Income Taxes

12 Months Ended

Dec. 31, 2014

Income Taxes [Abstract]

INCOME TAXES

NOTE 10 – INCOME TAXES

The Company accounts for income taxes pursuant to ASC 740 “Accounting for Income Taxes” that requires the recognition of deferred tax assets and liabilities for the differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally, the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the U.S. net operating loss carry forwards and to the temporary differences related to the deduction of impairment losses in PRC for income tax purposes as compared to financial statement purposes, are dependent upon future taxable income and timing of reversals of future taxable differences along with any other positive and negative evidence during the periods in which those temporary differences become deductible or are utilized.

 Net deferred tax assets related to the U.S. net operating loss carry forward and impairment loss on equipment held for sale/operating lease have been fully offset by a valuation allowance. The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. Under the Income Tax Laws of PRC, Chinese companies are generally subject to an income tax at an effective rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. The Company’s VIEs (Dyeing and Heavy Industries) and the Company’s subsidiary, Fulland Wind Energy, are subject to these statutory rates. The Company’s wholly-owned subsidiary, Fulland Limited was incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, this entity is not subject to income taxes.

Cleantech Solutions International, Inc. was incorporated in the United States and has incurred an aggregate net operating loss of approximately $6,172,000 for income tax purposes through December 31, 2014, subject to the Internal Revenue Code Section 382, which places a limitation on the amount of taxable income that can be offset by net operating losses after a change in ownership. The net operating loss carries forward for United States income taxes and may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2034. Management believes that it appears more likely than not that the Company will not realize these tax benefits due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit related to the U.S. net operating loss carry forward to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustments as necessary.

The Company has cumulative undistributed earnings from its foreign subsidiaries of approximately $64 million and $60 million as of December 31, 2014 and 2013, respectively, which is included in the consolidated retained earnings and will continue to be indefinitely reinvested in the Company’s PRC operations. Accordingly, no provision has been made for any deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

The Company reviews the realization of its deferred tax asset related to the deduction of impairment loss on equipment held for sale/operating lease on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the timing of reversals of future taxable differences along with any other positive and negative evidence is considered. In the fourth quarter of fiscal 2014, the Company performed an analysis related to the realization of the deferred tax asset related to the deduction of impairment loss on equipment held for sale/operating lease. As a result, the Company determined that it was more likely than not that the deferred tax asset related to the deductibility for PRC tax purposes of impairment losses on equipment held for sale/operating lease would not be realized. Therefore, the Company recorded a $2,165,677 valuation allowance related to the impairment losses as income tax expense in the year ended December 31, 2014.

The table below summarizes the Company’s income tax provision:

	Years Ended December 31,
	2014		2013
Income tax provision:
Current	$	3,475,822	$	2,356,481
Deferred		1,085,208		643,314
Total provision for income taxes	$	4,561,030	$	2,999,795

The table below summarizes the differences between the U.S. statutory federal rate and the Company’s effective tax rate for the years ended December 31, 2014 and 2013:

	2014			2013
U.S. statutory rates		34.0	%		34.0	%
U.S. effective rate in excess of China tax rate		2.5	%		(9.6	)%
China valuation allowance		12.3	%		0.0	%
U.S. valuation allowance		2.9	%		2.4	%
Total provision for income taxes		51.7	%		26.8	%

For the years ended December 31, 2014 and 2013, income tax expense related to our operations in the PRC and amounted to $4,561,030 and $2,999,795, respectively.

The tax effects of temporary differences under ASC 740 “Accounting for Income Taxes” that give rise to significant portions of deferred tax assets and liabilities as of December 31, 2014 and 2013 were as follows:

	December 31, 2014			December 31, 2013
Deferred tax assets:
Net U.S. operating loss carry forward	$	2,098,420		$	1,844,921
Loss on impairment of equipment		2,167,335			1,222,216
Allowance for doubtful accounts and inventory reserve		375,744			253,173
Total gross deferred tax assets		4,641,499			3,320,310
Less: valuation allowance		(4,265,755	)		(1,844,921	)
Net deferred tax assets	$	375,744		$	1,475,389

The valuation allowance at December 31, 2014 and 2013 were $2,098,420 and $1,844,921, respectively, related to the U.S. net operating loss carry forward and $2,167,335 and $0, respectively, related to the impairment loss on equipment held for sale/operating lease. During the years ended December 31, 2014 and 2013, the valuation allowance was increased by approximately $2,421,000 and $274,000, respectively.