INCOME TAXES

12 Months Ended

Mar. 31, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

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, 2022 and 2021, the Macau Subsidiary recorded no tax provision.

The U.S. Federal net operating loss carryforward is subject to an IRS Section 382 limitation. As of both March 31, 2022 and 2021, the Company had net deferred tax assets of approximately $0.9 million. For the fiscal year ended March 31, 2022 we determined our effective tax rate to be approximately 20.0% and we recorded a tax provision of approximately $0.1 million which was net of a valuation reserve of approximately $78,000 for deferred tax assets that will most likely expire prior to being realized. For the fiscal year ended March 31, 2021 we determined our effective tax rate to be approximately 17.4% and we recorded a tax provision of approximately $0.5 million which was net of a valuation reserve of approximately $23,000 for deferred tax assets that will most likely expire prior to being realized. The Company also recorded an income tax receivable of approximately $13,000 due to the availability of net operating loss carrybacks and alternative minimum tax credits that were realized for the year ended March 31, 2022. The income tax receivable was included as a component of prepaid expenses and other current assets on the accompanying consolidated balance sheet as of March 31, 2022.

The income tax provision (benefit) for federal, foreign, and state income taxes in the consolidated statements of income consisted of the following components for 2022 and 2021:

	2022			2021
Income tax provision:
Current:
Federal	$	62,699		$	54,487
State		-			3,825
Total current Federal and State tax provision	$	62,699		$	58,312
Deferred:
Federal	$	(59,434	)	$	417,477
State		54,039			(18,920	)
Total Deferred Federal and State		(5,395	)		398,557
Total income tax provision	$	57,304		$	456,869

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

March 31, 2022 and 2021

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

	2022			2021
United States	$	(260,911	)	$	1,922,947
Foreign		548,686			706,287
	$	287,775		$	2,629,234

The actual tax provision differs from the “expected” tax for the years ended March 31, 2022 and 2021 (computed by applying the U.S. Federal Corporate tax rate of 21 percent to income before taxes) as follows:

	2022			2021
Expected tax provision	$	60,324		$	551,982
State income taxes, net of Federal income tax provision		13,816			128,699
Permanent differences		10,290			(6,578	)
Tax rate differential on foreign earnings		(83,954	)		(108,690	)
Change in valuation allowance		55,375			(65,193	)
Other		1,453			(43,351	)
Tax provision	$	57,304		$	456,869

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

	2022			2021
NOL Federal Carryforward	$	238,955		$	246,769
State NOL Carryforward		181,943			194,388
Inventory differences		415,404			348,921
Stock option compensation expense		117,159			115,730
Section 163(j)		62,801			-
Allowance for doubtful accounts		31,619			35,877
Reserve for estimated returns		79,109			111,887
Accrued vacation		10,143			13,186
		1,137,133			1,066,758
Less: valuation allowance		(78,024	)		(22,649	)
Net deferred tax asset		1,059,109			1,044,109
Depreciable and amortizable assets		(117,595	)		(119,242	)
Prepaid expenses		(48,955	)		(37,703	)
Net deferred tax liability		(166,550	)		(156,945	)
	$	892,559		$	887,164

The Company performed an analysis in accordance with the provisions of ASC 740, which requires 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. At March 31, 2022, the Company evaluated the realizability of its deferred tax assets in accordance with accounting principles generally accepted in the United States of America and concluded that a $78,024 valuation allowance against deferred tax assets was necessary. The recognition of the remaining net deferred tax asset and corresponding tax benefit is based upon the Company’s conclusions regarding, among other considerations, the Company’s history of earnings and projected earnings for fiscal year 2023 and in the future.

At March 31, 2022, the Company has federal tax net operating loss carryforwards in the amount of approximately $1.1 million that begin to expire in the year 2025. The net operating loss carryforward is subject to an IRS Section 382 limitation that limited the amount available to use beginning in Fiscal 2020 to approximately $0.15 million per year. In addition, the Company has state tax net operating loss carryforwards of approximately $3.4 million that will begin to expire beginning in 2024. These tax net operating loss carryforwards may be subject to adjustment based on future changes in control (See Note 19 – Subsequent Events).

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022 and 2021