts and circumstances. The $37,000 reduction in the valuation allowance is due to the reduction of a state deferred tax asset that had not been expected to be utilized.

 

As of September 27, 2025, we had no material, known tax exposures that required the establishment of contingency reserves for uncertain tax positions.

 

We classify interest and penalties related to unrecognized tax benefits as part of income tax expense. There were no interest and penalties related to unrecognized tax benefits incurred during 2025, 2024 and 2023.

 

We file U.S. federal income tax returns as well as state and local income tax returns in various jurisdictions. Federal and various state tax returns filed subsequent to 2020 remain subject to examination.

 

On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was signed into law, extending key provisions of the 2017 Tax Cuts and Jobs Act including, but not limited to, federal bonus depreciation and deductions for domestic research and development expenditures. The impact of OBBBA did not have a material impact on the Company’s consolidated financial statements.