NOTE 3- INCOME TAXES

The Company analyzes its deferred tax assets and liabilities at the end of each interim period and based on management’s best estimate of its full year effective tax rate recognizes cumulative adjustments to its deferred tax assets and liabilities. The Company’s effective tax rate for the fiscal year ending March 31, 2014 is estimated to be approximately 45%. The effective tax rate for the fiscal year ended March 31, 2013 was 41%. The increase in the tax rate was primarily due to a decrease in deemed dividends from the company’s Macau subsidiary as well as changes in timing differences in book versus tax deductions.

As of December 31, 2013 and March 31, 2013, The Singing Machine had gross deferred tax assets of approximately $2.8 million and $3.2 million, respectively, against which the Company recorded valuation allowances totaling approximately $1.6 million. A valuation allowance was recorded against deferred tax assets because it is more likely than not that a portion of the tax benefits from the gross deferred tax assets will not be realized. For the three month period ended December 31, 2013, the Company recorded income before provision for income taxes of approximately $1,448,000 which generated a decrease in current deferred tax assets and an income tax provision of approximately $627,000. For the nine month period ended December 31, 2013, the Company recorded income before provision for income taxes of approximately $1,092,000 which generated a decrease in current deferred tax assets and an income tax provision of approximately $488,000.

As of December 31, 2013 the Company is subject to U.S. Federal income tax examinations for the tax years ended March 31, 2011 through March 31, 2013.