SONO TEK CORP Income Taxes Disclosure

NOTE 9: INCOME TAXES

 

The annual provision (benefit) for income taxes differs from amounts computed by applying the maximum U.S. Federal income tax rate of 21% to pre-tax income as follows:

 Income taxes - income tax reconciliation

		February 28, 2025				February 29, 2024
Expected federal income tax		$	322,159			$	366,362
State tax, net of federal			30,884				52,510
Research and development tax credits			(151,529	)			(161,525	)
Permanent differences:
Non-Deductible equity based compensation			52,007				42,751
Other			7,157				3,019
Income tax expense		$	260,678			$	303,117

 

Components of the current and deferred tax expense are as follows:

 Income taxes - current and deferred tax expense

		February 28, 2025				February 29, 2024
Current:
Federal		$	548,743			$	716,003
State			78,543				123,743
Total current income tax			627,286				839,746
Deferred:
Federal			(318,949	)			(471,396	)
State			(47,659	)			(65,233	)
Total deferred income tax			(366,608	)			(536,629	)
Income tax expense		$	260,678			$	303,117

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Massachusetts research and development tax credits have been fully reserved as management does not forsee utilizing such tax credits in the foreseeable future. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and projections for future taxable income over periods in which the deferred tax assets are deductible. Management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

 

The incorporation of the new tax laws for 2023, requires the Company to capitalize for income tax purposes research and development expenses incurred during the year and for such expenses to be amortized over a five-year period. As a result, a deferred tax asset “Capitalized R&D expenses – IRC Section 174” has been recorded.

 

The Company does not have any uncertain tax positions in 2025. There are no interest and penalties related to uncertain tax positions in 2025. As of February 28, 2025, open years related to the federal and state jurisdictions are 2024, 2023 and 2022.

 

The deferred tax asset and liability are comprised of the following:

 Income taxes - deferred tax asset and liability components

		February 28, 2025				February 29, 2024
Deferred tax asset
Allowance for inventory		$	92,000			$	91,000
Allowance for accounts receivable			3,000				3,000
Capitalized R&D expenses – IRC Section 174			1,277,000				985,000
Accrued expenses and other			154,000				177,000
Research & Development tax credits - Massachusetts			383,000				303,000
Sub-total deferred tax asset			1,909,000				1,559,000
Less valuation allowance – Massachusetts R&D tax credits			(383,000	)			(303,000	)
Deferred tax asset – Long Term		$	1,526,000			$	1,256,000
Deferred tax liability
Building and leasehold depreciation			(132,000	)			(230,000	)
Deferred tax liability – Long Term		$	(132,000	)		$	(230,000	)