NOTE 4 INCOME TAXES

The income tax (benefit) expense for the years ended December 31, 2015 and 2014 consists of the following:

	2015			2014
Current taxes—Federal	$	(297,000	)	$	(106,000	)
Current taxes—State		6,000			39,000
Current taxes—Foreign		29,000			51,000
Deferred taxes—Federal		(107,000	)		137,000
Deferred taxes—State		53,000			(40,000	)

Income tax (benefit) expense	$	(316,000	)	$	81,000

The statutory rate reconciliation for the years ended December 31, 2015 and 2014 is as follows:

	2015			2014
Statutory federal tax provision	$	(302,000	)	$	327,000
State income taxes		3,000			45,000
Effect of foreign operations		(5,000	)		(9,000	)
Uncertain tax positions		(3,000	)		(88,000	)
Income tax credits		(125,000	)		(215,000	)
Valuation allowance		86,000			—
Permanent differences		30,000			21,000

Income tax (benefit) expense	$	(316,000	)	$	81,000

Income (loss) from operations before income taxes was derived from the following sources:

	2015			2014
Domestic	$	(968,793	)	$	816,840
Foreign		81,371			144,177

Total	$	(887,422	)	$	961,017

Deferred tax assets (liabilities) at December 31, 2015 and 2014, consist of the following:

	2015			2014
Allowance for uncollectable accounts	$	115,000		$	50,000
Inventories reserve		270,000			267,000
Accrued vacation		360,000			334,000
Non-compete amortization		191,000			222,000
Stock-based compensation and equity appreciation rights		111,000			148,000
State Tax NOL		113,000			95,000
Tax credit carryforwards		231,000			73,000
Other		180,000			94,000

		1,571,000			1,283,000
Valuation allowance		(86,000	)		—

Deferred tax assets		1,485,000			1,283,000

Prepaid expenses		(481,000	)		(292,000	)
Property and equipment		(663,000	)		(704,000	)

Deferred tax liabilities		(1,144,000	)		(996,000	)

Net deferred tax assets	$	341,000		$	287,000

We established a valuation allowance because we determined that it was more likely than not that a portion of the NOL and R&D credit would not be utilized. For 2014, our long term deferred tax liability of $149,000 has been netted with our current deferred tax asset or $436,000 for a net noncurrent deferred tax asset of $286,000.

The tax effects from an uncertain tax positions can be recognized in our consolidated financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The following table sets forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for the years ended December 31, 2015 and 2014:

Balance as of December 31, 2013	$	193,000
Tax positions related to 2014:
Additions		23,000
Reductions		(160,000	)

Balance as of December 31, 2014		56,000


Tax positions related to current year:
Additions based on tax positions related to the current year		12,000
Additions based on tax[ib]-positions related to a prior year		2,000
Reductions based on tax positions related to a prior year		(9,000	)
Statute of limitations		(10,000	)

Balance as of December 31, 2015	$	51,000

The $51,000 of unrecognized tax benefits as of December 31, 2015 includes amounts which, if ultimately recognized, will reduce our annual effective tax rate. It is included in Other Long-Term Liabilities on the accompanying consolidated balance sheets.

Our policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes. The liability for accrued interest as of December 31, 2015 and 2014 was not significant. Interest is computed on the difference between our uncertain tax benefit positions and the amount deducted or expected to be deducted in our tax returns.

We are subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply.