NOTE 11 - INCOME TAXES

The Company files separate tax returns in the United States and in Macau. The Macau Subsidiary has received approval from the Macau government to operate its business as a Macau Offshore Company (MOC), and is exempt from the Macau income tax. For the fiscal years ended March 31, 2014, 2013 and 2012, the Macau Subsidiary recorded no tax provision.

Due to the change of control of the Company, the net operating loss carry over is subject to the IRS Section 382 limitation. As of March 31, 2014, 2013 and 2012, The Singing Machine had net deferred tax assets before valuation allowances of approximately $3.2 million, $3.2 million, and $3.9 million, respectively, against which the Company recorded valuation allowances totaling approximately $0.8 million, $1.6 million, and $3.9 million, respectively.

The income tax benefit for federal, foreign, and state income taxes in the consolidated statements of income consisted of the following components for 2014, 2013 and 2012:

	2014		2013		2012
Income tax provision:
Current:
Federal	$	-	$	-	$	-
State		-		-		-

Total current Federal and State	$	-	$	-	$	-

Deferred:
Federal	$	(675,447)	$	(1,412,535)	$	-
State		(103,350)		(206,924)		-

Total income tax benefit	$	(778,797)	$	(1,619,459)	$	-

The United States and foreign components of income (loss) before income taxes are as follows:

	2014		2013		2012

United States	$	(62,095)	$	92,122	$	(432,111)
Foreign		287,614		1,429,354		895,227
	$	225,519	$	1,521,476	$	463,116

The actual tax expense differs from the "expected" tax expense for the years ended March 31, 2014, 2013 and 2012 (computed by applying the U.S. Federal Corporate tax rate of 34 percent to income before taxes) as follows:

	2014		2013		2012

Expected tax expense	$	76,676	$	517,302	$	157,459
State income taxes, net of Federal income tax benefit		7,815		25,236		26,299
Permanent differences		8,374		5,421		5,247
Deemed Dividend		108,864		537,866		304,377
Change in valuation allowance		(820,040)		(2,246,235)		385,219
Tax rate differential on foreign earnings		(111,164)		(537,866)		(304,377)
Prior year adjustments		(49,322)		78,817		(574,224)
Actual tax benefit	$	(778,797)	$	(1,619,459)	$	-

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows:

	2014		2013		2012

Deferred tax assets:
Federal net operating loss carryforward	$	2,076,141	$	2,189,622	$	2,579,924
State net operating loss carryforward		413,401		413,849		431,306
AMT credit carryforward		36,808		36,808		70,090
Inventory differences		490,716		358,130		438,773
Allowance for doubtful accounts		66,658		67,849		57,308
Reserve for sales returns		90,895		81,082		74,718
Stock option compensation expense		59,713		-		-
Stock warrants		39,193		-		-
Charitable contributions		-		-		60,700
Accrued Vacation		10,241		9,839		9,551
Depreciation and amortization		-		81,739		135,660
Amortization of reorganization intangible		-		-		7,664
Total deferred tax assets		3,283,766		3,238,918		3,865,694
Deferred tax liability:
Depreciation		(86,091)		-		-
Net deferred tax asset before valuation allowance		3,197,675		3,238,918		3,865,694
Valuation allowance		(799,419)		(1,619,459)		(3,865,694)
Net deferred tax assets	$	2,398,256	$	1,619,459	$	-

Due to economic conditions prior to the fiscal year ended March 31, 2013, the Company believed that it was more likely than not that the benefit from the net deferred tax assets would not be realized, and established a valuation allowance on the deferred tax assets for the entire balance.

During the fiscal year ended March 31, 2014 and March 31, 2013, the Company released a portion of the valuation allowance. The release of the valuation allowance was determined in accordance with the provisions of ASC 740, which require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. The analysis performed to assess the realizability of the deferred tax assets included an evaluation of the pattern and timing of the reversals of temporary differences and the length of carryback and carry forward periods available under the applicable federal and state laws; and the amount and timing of future taxable income. The analysis indicated that it is more likely than not that at least 75% of the deferred tax asset recorded will be realized. As a result, approximately $0.8 million and $1.6 million of the valuation allowance were released during the fiscal years ended March 31, 2014 and March 31, 2013, respectively. The Company recognized an approximate tax benefit of $0.8 million and $1.6 million for the fiscal years ended March 31, 2014 and March 31, 2013, respectively.

At March 31, 2014, the Company has federal tax net operating loss carry forwards in the amount of approximately $6.1 million that will expire beginning in the year 2027. In addition, the Company has state tax net operating loss carry forwards in the amount of approximately $8.9 million that will expire beginning in 2015. The Company has now exhausted its ability to carry back any further losses and therefore will only be able to recognize tax benefits to the extent that it has future taxable income. Net operating loss carry forward amounts and their year of expiration are as follows:

Year of	NOL		NOL
Expiration	Federal		State

2014	$	-	$	-
2015		-		1,984,929
2016		-		-
2017		-		-
2018		-		-
2019 and beyond		6,106,299		6,884,857

	$	6,106,299	$	8,869,786

The Company is no longer subject to income tax examinations for fiscal years before 2011.