NOTE 4 - Income Taxes

The income tax expense (benefit) for the years ended December 31, 2016 and 2015 consists of the following:

	2016			2015

Current taxes - Federal	$	240,000		$	(297,000	)
Current taxes - State	10,000			6,000
Current taxes - Foreign	(13,000		)	29,000
Deferred taxes - Federal	(167,000		)	(107,000		)
Deferred taxes - State	10,000			53,000
Deferred taxes - Foreign	(45,000		)	—

Income tax expense (benefit)	$	35,000		$	(316,000	)

The statutory rate reconciliation for the years ended December 31, 2016 and 2015 is as follows:

	2016			2015
Statutory federal tax provision (benefit)	$	27,000		$	(302,000	)
State income taxes	(32,000		)	3,000
Effect of foreign operations	107,000			(5,000		)
Uncertain tax positions	2,000			(3,000		)
Income tax credits	(134,000		)	(125,000		)
Valuation allowance	49,000			86,000
Permanent differences	16,000			30,000
Other	—			—

Income tax expense (benefit)	$	35,000		$	(316,000	)

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

	2016			2015
Domestic	$	486,425		$	(968,793	)
Foreign	(407,651		)	81,371

Total	$	78,774		$	(887,422	)

Deferred tax assets (liabilities) at December 31, 2016 and 2015, consist of the following:

	2016			2015
Deferred Tax
Allowance for uncollectable accounts	$	317,000		$	115,000
Inventories reserve	242,000			270,000
Accrued vacation	362,000			360,000
Non-compete amortization	56,000			191,000
Stock-based compensation and equity appreciation rights	29,000			111,000
Net operating loss carryforwards	134,000			113,000
Tax credit carryforwards	242,000			231,000
Other	188,000			180,000

	1,570,000			1,571,000
Valuation allowance	(135,000		)	(86,000		)

Deferred tax assets	1,435,000			1,485,000


Prepaid expenses	(323,000		)	(481,000		)
Property and equipment	(569,000		)	(663,000		)

Deferred tax liabilities	(892,000		)	(1,144,000		)

Net deferred tax assets	$	543,000		$	341,000

We established a valuation allowance because we determined that it was more likely than not that a portion of the net operating loss carryforwards and research and development credit would not be utilized. At December 31, 2016, the Company has established a valuation allowance of $135,000 against certain of its stated deferred tax assets to reduce the total to an amount which management believes to be appropriate realization of deferred tax asset is dependent upon sufficient future taxable income during the periods when deductible temporary differences and carryforwards are expected to be available to reduce taxable income.

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, 2016 and 2015:

Balance as of December 31, 2014	$	56,000

Tax positions related to 2015:
Additions based on tax positions related to the current year	12,000
Additions based on tax positions related to the 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

Tax positions related to current year:
Additions based on tax positions related to the current year	15,000
Additions based on tax positions related to a prior year	5,000
Reductions based on tax positions related to a prior year	(6,000		)
Statute of limitations	(13,000		)

Balance as of December 31, 2016	$	52,000

The $52,000 of unrecognized tax benefits as of December 31, 2016 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, 2016 and 2015 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. The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2016, with few exceptions, the Company or its subsidiaries are no longer subject to examination prior to tax year 2010.