NOTE 9 - INCOME TAXES

The Company files separate tax returns in the United States and in Macau, China. 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, 2016, 2015 and 2014, the Macau Subsidiary recorded no tax provision.

The net operating loss carryforward is subject to an IRC Section 382 limitation. As of March 31, 2016, 2015 and 2014, The Singing Machine had net deferred tax assets before valuation allowances of approximately $2.4 million, $3.0 million, and $3.2 million, respectively, against which the Company recorded valuation allowances totaling approximately $0, $0.7 million, and $0.8 million, respectively.

The income tax provision (benefit) for federal, foreign, and state income taxes in the consolidated statements of income consisted of the following components for 2016, 2015 and 2014:

	2016		2015		2014
Income tax provision:
Current:
Federal	$	-	$	-	$	-
State		-		-		-

Total current Federal and State	$	-	$	-	$	-

Deferred:
Federal	$	(89,718)	$	80,836	$	(675,447)
State		(11,658)		11,865		(103,350)

Total income tax (benefit) provision	$	(101,376)	$	92,701	$	(778,797)

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

	2016		2015		2014

United States	$	1,406,301	$	161,255	$	(62,095)
Foreign		195,713		101,604		287,614
	$	1,602,014	$	262,859	$	225,519

The actual tax (benefit) provision differs from the "expected" tax expense for the years ended March 31, 2016, 2015 and 2014 (computed by applying the U.S. Federal Corporate tax rate of 34 percent to income before taxes) as follows:

	2016		2015		2014

Expected tax expense	$	544,684	$	89,372	$	76,676
State income taxes, net of Federal income tax benefit		19,420		(97)		7,815
Permanent differences		11,176		7,507		8,374
Deemed Dividend		80,207		37,563		108,864
Change in valuation allowance		(708,385)		(91,034)		(820,040)
Tax rate differential on foreign earnings		(75,007)		(39,272)		(111,164)
Other		26,529		88,662		(49,322)
Actual tax (benefit) provision	$	(101,376)	$	92,701	$	(778,797)

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

	2016		2015		2014
Deferred tax assets:
Federal net operating loss carryforward	$	1,481,531	$	2,041,207	$	2,076,141
State net operating loss carryforward		277,673		318,830		413,401
AMT credit carryforward		52,004		52,004		36,808
Inventory differences		443,749		431,744		490,716
Allowance for doubtful accounts		19,614		67,305		66,658
Reserve for sales returns		112,100		76,482		90,895
Stock option compensation expense		80,489		74,716		59,713
Stock warrants		38,863		39,194		39,193
Accrued Vacation		11,212		9,183		10,241
Total deferred tax assets		2,517,235		3,110,665		3,283,766
Deferred tax liability:
Depreciation		(108,704)		(96,725)		(86,091)
Net deferred tax assets before valuation allowance		2,408,531		3,013,940		3,197,675
Valuation allowance		-		(708,385)		(799,419)
Net deferred tax assets	$	2,408,531	$	2,305,555	$	2,398,256

During the fiscal years ended March 31, 2016, March 31, 2015 and March 31, 2014, the Company released portions 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 carryforward periods available under the applicable federal and state laws; and the amount and timing of future taxable income. As of March 31, 2016 the analysis indicated that it is more likely than not that the deferred tax asset recorded will be realized. As a result, approximately $0.7 million, $0.0 million and $0.8 million of the valuation allowance were released during the fiscal years ended March 31, 2016, 2015 and 2014, respectively and there is no remaining valuation remaining as of March 31, 2016.

At March 31, 2016, the Company has federal tax net operating loss carryforwards in the amount of approximately $4.4 million that begin to expire in the year 2029. In addition, the Company has state tax net operating loss carryforwards in the amount of approximately $6.4 million that will begin to expire beginning in 2025.

The Company is no longer subject to income tax examinations for fiscal years before 2013.