8. Income Taxes

12 Months Ended

Dec. 31, 2018

Notes to Financial Statements

8. Income Taxes

The income tax expense (benefit) is summarized as follows:

	Years Ended December 31,
	2018			2017
Current:
Federal	$	(110	)	$	(11	)
State		10			10
		(100	)		(1	)
Deferred:
Federal		(280	)		(1,780	)
State		103			(43	)
Impact of rate change		—			665
		(177	)		(1,158	)
	$	(277	)	$	(1,159	)

A reconciliation of the statutory U.S. income tax rate to the effective income tax rate follows:

	Years Ended December 31,
	2018			2017
Statutory U.S. income tax rate		(21.00	)%		(34.00	)%
State taxes, net of federal benefit		1.75	%		(1.37	)%
Non-deductible items		3.52	%		0.52	%
Change in valuation allowance		(13.53	)%		(0.25	)%
Change in net operating loss carryforwards and tax credits		(33.48	)%		(3.27	)%
Other		4.02	%		0.25	%
Effective income tax rate		(58.72	)%		(38.12	)%

The components of the deferred income tax assets (liabilities) are as follows:

	Years Ended December 31,
	2018			2017
Deferred tax assets:
Operating loss carryforwards	$	313		$	1,874
R&D Tax Credit		1,394			1,478
AMT Tax Credit		179			352
Section 263A costs		252			315
R&D costs		224			335
Amortization		24			24
Unrealized loss		422			—
Asset reserves:
Bad debts		12			12
Inventory allowance		146			182
Accrued expenses:
Non-qualified stock options		112			86
Compensation		140			165
Warranty		764			465
Deferred tax assets		3,982			5,288
Less state valuation allowance		—			(64	)
Total deferred tax assets		3,982			5,224
Deferred tax liabilities:
Depreciation		(487	)		(338	)
Total deferred tax liabilities		(487	)		(338	)
Net deferred tax assets (before unrealized gain)		3,495			4,886
Deferred tax liability: unrealized gain		—			(1,569	)
Net deferred tax assets	$	3,495		$	3,317

As of December 31, 2018, the Company had a net deferred tax asset of approximately $3,982 offset by deferred tax liabilities of $487 derived from accelerated tax depreciation. This asset is primarily composed of net operating loss carryforwards (“NOLs”), research and development costs, deferred revenue and unrealized loss on investment. The NOLs total approximately $7,200 for state purposes, with expirations starting in 2019 for state purposes.

During 2017, the Company generated $4,693, adjusted to final tax return, of its federal NOLs and, during 2018, the Company generated no additional NOLs. The deferred tax asset amounts are based upon management’s conclusions regarding, among other considerations, the Company’s current and anticipated customer base, contracts, and product introductions, certain tax planning strategies, and management’s estimates of future earnings based on information currently available, as well as recent operating results during 2018, 2017, and 2016. GAAP requires that all positive and negative evidence be analyzed to determine if, based on the weight of available evidence, the Company is more likely than not to realize the benefit of the deferred tax asset.

Management’s analysis of all available evidence, both positive and negative, provides support that the Company has the ability to generate sufficient taxable income in the necessary period to utilize the entire benefit for the deferred tax asset. Management estimated that, as of December 31, 2018, a valuation allowance related to the Florida NOLs was no longer needed due to expected 2018 usage.

Should the factors underlying management’s analysis change, future valuation adjustments to the Company’s net deferred tax asset may be necessary. If future losses are incurred, it may be necessary to record a valuation allowance related to the Company’s net deferred tax asset recorded as of December 31, 2018. It cannot presently be estimated what, if any, changes to the valuation of the Company’s deferred tax asset may be deemed appropriate in the future. The 2018 federal and state NOL and tax credit carryforwards could be subject to limitation if, within any three-year period prior to the expiration of the applicable carryforward period, there is a greater than 50% change in ownership of the Company.

For the year ended December 31, 2018, the Company is expecting a refund of a portion of the alternative minimum tax credits of approximately $110 (net). The alternative minimum tax legislation was repealed by the 2017 Tax Act.

The Company performed a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by GAAP. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return or planned to be taken in a future tax return that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, on January 1, 2019, the Company is not aware of any uncertain tax positions that would require additional liabilities or which such classification would be required. The amount of unrecognized tax positions did not change as of December 31, 2018, and the Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.

Penalties and tax-related interest expense, of which there were no material amounts for the years ended December 31, 2018 and 2017, are reported as a component of income tax expense (benefit).

The Company files federal income tax returns, as well as multiple state and local jurisdiction tax returns. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution on any particular uncertain tax position, the Company believes that its allowances for income taxes reflect the most probable outcome. The Company adjusts these allowances, as well as the related interest, in light of changing facts and circumstances. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and the effective tax rate in the period of resolution. The calendar years 2015, 2016, and 2017 are still open to IRS examination under the statute of limitations. The last IRS examination on the Company’s 2007 calendar year was closed with no change.