3.	Income Taxes

The Tax Cuts and Jobs Act (TCJA) was signed into law by the President on Friday

December 22, 2017.

The TCJA includes the reduction in the corporate tax rate from a top rate of

35%

to a flat rate of

21%,

changes in business deductions, and many international provisions. The drop in the corporate rate is effective for tax years beginning after

December 31, 2017.

IRC Section

indicates that “if any rate of tax imposed…changes, and if the taxable year includes the effective date of the change…, then tentative taxes shall be computed by applying the rate for the period before the effective date of the change, and the rate for the period on and after such date, to the taxable income for the entire taxable year, and the tax for such taxable year shall be the sum of that proportion of each tentative tax which the number of days in each period bears to the number of days in the entire taxable year.” (

§15

(a)). As the Company is a fiscal year taxpayer, they will receive a partial benefit for the drop in the federal corporate tax rate for their fiscal year ended

March 31, 2018.

The weighted average federal tax rate computed in accordance with IRC Section

30.79%

for the current fiscal year.

Based on the drop in the corporate tax rate to a flat

21%,

the Company revalued each of their deferred tax assets and liabilities in the current period using the new corporate tax rate. The net impact from this revaluing resulted in a tax expense recognized in the current period of

$119,000.

The TCJA also repealed the corporate alternative minimum tax and made any minimum tax credit carryforwards to the extent

not

utilized refundable for tax years beginning after

December 31, 2017.

As a result, Delphax will be able to receive a refund of its minimum tax credit carryforward of

$311,000

beginning in their fiscal year ended

September 30, 2019.

Previously, a valuation allowance was established against the minimum tax credit carryforward. As a result of the TCJA relating to the refundability of the minimum tax credit carryforward, an income tax benefit was recognized by the Company during the current period and a long

-term income tax receivable was established.

Income taxes have been provided using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

During the

nine

-month period ended

December 31, 2017,

the Company recorded $

595,000

in income tax expense at an effective rate of

37.45%.

The Company records income taxes using an estimated annual effective tax rate for interim reporting. The individually largest factor contributing to the difference between the federal statutory rate of

30.79%

and the Company’s effective tax rate for the

nine

-month period ended

December 31, 2017

was the change in valuation allowance relating to the other than temporary impairment of available for sale securities included in the pretax activity in the period. Additionally, the estimated annual effective tax rate differs from the U. S. federal statutory rate due to the benefit for the Section

831

(b) income exclusion for SAIC, the benefit for the federal domestic production activities deduction, the change in the valuation allowance related to the activity of Delphax, and state income tax expense. As a result of tax reform, the rate was also impacted by the recognition of the minimum tax credit carryforward and the expense relating to the revaluing of the deferred tax asset and liability balances to the new federal statutory rate. During the

nine

-month period ended

December 31, 2016,

the Company recorded

$152,000

in income tax expense which resulted in an effective tax rate of (

2.99%

). The individually largest factor contributing to the difference between the federal statutory rate and the Company’s effective tax rate for the period ending

December 2016

was the recognition of a valuation allowance against Delphax’s pretax activity in the period. The income tax provision for the

nine

-month period ended

December 31, 2016

differs from the federal statutory rate due also in part to the effect of state income taxes and the federal domestic production activities deduction. Additionally, the rate for the period ended

December 31, 2016

includes the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary afforded under Section

831

(b).

As described in Note

effective on

November 24, 2015,

Air T, Inc. purchased equity and debt interests in Delphax Technologies, Inc. (“Delphax”) and its subsidiary Delphax Technologies Canada Limited (“Delphax Canada”). With an equity investment level by the Company of approximately

38%,

Delphax is required to continue filing a separate United States corporate tax return. Furthermore, Delphax has

three

foreign subsidiaries located in Canada, France, and the United Kingdom which file tax returns in those jurisdictions. With few exceptions, Delphax is

longer subject to examinations by income tax authorities for tax years before

2012.

Delphax maintains a

September 30

fiscal year. As of

September 30, 2016,

Delphax and its subsidiaries had estimated foreign and domestic tax loss carryforwards of

$6.3

million and

$13.2

million, respectively. As of that date, they had estimated foreign research and development credit carryforwards of

$4.3

million, which are available to offset future income tax. The credits and net operating losses expire in varying amounts beginning in the year

2023.

Domestic alternative minimum tax credits of approximately

$311,000

will be refundable beginning in the fiscal year ending

September 30, 2019.

Should there be an ownership change for purposes of Section

382

or any equivalent foreign tax rules, the utilization of the previously mentioned carryforwards

may

be significantly limited. As a result of the bankruptcy proceedings involving Delphax Canada (see Note

), any remaining tax attributes

not

utilized during the fiscal year ended

September 30, 2017,

including net operating losses and credit carryforwards in Canada will be lost. The tax attributes in Canada that will be lost to the extent

not

utilized include, but are

not

limited to,

$4.0

million of net operating losses and

$4.3

million of foreign credits.

The Company has recorded an outside basis difference in stock of these entities of

$2.9

million which is the estimated loss that will be recognized in the United States upon their liquidation. See additional information regarding Delphax Canada in Note

The returns for the fiscal year ended

September 30, 2017

have

not

yet been filed.

The provisions of ASC

740

require an assessment of both positive and negative evidence when determining whether it is more-likely-than-

not

that deferred tax assets will be recovered. In accounting for the Delphax acquisition on

November 24, 2015,

the Company established a full valuation allowance against Delphax

’s net deferred tax assets of approximately

$11,661,000.

The corresponding valuation allowance at

December 31, 2017

and

December 31, 2016

was approximately

$11,125,000

and

$12,352,000

respectively. The cumulative losses incurred by Delphax in recent years was the primary basis for the Company’s determination that a valuation allowance should be established. As previously noted, the TCJA repealed the corporate alternative minimum tax and made any minimum tax credit carryforwards to the extent

not

utilized refundable for tax years beginning after

December 31, 2017.

As a result, Delphax will be able to receive a refund of its minimum tax credit carryforward of

$311,000

beginning in the fiscal year ended

September 30, 2019.

As described in Note

effective on

July 18, 2016,

Air T, Inc. through its subsidiary, Contrail Aviation, acquired substantially all of the assets of the Seller for payment to the Seller of cash and equity membership units representing

21%

of the total equity of Contrail Aviation. The acquisition was treated as an asset acquisition for tax purposes, with Air T, Inc. receiving a step up on the

79%

interest deemed to be acquired. Contrail Aviation, a limited liability company, is taxed as a partnership with Air T, Inc. and the Seller recognizing on a pass-through basis the taxable income or loss of Contrail Aviation in proportion to their relative equity interests. Air T, Inc. will recognize deferred taxes as applicable on the outside basis difference of the investment.

As described in Note

May 2, 2017

and

May 31, 2017,

AirCo acquired the inventory and principal business assets, and assumed specified liabilities, of the AirCo Sellers.

The acquired business, which is based in Wichita, Kansas, distributes and sells airplane and aviation parts and maintains a license under Part

145

of the regulations of the Federal Aviation Administration. The consideration paid for the acquired business was

$2,400,000.

A bargain purchase gain was recognized on the acquisition of approximately

$780,000.

The tax impact related to the bargain purchase gain was to record a deferred tax liability of approximately

$278,000

and record tax expense against the bargain purchase gain line of approximately

$278,000.

The resulting net bargain purchase gain after taxes was approximately

$502,000.