NOTE 6 – INCOME TAXES

The provision for income tax expense (benefit) consists of:


	Years Ended September 30,
	2016			2015
Current:
Federal	$	679,000		$	261,000
State		31,000			37,000

Total current		710,000			298,000

Deferred:
Federal		1,768,000			(1,871,000	)
State		(121,000	)		(154,000	)

Total deferred		1,647,0000			(2,025,000	)

Income tax expense (benefit)	$	2,357,000		$	(1,727,000	)

A reconciliation of the federal statutory tax rate to the total tax provision is as follows:


	Years Ended September 30,
	2016			2015
Federal income taxes computed at the statutory rate		34.0	%		(34.0	%)
State income taxes, net of federal benefit		1.5	%		(3.3	%)
Research & development tax refunds & credits		(2.8	%)		(5.2	%)
Dividend received deduction		(2.2	%)		—
Domestic production activities deduction		(1.9	%)		—
Domestic international sales corporation benefits		—			(5.8	%)
Other, net		(3.4	%)		(0.4	%)

Effective income tax rate		25.2	%		(48.7	%)

Deferred tax assets and liabilities consist of the following:


	September 30,
	2016			2015
Deferred Tax Assets:
Accrued liabilities and reserves	$	331,000		$	255,000
Allowance for doubtful accounts		70,000			133,000
Inventory		632,000			—
R&D tax credits carryforwards		871,000			1,114,000
Stock-based compensation		140,000			194,000
Net operating losses carryforwards		73,000			48,000
Unrealized loss on investments		85,000			1,023,000
Other		62,000			14,000

Gross Deferred Tax Assets		2,264,000			2,781,000

Deferred and Other Tax Liabilities:
Domestic international sales corporation		(577,000	)		—
Inventory		—			(43,000	)
Percentage of completion		(1,158,000	)		(415,000	)
Property and equipment		(683,000	)		(806,000	)
Unrecognized tax benefits		(150,000	)		(150,000	)
Other		(12,000	)		(36,000	)

Gross Deferred and Other Tax Liabilities		(2,580,000	)		(1,450,000	)

Net Deferred and Other Income Tax Assets (Liabilities)	$	(316,000	)	$	1,331,000

Total income taxes paid in fiscal 2016 and 2015 were $1,105,000 and $200,000, respectively.

Accounting principles generally accepted in the United States of America (“GAAP”) prescribes a comprehensive model for the financial recognition, measurement, classification, and disclosure of uncertain tax positions. GAAP contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Significant judgment is required in evaluating the Company’s uncertain tax position and determining the Company’s provision for taxes. Although the Company believes the reserves of unrecognized tax benefits (“UTB’s”) are reasonable, no assurance can be given that the final outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provision and accruals. The Company adjusts these reserves in light of changing facts and circumstances. As of September 30, 2016 and 2015, the Company had UTB’s of $150,000. There were no additional accruals of UTB’s during fiscal years ended September 30, 2016 and 2015.

The Company recognizes interest and penalties accrued related to UTB’s as a component of income tax expense. There were no additional accruals of interest expense nor penalties during fiscal years ended September 30, 2016 and 2015. It is reasonably possible that the amount of the UTB’s with respect to certain unrecognized tax positions will increase or decrease during the next 12 months. The Company does not expect the change to have a material effect on its results of operations or its financial position. The only expected potential reason for change would be the normal expiration of the statute of limitations or the ultimate results stemming from any examinations by taxing authorities. If recognized, the entire amount of UTB’s would have an impact on the Company’s effective tax rate.

The effective income tax rate for fiscal 2016 was 25.2% versus a benefit of (48.7%) in fiscal 2015. As of September 30, 2015, the Company had $900,000 in research and development tax credits (“R&D Credits”) carry-forwards. In fiscal 2016, there was a net usage of R&D Credits of $253,000 bringing the total R&D Credits carry-forwards to $647,000 at September 30, 2016. The $647,000 of R&D Credits carry-forwards, which are included in net deferred and other income tax liabilities of $(316,000) at September 30, 2016, expire in fiscal years 2031 through 2035.

As of September 30, 2015, the Company had $214,000 in Florida state research and development tax credits (“Florida R&D Credits”) carry-forwards. The Company received additional net Florida R&D Credits of $10,000 in fiscal 2016. The $224,000 of Florida R&D Credits, which are included in net deferred and other income tax liabilities of $(316,000) at September 30, 2016, expire in fiscal 2020.

The Company files U.S. federal income tax returns, as well as income tax returns in various states. The Company’s U.S. federal income tax returns and most state returns, filed for tax years prior to fiscal year ended September 30, 2013 are no longer subject to examination by taxing authorities due to the expiration of the statute of limitations.