NOTE 5 - Income Taxes

The provision for income taxes is comprised of the following (in thousands):

	For the Years Ended June 30,
	2016		2015
Current income taxes:
Federal	$	(31)	$	(49)
State		27		35
		(4)		(14)
Deferred income tax provision		375		230
Provision for income taxes	$	371	$	216

A reconciliation of the U.S. Federal statutory income tax rate to our actual effective tax rate on earnings before income taxes is as follows for the years ended June 30, (dollars in thousands):

	2016					2015
	Amount		% of Pre-tax Income			Amount		% of Pre-tax Income
Tax at Federal statutory rate	$	2,089		34.0	%	$	1,721	34.0	%
Increases (decreases) in taxes resulting from:
Meals and entertainment		61		1.0	%		66	1.3	%
State income taxes, net of Federal income tax benefit		20		0.3	%		21	0.4	%
Foreign source income not subject to tax		(1,278)		(20.8)	%		(1,069)	(21.1)	%
R&D Credit refund		(415)		(6.8)	%		(328)	(6.5)	%
Undistributed foreign earnings		(90)		(1.4)	%		(93)	(1.8)	%
Other, net		(16)		(0.3)	%		(102)	(2.0)	%
Effective tax rate	$	371		6.0	%	$	216	4.3	%

Deferred tax assets and deferred tax liabilities at June 30, 2016 and 2015 are as follows (in thousands):

	Current Deferred Tax Assets (Liabilities)				Long-term Deferred Tax Assets (Liabilities)
	2016		2015		2016		2015
Accounts receivable	$	26	$	36	$	—	$	—
Inventories		364		533		200		261
Accrued Liabilities		313		311		87		86
Stock based compensation expense		—		—		154		147
Goodwill		—		—		(14)		214
R&D credit		—		—		1,214		804
Property, plant and equipment		—		—		(503)		(512)
Other deferred tax liabilities		—		—		(702)		(366)
		703		880		436		634
Valuation allowance		—		—		—		—
Net deferred tax assets	$	703	$	880	$	436	$	634

The Company has identified the United States and New York State as its major tax jurisdictions. The fiscal 2012 and forward years are still open for examination.

During the year ending June 30, 2016 the Company increased its reserve for uncertain income tax positions by $46,000. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes. As of June 30, 2016, the Company had accrued interest totaling $0 and $148,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. The Company uses the flow through method to account for investment tax credits earned on eligible research and development expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax expense.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	Tax		Interest		Total
Balance of gross unrecognized tax benefits as of July 1, 2015	$	102	$	—	$	102
Increases to unrecognized tax benefits resulting from the generation of additional R&D credits		46		—		46
Balance of gross unrecognized tax benefits as of June 30, 2016	$	148	$	—	$	148

The Company plans to permanently reinvest a substantial portion of its foreign earnings and as such has not provided US corporate taxes on the permanently reinvested earnings. As of June 30, 2016, the Company had approximately $7.6 million of undistributed earnings of foreign subsidiaries.