Note 9. Taxes on Income

Provision (benefit) for income taxes in the consolidated statements of income consisted of the following components (in thousands):


	Fiscal Year Ended
	February 28, 2014			February 28, 2013
Current:
Federal	$	(2,337	)	$	(1,206	)
State		(25	)		67

		(2,362	)		(1,139	)

Deferred:
Federal		1,632			(217	)
State		244			(77	)

		1,876			(294	)

Total	$	(486	)	$	(1,433	)

Income before provision for taxes consisted of the following (in thousands):


	Fiscal Year Ended
	February 28, 2014			February 28, 2013

U.S. operations	$	(5,946	)	$	(3,915	)
Foreign operations		—			—


	$	(5,946	)	$	(3,915	)

The provision for income taxes differs from the amount computed by applying the federal statutory rate of 34% to income before income taxes as follows (in thousands):


	Fiscal Year Ended
	February 28, 2014			February 28, 2013

Statutory U.S. federal income tax rate	$	(2,022	)	$	(1,331	)
State income taxes, net of federal benefit		(69	)		(6	)
Research and experimentation credits		(50	)		(82	)
Valuation allowance		1,556			—
Non-deductible expenses		12			19
Domestic production activities deduction		—			(38	)
Other		87			5

Taxes at effective income tax rate	$	(486	)	$	(1,433	)

The income tax benefit effective tax rate for fiscal 2014 was 8% compared to 36% for fiscal 2013. The lower effective rate in 2014 compared to the effective rate in 2013 was primarily due to the valuation allowance the Company recognized on the net operating loss carryforwards, research and experimentation credits, the domestic production activities deduction and various other permanent items.

The deferred tax assets were reduced by a valuation allowance because, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has determined that a valuation allowance is needed due to recent taxable net operating losses, the sale of profitable divisions and the limited taxable income in the carry back periods.

Deferred income taxes as of February 28, 2014 and 2013 reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain tax loss carry forwards.

The sources of the temporary differences and carry forwards, and their effect on the net deferred tax asset consisted of the following (in thousands):


	Fiscal Year Ended
	February 28, 2014			February 28, 2013
Current deferred tax assets (liabilities):
Uniform capitalization costs	$	159		$	586
Inventory reserves		41			1,120
Accrued liabilities		59			500
Allowance for doubtful accounts		15			22
Other		(32	)		(34	)

Net current deferred tax assets		242			2,194

Non-current deferred tax assets:
Amortization of intangibles		241			720
Deferred rent		200			—
State net operating loss carry-forward		351			165
Federal net operating loss carry-forward		1,369			—
Foreign tax credit carry-forward		99			99
Basis difference of property, plant and equipment		56			(299	)
Valuation allowance		(1,556	)		—

Net non-current deferred tax assets		760			685

Net deferred tax assets	$	1,002		$	2,879


Current asset	$	242		$	2,219
Non-current asset		760			660

	$	1,002		$	2,879

The Company has available federal and state net operating loss carryforwards of $1.4 million and $0.3 million, respectively. The net operating loss carryforwards expire in fiscal 2034.

Undistributed earnings of the Company’s foreign subsidiary have been considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign country. The Company closed the foreign subsidiary and has determined the tax liability to be immaterial.