note

INCOME TAXES

December 22, 2017,

the Tax Cuts and Jobs Act (“TCJA” or the Act) was enacted. The legislation significantly changed U.S. tax law by lowering the federal corporate tax rate from

34.0%

21.0%,

effective

January 1, 2018,

modifying the foreign earnings deferral provisions, and imposing a

one

-time toll charge on deemed repatriated earnings of foreign subsidiaries as of

December 31, 2017.

Effective for

2018

and forward, there is a tax on global intangible low-taxed income provisions (“GILTI”) which has been considered in the provision for income taxes..

The income tax expense for the years ended

December

31,

2019

and

2018

consists of the following:

	2019		2018

Current taxes - Federal	$	248	$	(38	)
Current taxes - State		11		10
Current taxes - Foreign		150		334
Deferred taxes - Foreign		-		20
Income tax expense	$	409	$	326

The statutory rate reconciliation for the years ended

December

31,

2019

and

2018

is as follows:

	2019			2018
Statutory federal tax provision (benefit)	$	(172	)	$	107
State income tax benefit		(29	)		(36	)
Effect of foreign operations		(23	)		52
FIN 48 adjustment, including federal benefit for state reserves		44			(19	)
Income tax credits		(70	)		-
Valuation allowance		789			(199	)
Permanent differences		36			15
Global Intangile Low-Taxed Income Effect		80			296
Return to Provision - Credits and NOL		(240	)		176
Deferred adjustments		(16	)		(62	)
Other		10			(4	)
Income tax expense	$	409		$	326

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

	2019			2018
Domestic	$	(1,512	)	$	(1,090	)
Foreign		693			1,582
Total	$	(819	)	$	492

Deferred tax (liabilities) assets at

December 31, 2019

and

2018,

consist of the following:

	2019			2018
Deferred Tax
Allowance for uncollectable accounts	$	79		$	53
Inventories reserve		348			267
Accrued vacation		112			145
Accrued bonus		171			-
Stock-based compensation and equity appreciation rights		62			54
Lease Accounting ASC 842 Lease Liability		1,230			-
Section 481(a) adjustment		716			(249	)
Net operating loss carryforwards		97			175
Tax credit carryforwards		171			449
Other		7			76
Total		2,993			970
Valuation allowance		(1,403	)		(614	)
Deferred tax (liabilities) assets		1,590			356

Prepaid expenses		-			(40	)
Lease Accounting ASC 842 Lease Asset		(1,158	)		-
Property and equipment		(432	)		(316	)
Deferred tax liabilities		(1,590	)		(356	)
Net deferred tax assets	$	-		$	-

We currently have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and state net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, or when net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.

Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards

not

expiring unused and tax planning alternatives.

In analyzing the need for a valuation allowance, we considered our history of operating results for income tax purposes over the past

three

years in each of the tax jurisdictions where we operate, statutory carry forward periods and tax planning alternatives. Finally, we considered both our near and long-term financial outlook and timing regarding when we might return to profitability. After considering all available evidence both positive and negative, we concluded that the valuation allowance is needed for all our U.S. based deferred tax assets.

December 31, 2019,

we had federal general business tax credit carryforwards of

$284

that will begin to expire in

2028,

if unused. For U.S. state tax purposes, we have Minnesota R&D credit carryforwards of

$190

and various state net operating loss carryforwards of

$1,

The state credits and NOLs expire at various years starting in

2024.

The following table sets forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for the years ended

December

31,

2019

and

2018

(in thousands):

Balance as of December 31, 2018	$	33

Tax positions related to current year:
Additions based on tax positions related to the current year		11
Statute of limitations		-
Balance as of December 31, 2019	$	44

●

The

$44

of unrecognized tax benefits as of

December 31, 2019

includes

$25

which, if ultimately recognized, will reduce our annual effective tax rate. The remainder would be a reduction in the deferred tax asset and valuation allowance.

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,

2019

and

2018

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,

2019,

with few exceptions, the Company or its subsidiaries are

longer subject to examination prior to tax year

2016.