Note 9 – Income Taxes

Income (loss) before the provision (benefit) for income taxes consists of the following:

	2017			2016
US	$	(626,000	)	$	(503,000	)
Foreign		(168,000	)		888,000
Total	$	(794,000	)	$	385,000

The provision (benefit) for income taxes in the accompanying consolidated financial statements consists of the following:

	2017			2016
Current
Federal	$	6,000		$	-
State		13,000			3,000
Foreign		(83,000	)		(9,000	)
	$	(64,000	)	$	(6,000	)

Deferred
Federal	$	(2,642,000	)	$	-
State		-			-
Foreign		(35,000	)		57,000
		(2,677,000	)		57,000
Income tax expense (benefit)	$	(2,741,000	)	$	51,000

A reconciliation of the federal statutory rate to the Company's effective tax rate is as follows:

	2017			2016

Tax due at statutory rate		34.00	%		34.00	%

State tax provision, net of federal		-3.49	%		9.13	%
Valuation allowance		-78.87	%		93.66	%
Valuation allowance release		380.61	%		0.00	%
Foreign tax credits		29.34	%		-77.28	%
Foreign rate differential and other		-16.54	%		-46.39	%
Total		345.05	%		13.12	%

Net deferred tax assets (liabilities) consisted of the following at September 30, 2017:

	Domestic			Foreign			Worldwide

Credits	$	1,456,000		$	-		$	1,456,000
NOLs		3,750,000			26,000			3,776,000
Stock compensation		205,000			-			205,000
Accruals		352,000			-			352,000
Intangibles		5,000			-			5,000
Other		140,000			-			140,000
Gross deferred tax assets		5,908,000			26,000			5,934,000

Valuation allowance		(2,342,000	)		-			(2,342,000	)
Deferred tax assets, net		3,566,000			26,000			3,592,000

Depreciation		(902,000	)		(181,000	)		(1,083,000	)
Intangibles		(22,000	)		(79,000	)		(101,000	)
Gross deferred tax liabilities		(924,000	)		(260,000	)		(1,184,000	)

Net deferred tax asset (liability)	$	2,642,000		$	(234,000	)	$	2,408,000

Net deferred tax assets (liabilities) consisted of the following at September 30, 2016:

	Domestic			Foreign			Worldwide

Credits	$	1,466,000		$	-		$	1,466,000
NOLs		3,303,000			25,000			3,328,000
Stock compensation		143,000			-			143,000
Accruals		385,000			-			385,000
Other		150,000			-			150,000
Gross deferred tax assets		5,447,000			25,000			5,472,000

Valuation allowance		(4,739,000	)		-			(4,739,000	)
Deferred tax assets, net		708,000			25,000			733,000

Depreciation		(696,000	)		(200,000	)		(896,000	)
Intangibles		(12,000	)		(88,000	)		(100,000	)
Gross deferred tax liabilities		(708,000	)		(288,000	)		(996,000	)

Net deferred tax asset (liability)	$	-		$	(263,000	)	$	(263,000	)

In assessing the ability to realize the net deferred tax assets, management considers various factors including taxable income in carryback years, future reversals of existing taxable temporary differences, tax planning strategies and projections of future taxable income, to determine whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized.

As a result of the conversion of the Xcede convertible notes and accrued interest to preferred stock in November 2016 (see Note 3), the Company’s ownership percentage in Xcede decreased to less than 80%. Xcede, therefore, will no longer be included in Dynasil’s federal consolidated tax return and will file a separate federal return. Xcede will continue to be included in the Dynasil consolidated state tax filings pursuant to the respective state tax requirements.

As a result of Xcede’s de-consolidation from the Company’s federal tax returns, the Company will no longer be able to offset taxable income with Xcede’s current or cumulative net operating losses. Upon review of relevant criteria for the new Dynasil federal consolidated group, it was determined that it is more likely than not that the federal, deferred tax assets of the new Dynasil federal consolidated group will be realized based upon positive earnings history and expected future profits of the group. As a result, the federal deferred tax asset valuation allowance associated with the Dynasil federal consolidated group has been reversed resulting in an income tax benefit in the amount of $2.7 million during the twelve months ended September 30, 2017. Going forward, as the Company records income, it will be able to utilize the NOLs (net operating losses) within its deferred tax assets. Based upon the Xcede’s recent losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of the Company’s state and separate Xcede deferred tax assets is sufficient to warrant the continued need for a valuation allowance against these deferred tax assets.

The tax accounting impact, including the assessment on the valuation allowance against the U.S. federal and state net deferred tax assets, will be evaluated in subsequent periods. The valuation allowance will continue to be addressed independently for the Company and Xcede, instead of on a consolidated basis. The net change in the valuation allowances for the years ending September 30, 2017 and 2016 was ($2.4) million and $0.4 million, respectively.

As of September 30, 2017 and 2016, the Company has federal net operating losses of $8.1 and $7.1 million, respectively. As of September 30, 2017 and 2016, the Company has state net operating losses of $16.9 million and $15.2 million, respectively. The federal and state net operating losses begin expiring in 2025 and 2029, respectively. At September 30, 2017 and 2016, the Company has foreign net operating loss carryforwards of approximately $151,000 and $146,000, respectively which can be carried forward indefinitely.

As of September 30, 2017 and 2016, the Company has federal research credits of $1.4 million and $1.5 million, respectively. The federal credits begin expiring in fiscal year 2026. As of September 30, 2017 and 2016, the Company has state research credits of $70,000 and $93,000, respectively. The state credits begin expiring in fiscal year 2027.

As of September 30, 2017 and 2016, the Company has no unrecorded liabilities for uncertain tax positions. Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expense in the accompanying consolidated statement of operations. As of September 30, 2017 and 2016, the Company has no accrued interest or penalties related to uncertain tax positions.

The Company is subject to taxation in the United States, various states, and the United Kingdom. At September 30, 2017, domestic tax years from fiscal 2011 through fiscal 2017 remain open to examination by the taxing authorities and tax years 2014 through 2017 remain open in the United Kingdom.