Income Taxes

12 Months Ended

Jun. 30, 2018

NOTE 5 - Income Taxes

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

	For the Years Ended June 30,
	2018		2017
Current income taxes:
Federal	$	567	$	280
State		37		55
		604		335
Deferred income tax provision		80		361
Provision for income taxes	$	684	$	696

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):

	2018						2017
	Amount			% of Pre-tax Income			Amount			% of Pre-tax Income
Tax at Federal statutory rate	$	2,296			27.6	%	$	2,140			34.0	%

Increases (decreases) in taxes resulting from:
Meals and entertainment		56			0.6	%		68			1.1	%
State income taxes, net of Federal income tax benefit		29			0.3	%		28			0.4	%
Foreign source income not subject to tax		(1,895	)		(22.7	)%		(1,286	)		(20.4	)%
R&D Credit		(314	)		(3.8	)%		(286	)		(4.5	)%
Transition tax		381			4.6	%		—			—
Foreign withholding tax		256			3.1	%		—			—
U.S. Federal Tax rate reduction		(136	)		(1.6	%)		—			—
Other, net		11			0.1	%		32			0.5	%
Effective tax rate	$	684			8.2	%	$	696			11.1	%

Deferred tax assets and deferred tax liabilities at June 30, 2018 and 2017 are as follows (in thousands):

	Deferred Tax Assets (Liabilities)
	2018			2017
Accounts receivable	$	17		$	26
Inventories		437			586
Accrued Liabilities		233			453
Stock based compensation expense		15			28
Intangibles		(324	)		(258	)
R&D credit		781			1,427
Property, plant and equipment		(339	)		(579	)
Other deferred tax liabilities		(256	)		(1,039	)
		564			644
Valuation allowance		—			—
Net deferred tax assets	$	564		$	644

The Company has identified the United States and New York State as its major tax jurisdictions. The fiscal 2015 and forward years are still open for examination.

In addition, the Company has a wholly-owned subsidiary which operates in a Free Zone in the Dominican Republic (“DR”) and is exempt from DR income tax.

The provision for income taxes represents Federal, Foreign, and State and Local income taxes. The effective rate differs from statutory rates due to the effect of tax rates in foreign jurisdictions, tax benefit of R&D credits, certain nondeductible expenses and by the enactment of H.R. 1, Tax Cuts and Jobs Act (the “Act”) on December 22, 2017. The Act reduced the U.S. Corporate income tax rate to 21% and resulted in a $136,000 reduction in the Company’s net deferred tax liabilities. As The Company has a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. federal statutory rate of approximately 27.55% for fiscal 2018 and a 21% U.S. federal statutory rate for subsequent fiscal years. The Company reported $381,000 of provisional expense on its unremitted foreign earnings.

Accounting Standard Codification (“ASC”) 740 requires filers to record the effects of tax law changes in the period enacted. However, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), that permits filers to record provisional amounts during a measurement period ending no later than one year from the date of the Act’s enactment. As of June 30, 2018, The Company has not completed accounting for the tax effects of enactment of the Act; however, The Company has made a reasonable estimate of the effects on the existing deferred balances as well as the computation of the one-time transition tax. In addition, changes in judgment from the evaluation of new information resulting in the recognition, de-recognition or re-measurement of a tax position taken in a prior annual period is recognized separately in the quarter of the change.

During the year ending June 30, 2018 the Company increased its reserve for uncertain income tax positions by $38,000. 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, 2018, the Company had accrued interest totaling $0 and $221,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period.

The Company does not expect that its unrecognized tax benefits will significantly change within the next twelve months. The Company claims R&D tax credits on eligible research and development expenditures. The R&D 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, 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

Increases to unrecognized tax benefits resulting from the generation of additional R&D credits		38		—		38

Balance of gross unrecognized tax benefits as of June 30, 2018	$	221	$	—	$	221

The Company plans to permanently reinvest a substantial portion of its foreign earnings and as such has not provided withholding tax on the permanently reinvested earnings. The Company has accrued $256,000 for withholding taxes on undistributed earnings that are not permanently reinvested.

As of June 30, 2018 the Company had approximately $19.7 million of undistributed earnings of foreign subsidiaries.