Income Taxes

The components of income tax expense (benefit) for the fiscal years indicated are as follows:



	2014		2013
Current:
Federal	$	—	$	(575,000	)
State	—		—
Foreign	—		32,000
	—		(543,000		)
Deferred:
Federal	—		—
State	—		—
Foreign	—		—
	—		—
Total	$	—	$	(543,000	)

A reconciliation of the U.S statutory tax rate to the Company’s effective tax rate follows:



	2014					2013
	Amount			Percent		Amount			Percent
U.S. statutory tax	$	(2,695,000	)	(34.0	)%	$	(178,000	)	(34.0	)%
Change in uncertain tax positions	—			—		(575,000		)	(109.7	)
Increase (decrease) in valuation allowance	2,144,000			27.1		(257,000		)	(49.0	)
Foreign tax rate differences	303,000			3.8		178,000			33.9
Prior year foreign tax adjustment	—			—		164,000			31.3
Permanent differences	349,000			4.4		88,000			16.8
State tax, net of federal benefit	(141,000		)	(1.8	)	27,000			5.1
Other, net	40,000			0.5		10,000			2.0
Effective tax rate	$	—		—	%	$	(543,000	)	(103.6	)%

The tax effects of temporary differences that give rise to deferred tax assets and liabilities at September 30, 2014 and 2013 are presented below:



	2014			2013
Deferred tax assets:
Inventories	$	1,740,000		$	900,000
Accrued compensation	763,000			459,000
Warranty accrual	306,000			139,000
Depreciation	145,000			75,000
Allowance for doubtful accounts receivable	471,000			335,000
Unearned revenue	170,000			202,000
U.S. net operating loss carryforwards	4,253,000			2,117,000
Foreign net operating loss carryforwards	1,434,000			986,000
Tax credits	989,000			398,000
Other	407,000			299,000
Gross deferred tax assets	10,678,000			5,910,000
Deferred tax liabilities:
Intangibles	958,000			—
Other	33,000			38,000
Gross deferred tax liabilities	991,000			38,000
Total deferred tax assets and liabilities	9,687,000			5,872,000
Less valuation allowance	(9,687,000		)	(5,872,000		)
Net deferred tax assets and liabilities	$	—		$	—

Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which a tax benefit has been recorded in the income statement. Deferred U.S. income taxes are not provided on approximately $2.1 million of undistributed earnings of foreign subsidiaries as the Company presently intends to reinvest such earnings indefinitely, and any plan to repatriate any of such earnings in the future is not expected to result in a material incremental tax liability to the Company. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries. In addition, foreign tax credit carryforwards would be available to reduce a portion of such U.S. tax liability.

The Company provides for a valuation allowance against its deferred tax assets due to the uncertainty of future realization. The full valuation allowance is determined to be appropriate due to the Company's operating losses since fiscal year 2010 and the inherent uncertainties of predicting future operating results in periods over which such net tax differences become deductible.

Pretax domestic income (loss) amounted to approximately $(5,714,000) and $651,000 in fiscal years 2014 and 2013, respectively. Pretax foreign income (loss) amounted to approximately ($2,211,000) and ($1,175,000) in fiscal years 2014 and 2013, respectively. The Company has U.S. and foreign net operating loss carryforwards (NOLs) of approximately $11.5 million and $5.8 million, respectively, available to offset future taxable income. Such NOLs can be carried forward over periods through September 30, 2034 in the U.S. and indefinitely in foreign jurisdictions. On August 29, 2014, the Company merged with IQinVision, Inc. (see Note 10). In connection with this merger, the Company's ability to utilize pre-merger net operating losses and tax credit carryforwards in the future is subject to certain limitations pursuant to Section 382 of the Internal Revenue Code. No determination has been made at this time as to the occurrence of a Section 382 change in ownership. However, in such event, the annual limitation on utilization of the Company's U.S. net operating loss carryforwards is presently estimated at $500,000 based on a preliminary entity valuation.

The Company follows the provisions of ASC 740 as it relates to uncertain tax positions. Unrecognized tax benefits activity for the years ended September 30, 2014 and 2013 is summarized below:



	2014		2013
Beginning balance	$	45,000	$	502,000
Additions (reductions) based on tax positions related to prior years
	—		(457,000		)
Additions (reductions) based on tax positions related to the current year
	—		—
Ending balance	$	45,000	$	45,000

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. At September 30, 2014 and 2013, there was no accrued net interest and penalties related to tax positions taken or to be taken on the Company’s tax returns and recorded as part of the reserves for uncertain tax positions. The Company files U.S. Federal and State income tax returns and foreign tax returns in the United Kingdom, Germany and Israel. The Company is generally no longer subject to tax examinations for fiscal years prior to 2011 in the U.S. and 2009 in the U.K., Germany and Israel.