NOTE 6 - INCOME TAXES

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


	Years Ended September 30,
	2017		2016			2015
Current:
Federal	$	2,381,000	$	679,000		$	261,000
State		50,000		31,000			37,000

Total current		2,431,000		710,000			298,000

Deferred:
Federal		1,238,000		1,768,000			(1,871,000	)
State		91,000		(121,000	)		(154,000	)

Total deferred		1,329,000		1,647,000			(2,025,000	)

Income tax expense (benefit)	$	3,760,000	$	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,
	2017			2016			2015
Federal income taxes computed at the statutory rate		34.0	%		34.0	%		34.0	%
State income taxes, net of federal benefit		1.2	%		1.5	%		3.3	%
Research & development tax refunds & credits		(2.1	%)		(2.8	%)		5.2	%
Dividend received deduction		(0.9	%)		(2.2	%)		—
Domestic production activities deduction		(2.8	%)		(1.9	%)		—
Domestic international sales corporation benefits		—			—			5.8	%
Other, net		1.5	%		(3.5	%)		0.4	%

Effective income tax rate		30.9	%		25.1	%		48.7	%

Deferred tax assets and liabilities consist of the following:


	September 30,
	2017			2016
Deferred Tax Assets:
Accrued liabilities and reserves	$	351,000		$	331,000
Allowance for doubtful accounts		73,000			70,000
Inventory		778,000			632,000
R&D tax credits carryforwards		155,000			871,000
Stock-based compensation		95,000			140,000
Net operating losses carryforwards		58,000			73,000
Unrealized loss on investments		—			85,000
Other		48,000			62,000

Gross Deferred Tax Assets		1,558,000			2,264,000

Deferred and Other Tax Liabilities:
Domestic international sales corporation		(839,000	)		(577,000	)
Percentage of completion		(1,114,000	)		(1,158,000	)
Property and equipment		(694,000	)		(683,000	)
Unrealized gain on investments		(332,000	)		—
Unrecognized tax benefits		(150,000	)		(150,000	)
Other		(30,000	)		(12,000	)

Gross Deferred and Other Tax Liabilities		(3,159,000	)		(2,580,000	)

Net Deferred and Other Income Tax Assets (Liabilities)	$	(1,601,000	)	$	(316,000	)

Total income taxes paid in fiscal 2017 and 2016 were $1,918,000 and $1,105,000, 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, 2017 and 2016, the Company had UTB’s of $150,000. There were no additional accruals of UTB’s during fiscal years ended September 30, 2017 and 2016.

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, 2017, 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 2017 was 30.9% versus 25.1% in fiscal 2016 and a benefit of 48.7% in fiscal 2015. As of September 30, 2016, the Company had $647,000 in federal research and development tax credits (“R&D Credits”) carryforwards. In fiscal 2017, there was $332,000 of new credits generated bringing the total R&D Credits to $979,000, of which all were used. There are no R&D Credits carryforwards as of September 30, 2017.

As of September 30, 2016, the Company had $224,000 in Florida state research and development tax credits (“Florida R&D Credits”) carryforwards. The Company received additional Florida R&D Credits of $22,000 in fiscal 2017 and used $91,000, leaving $155,000 of Florida R&D Credits carryforwards as of September 30, 2017. The $155,000 of Florida R&D Credits, which are included in net deferred and other income tax liabilities of $(1,601,000) at September 30, 2017, expire in fiscal 2021.

The Company files U.S. federal income tax returns, as well as Florida and Iowa income tax returns. The Company’s U.S. federal income tax returns filed for tax years prior to fiscal year ended September 30, 2014 are no longer subject to examination by taxing authorities due to the expiration of the statute of limitations.