Note 8. Income Taxes

The following summarizes the Company’s provision for income taxes on income from continuing and discontinued operations:

	For the Year Ended August 31,
	2015		2014
Current:
Federal	$	1,568,000	$	751,000
State		325,000		214,000
Foreign		(5,000)		9,000
		1,888,000		974,000

Deferred:
Federal		560,000		(343,000)
State		(194,000)		378,000
Foreign		-		-
		366,000		35,000
Total	$	2,254,000	$	1,009,000

Income taxes for the years ended August 31, 2015 and August 31, 2014 differ from the amounts computed by applying the federal statutory corporate rates of 34% to the pre-tax income from continuing operations.

The differences are reconciled as follows:

	For the Year Ended August 31,
	2015		2014
Current:
Expected income tax benefit at statutory rate	$	2,008,000	$	2,085,000
Increase (decrease) in taxes due to:
State tax, net of federal benefit		284,000		287,000
Permanent differences		32,000		29,000
Change in deferred tax asset valuation allowance		62,000		(919,000)
Other, net		(132,000)		(473,000)
Income tax expense (benefit)	$	2,254,000	$	1,009,000

The components of deferred taxes at August 31, 2015 and 2014 are summarized below:

	August 31,
Deferred tax assets:	2015		2014
Net operating loss	$	522,000	$	527,000
Capital losses		116,000		99,000
Allowance for doubtful accounts		14,000		4,000
Accrued expenses		146,000		333,000
Accrued workers’ compensation		32,000		125,000
Inventory reserve		775,000		644,000
Unrealized losses on investment		(254,000)		(51,000)
Excess of tax over book depreciation		(78,000)		(131,000)
Other		305,000		331,000
Total deferred tax assets		1,578,000		1,881,000
Valuation allowance		(639,000)		(576,000)
Total deferred tax assets	$	939,000	$	1,305,000

The Company records net deferred tax assets to the extent management believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance.

Based on the Company’s profitability and future forecast, management believes it is more-likely-than not that a portion of its net deferred tax assets will not be utilized in the future. Therefore, as of August 31, 2015 and 2014, a partial valuation allowance has been recorded based on management’s estimate of the amount of its net deferred tax assets that will be able to be utilized in future periods.

The guidance in the “Transactions Between Entities Under Common Control Subsections” of ASC 805-50, does not specifically address the accounting for the deferred tax consequences that may result from a transfer of net assets or the exchange of equity interest between enterprises under common control. Although such a transaction is not a pooling of interests, it appears as if the guidance of the Financial Accounting Standards Board (“FASB”) Statement No. 109 (ASC 740), paragraphs 270-272, which addresses the income tax accounting effects of a pooling-of-interests transaction should be applied by analogy.

On January 1, 2007, we adopted ASC 740 “Income Taxes” formerly FASB Interpretation No. 48 an interpretation of FASB Statement No. 109 (ASC 740). ASC 740 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in the tax return. The Company did not recognize any additional liability for unrecognized tax benefit as a result of the implementation. The Company has no liability for unrecognized tax benefit related to tax positions for either the August 31, 2015 year end or the August 31, 2014 year end.

The Company’s policy is to recognize interest and penalty related to unrecognized tax benefits as income tax expense. As of August 31, 2015, the Company has not recognized liabilities for penalty and interest as the Company does not have any liability for unrecognized tax benefits.

The Company is subject to taxation in the US, Canada and various states. The Company’s tax years for 2011, 2012, 2013 and 2014 are subject to examination by the taxing authorities. With few exceptions, the Company is no longer subject to U.S. federal, state, local or foreign examinations by taxing authorities for years before 2011.