NOTE 12 – 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 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.

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 subsidiary, Green Power, and VIEs (Dyeing and Heavy Industries) 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 $7,925,000 for income taxes purposes through December 31, 2016, 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 2036. Management believes that it appears more likely than not that the Company will not realize these tax benefits due to the Company’s continuing losses for United States income taxes 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 China subsidiary and VIEs of approximately $45.2 million and $53.3 million as of December 31, 2016 and 2015, 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.

Net deferred tax assets related to the U.S. net operating loss carry forward are fully offset by a valuation allowance. The Company reviews the realization of its deferred tax assets related to the deduction of allowance for doubtful accounts and reserve for obsolete inventories on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required.

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

	Year Ended December 31,
Income taxes provision:	2016		2015
Current	$	-	$	1,204,352
Deferred		-		13,023
Total provision for income taxes	$	-	$	1,217,375

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, 2016 and 2015:

	2016			2015
U.S. statutory rates		34.0	%		34.0	%
U.S. effective rate in excess of China tax rate		(4.2	)%		(10.3	)%
Bad debt allowance		(8.8	)%		(0.4	)%
China valuation allowance		(11.6	)%		0.4	%
U.S. valuation allowance		(9.4	)%		5.2	%
Total provision for income taxes		0.0	%		28.9	%

For the years ended December 31, 2016 and 2015, income taxes expense was related to our operations in the PRC and amounted to $0 and $1,217,375, 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, 2016 and 2015 were as follows:

	December 31, 2016			December 31, 2015
Deferred tax assets:
Net U.S. operating loss carry forward	$	2,694,569		$	2,318,150
Allowance for doubtful accounts and reserve for obsolete inventories		454,663			220,895
Total gross deferred tax assets		3,149,232			2,539,045
Less: valuation allowance		(2,762,851	)		(2,318,150	)
Net deferred tax assets	$	386,381		$	220,895

At December 31, 2016 and 2015, the valuation allowance were $2,694,569 and $2,318,150 related to the U.S. net operating loss carry forward, and $68,282 and $0 related to allowance for doubtful accounts and reserve for obsolete inventories, respectively. During the year ended December 31, 2016, the valuation allowance increased by approximately $445,000.

The Company had incurred a significant loss from discontinued operations of $10,285,932 for the year ended December 31, 2016. Such loss is attributable to the Company’s China operations from the forged rolled rings and related component segment and the petroleum and chemical equipment segment. Management believes there will be no tax benefit from such loss and accordingly, no deferred tax asset and corresponding valuation reserve has been provided for at December 31, 2016 and 2015.