Note 11—Income Taxes

The components of income from continuing operations before income taxes are as follows:


	Years Ended January 31
	2015		2014
(In thousands)
Domestic	$	5,401	$	537
Foreign		1,531		875

	$	6,932	$	1,412

The components of the provision for income taxes from continuing operations are as follows:


	Years Ended January 31
	2015			2014
(In thousands)
Current:
Federal	$	1,666		$	930
State		466			179
Foreign		535			297

		2,667			1,406


Deferred:
Federal		(290	)		(1,044	)
State		(107	)		(174	)
Foreign		—			(13	)

		(397	)		(1,231	)

	$	2,270		$	175

The provision for income taxes for continuing operations differs from the amount computed by applying the statutory federal income tax rate of 34% in fiscal 2015 and 2014 to income before income taxes due to the following:


	Years Ended January 31
	2015			2014
(In thousands)
Income Tax Provision at Statutory Rate	$	2,357		$	480
State Taxes, Net of Federal Tax Effect		233			(47	)
Change in Reserves Related to ASC 740 Liability		23			(59	)
Meals and Entertainment		41			38
Domestic Production Deduction		(164	)		(30	)
Share-Based Compensation		(25	)		36
Tax-exempt Income		(24	)		(22	)
R&D Credits		(135	)		(114	)
Foreign Rate Differential		(56	)		(26	)
Other Permanent Differences and Miscellaneous, Net		20			(81	)

	$	2,270		$	175

The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows:


	January 31
	2015			2014
(In thousands)
Deferred Tax Assets:
Inventory	$	1,666		$	1,792
Share-Based Compensation		572			535
State R&D Credits		371			258
Compensation Accrual		417			493
ASC 740 Liability Federal Benefit		304			290
Deferred Service Contract Revenue		235			181
Warranty Reserve		140			137
Reserve for Doubtful Accounts		116			127
Foreign Tax Credit		356			213
Other		298			119

		4,475			4,145
Deferred Tax Liabilities:
Accumulated Tax Depreciation in Excess of Book Depreciation		766			830
Deferred Gain on Asset Held for Sale		785			897
Currency Translation Adjustment		36			173
Other		87			78

		1,674			1,978

Subtotal		2,801			2,167
Valuation Allowance		(255	)		(258	)

Net Deferred Tax Assets	$	2,546		$	1,909

The valuation allowance at January 31, 2015 relates to certain state research and development tax credit carryforwards which are expected to expire unused. The change in the valuation allowance in 2015 was a decrease of approximately $3,000 and represented a decrease in the reserve due to the utilization of research and development credits during the current year, net of federal benefit. The change in the valuation allowance in 2014 was an increase of approximately $27,000 and represented an increase in the reserve due to the generation of research and development credits during the current year, net of federal benefit.

The Company reasonably believes that it is possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balance of unrecognized tax benefits, excluding interest and penalties are as follows:


	2015			2014
(In thousands)
Balance at February 1	$	715		$	941
Increases in prior period tax positions		—			31
Increases in current period tax positions		87			42
Reductions related to lapse of statute of limitations		(95	)		(299	)

Balance at January 31	$	707		$	715

If the $707,000 is recognized, $493,000 would decrease the effective tax rate in the period in which each of the benefits is recognized and the remainder would be offset by a reversal of deferred tax assets.

During fiscal 2015 and 2014 the Company recognized an expense of $43,000 and $68,000, respectively, related to interest and penalties, which are included as a component of income tax expense in the accompanying statements of income. At January 31, 2015 and 2014, the Company had accrued potential interest and penalties of $460,000 and $416,000, respectively.

The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations prior to 2010.

On September 13, 2013, the U.S. Treasury Department and the Internal Revenue Service released final regulations that provided guidance on the application of IRC Section 263(a) for amounts paid to acquire, produce, or improve tangible property, as well as the rules for materials and supplies and proposed regulations addressing dispositions and general asset accounts. The final regulations are generally effective for tax years beginning on or after January 1, 2014. We are currently evaluating the impact of these new regulations and do not expect them to have a material impact to our financial statements.

At January 31, 2015, the Company has indefinitely reinvested $3,909,000 of the cumulative undistributed earnings of its foreign subsidiary in Germany, all of which would be subject to U.S. taxes if repatriated to the U.S. Through January 31, 2015, the Company has not provided deferred income taxes on the undistributed earnings of this subsidiary because such earnings are considered to be indefinitely reinvested. Non-U.S. income taxes are, however, provided on these undistributed earnings.