NOTE 11 Income Taxes

The Company computes income tax expense using the liability method. Under this method, deferred income taxes are provided, to the extent considered realizable by management, for basis differences of assets and liabilities for financial reporting and income tax purposes.

The Company follows guidance issued by the FASB with respect to accounting for uncertainty in income taxes. A tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more-likely-than-not” test, no tax benefit is recorded.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the state of Florida. The Company’s income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not reflect any amounts for interest and penalties in its 2018 or 2017 statements of operations, nor are any amounts accrued for interest and penalties at November 3, 2018 and November 4, 2017.

The provision for income taxes for the years ended consists of the following:


	November 3, 2018			November 4, 2017
Current tax expense:
Federal	$	1,681,641		$	1,689,446
State		403,874			287,699

		2,085,515			1,977,145
Deferred tax (benefit)		(443,685	)		(118,878	)

Provision for income taxes	$	1,641,830		$	1,858,267

The following table shows the reconciliation between the statutory federal income tax rate and the actual provision for income taxes for the years ended:


	November 3, 2018			November 4, 2017
Provision—federal statutory tax rate	$	1,541,697		$	1,757,205
Increase (decrease) resulting from:
State taxes, net of federal tax benefit		278,507			187,606
Permanent differences:
Stock option expirations		(178	)		3,910
Decrease in federal tax rate		(171,248	)		—
Other comprehensive income		86,882			—
Other		(93,830	)		(90,454	)

Income tax expense	$	1,641,830		$	1,858,267

The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts and the related deferred tax assets and deferred tax liabilities are as follows:


	November 3, 2018			November 4, 2017
Deferred tax assets:
Allowance for doubtful accounts	$	58,773		$	87,261
Inventories		158,598			339,954
Accrued expenses		144,814			192,427
Stock-based compensation		1,312			1,052

Total deferred tax assets		363,497			620,694
Deferred tax liabilities:
Depreciation		(39,490	)		(80,858	)
Installment sale of Cypress Creek		—			(547,348	)
Carrying value of investments		(221,600	)		(388,543	)
Amortization		(39,611	)		(58,810	)
Prepaid expenses		(22,640	)		(10,013	)

Net deferred tax assets (liabilities)	$	40,156		$	(464,878	)

These amounts are included in the accompanying consolidated balance sheets under the following captions:


	November 3, 2018			November 4, 2017
Current assets (liabilities):
Deferred tax assets	$	—		$	619,642
Deferred tax liabilities		—			(10,013	)

Net current deferred tax assets		—			609,629

Non-current assets (liabilities):
Deferred tax assets		363,498			9,012
Deferred tax liabilities		(323,342	)		(1,083,519	)

Net non-current deferred tax (liabilities)		40,156			(1,074,507	)

Net deferred tax assets (liabilities)	$	40,156		$	(464,878	)

In assessing the ability to realize a portion of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. For fiscal years 2018 and 2017, the Company determined that a valuation reserve for the Company’s deferred tax assets was not considered necessary as the deferred tax assets were fully realizable.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (H.R. 1) (the “Act”). The Act includes a number of changes in existing tax law impacting businesses including, among other things, a permanent reduction in the corporate income tax rate from 34% to 21%. The rate reduction took effect on January 1, 2018.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company’s net deferred tax liability as of November 4, 2017 was determined based on the current enacted federal tax rate of 34% prior to the passage of the Act. As a result of the reduction in the corporate income tax rate to 21% from 34% under the Act, the Company revalued its net deferred tax assets and liabilities as of January 1, 2018. The impact of the reduction of the deferred tax liabilities was a reduction of deferred tax liability of approximately $171,000.