NOTE 5 - Income Taxes

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

	For the Years Ended June 30,
	2017		2016		2015
Current income taxes:
Federal	$	280	$	(31)	$	(49)
State		55		27		35
		335		(4)		(14)
Deferred income tax provision		361		375		230
Provision for income taxes	$	696	$	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):

	2017					2016					2015
	Amount		% of Pre-tax Income			Amount		% of Pre-tax Income			Amount		% of Pre-tax Income

Tax at Federal statutory rate	$	2,140		34.0	%	$	2,089		34.0	%	$	1,721		34.0	%

Increases (decreases) in taxes resulting from:
Meals and entertainment		68		1.1	%		61		1.0	%		66		1.3	%
State income taxes, net of Federal income tax benefit		28		0.4	%		20		0.3	%		21		0.4	%
Foreign source income not subject to tax		(1,286)		(20.4)	%		(1,278)		(20.8)	%		(1,069)		(21.1)	%
R&D Credit refund		(286)		(4.5)	%		(415)		(6.8)	%		(328)		(6.5)	%
Undistributed foreign earnings		—		—	%		(90)		(1.4)	%		(93)		(1.8)	%
Other, net		32		0.5	%		(16)		(0.3)	%		(102)		(2.0)	%

Effective tax rate	$	696		11.1	%	$	371		6.0	%	$	216		4.3	%

Deferred tax assets and deferred tax liabilities at June 30, 2017 and 2016 are as follows (in thousands):

	Deferred Tax Assets (Liabilities)
	2017		2016
Accounts receivable	$	26	$	26
Inventories		586		564
Accrued Liabilities		453		400
Stock based compensation expense		28		154
Intangibles		(258)		(14)
R&D credit		1,427		1,214
Property, plant and equipment		(579)		(503)
Other deferred tax liabilities		(1,039)		(702)
		644		1,139
Valuation allowance		—		—
Net deferred tax assets	$	644	$	1,139

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, 2017 the Company increased its reserve for uncertain income tax positions by $35,000. 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, 2017, the Company had accrued interest totaling $0 and $183,000 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
Increases to unrecognized tax benefits resulting from the generation of additional R&D credits		35		—		35

Balance of gross unrecognized tax benefits as of June 30, 2017	$	183	$	—	$	183

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, 2017, the Company had approximately $12.4 million of undistributed earnings of foreign subsidiaries.