Income Taxes

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

Income Taxes

7. Income Taxes

The amounts of income tax expense (benefit) reflected in operations is as follows:

	2018			2017
Current:
Federal	$	(118,269	)	$	1,263,124
State		44,315			32,737
Foreign		618,930			693,297
Total:	$	544,976		$	1,989,158
Deferred:
Federal	$	311,608		$	431,454
State		76,290			20,206
Total:		387,898			451,660
Total Income Tax Expense:	$	932,874		$	2,440,818

The current state tax provision was comprised of taxes on income, the minimum capital tax and other franchise taxes related to the jurisdictions in which the Company's facilities are located.

A summary of United States and foreign income before income taxes follows:

	2018		2017
United States	$	1,928,627	$	2,477,871
Foreign		3,602,597		4,015,426
Total:	$	5,531,224	$	6,493,297

As discussed in Note 11 below, for segment reporting, direct import sales are included in the United States segment. However, the revenues are earned by our Hong Kong subsidiary and related income taxes are paid in Hong Kong whose rate approximates 16.5%. As such, income of the Asian subsidiary is included in the foreign income before taxes.

The following schedule reconciles the amounts of income taxes computed at the United States statutory rates to the actual amounts reported in operations:

	2018			2017
Federal income taxes at 21%
statutory rate	$	1,083,174		$	2,322,741
State and local taxes, net of federal
income tax effect		95,278			39,783
Permanent items		(75,022	)		(370,978	)
Transition tax on deemed repatriation
of foreign earnings		—			1,169,263
Effect of federal rate change
on deferred taxes		(111,324	)		74,462
Foreign tax rate difference		(59,232	)		(699,047	)
Change in deferred income tax
valuation allowance		—			(95,406	)
Provision for income taxes:	$	932,874		$	2,440,818

The following summarizes deferred income tax assets and liabilities:

	2018		2017
Deferred income tax liabilities:
Plant, property and equipment	$	847,162	$	563,289
		847,162		563,289
Deferred income tax assets:
Asset valuations		575,920		506,993
Pension		105,647		96,098
Other		278,948		469,844
		960,515		1,072,935
Net deferred income tax asset:	$	113,353	$	509,646

The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law in December 2017 and includes a broad range of tax reforms, certain of which were required by GAAP to be recognized upon enactment. The U.S. Securities and Exchange Commission has issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Act. As permitted by SAB 118, the Company has subsequently finalized its accounting analysis based on the guidance, interpretations and data available as of December 31, 2018. There were no material adjustments to the Company’s financial statements as a result.

The Act introduced provisions that fundamentally change the U.S. approach to taxation of foreign earnings. Under the Act, qualified dividends of foreign subsidiaries are no longer subject to U.S. tax. Under the previously-existing tax rules, dividends from foreign operations were subjected to U.S. tax, and if not considered permanently reinvested, the Company had recognized expense and recorded a liability for the tax expected to be incurred upon receipt of the dividend of these foreign earnings. Although the Act excludes dividends of foreign subsidiaries from taxation, it includes provisions for a mandatory deemed dividend of undistributed foreign earnings at tax rates of 15.5% or 8% ("transition tax") depending on the nature of the foreign operations' assets. Companies may utilize tax attributes (including net operating losses and tax credits) to offset the transition tax. The estimated provisional net effect of applying the provisions of the Act on our 2017 results of operations was a non-cash charge to tax expense of $1,170,000. This provisional amount could be revised as additional guidance and interpretations are issued and as we continue to examine the details of the Act and the related tax attributes.

On January 22, 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company considers any potential GILTI as an expense in the period the tax is incurred.

Based on our historical financial performance in the U.S., at December 31, 2017, the Company had a significant net deferred tax asset position. As such, with the Act's reduction of the corporate tax rate from 35% to 21%, the Company re-measured its net deferred tax assets at the lower corporate rate of 21% and recognized a $75,000 tax expense to adjust net deferred tax assets to the reduced value.

The total effect in 2017 of applying the U.S. tax reform provisions of the Act was tax expense of $1,245,000 increasing the effective rate for 2017 by 128%.

In 2018, the Company evaluated its tax positions for years which remain subject to examination by major tax jurisdictions, in accordance with the requirements of ASC 740 and as a result, concluded no adjustment was necessary. The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company’s evaluation of uncertain tax positions was performed for the tax years ended December 31, 2015 and forward, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2018.

Due to the uncertain nature of the realization of the Company's deferred income tax assets based on past performance of its German subsidiary and carry forward expiration dates, the Company has recorded a valuation allowance for the amount of deferred income tax assets which are not expected to be realized. This valuation allowance, all of which is related to deferred tax assets resulting from net operating losses of the Company’s German subsidiary, is subject to periodic review, and, if the allowance is reduced, the tax benefit will be recorded in future operations as a reduction of the Company's tax expense.