INCOME TAXES

12 Months Ended

Mar. 31, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 13 - 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 was exempt from the Macau income tax for the fiscal year ended March 31, 2022. For the fiscal years ended March 31, 2023 and 2022, the Macau Subsidiary recorded a tax provision of approximately $34,000 and $0, respectively.

The U.S. Federal net operating loss carryforward is subject to an IRS Section 382 limitation. As of March 31, 2023 and 2022, the Company had net deferred assets of $0.0 million and $0.9 million, respectively. For the fiscal ended March 31, 2023 we determined our effective tax rate to be approximately (28.6%) and we recorded a tax provision of approximately $1.0 million which included a full valuation allowance of approximately $2.1 million for deferred tax assets that will more likely than not, expire prior to being realized.

For the fiscal year ended March 31, 2022, the Company determined its effective tax rate to be approximately 20.0% and the Company 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. 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 operations consisted of the following components for 2023 and 2022:

	2023			2022
Income tax (benefit) provision:
Current:
Federal	$	108,756		$	62,699
State		-			-
Other		(5,231	)
Macau		34,390			-
Total current Federal and State tax	$	137,915		$	62,699
Deferred:
Federal	$	686,357		$	(59,434	)
State		206,202			54,039
Total Deferred Federal and State		892,559			(5,395	)
Total income tax provision	$	1,030,474		$	57,304

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022

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

	2023			2022
United States	$	(3,526,258	)	$	(260,911	)
Foreign		(81,730	)		548,686
	$	(3,607,988	)	$	287,775

The actual tax provision differs from the “expected” tax for the years ended March 31, 2023 and 2022 (computed by applying the U.S. Federal Corporate tax rate of 21 percent to income before taxes) as follows:

	2023			2022
Expected tax (benefit) provision	$	(757,640	)	$	60,324
State income taxes, net of Federal income tax provision		(174,179	)		13,816
Permanent differences		13,445			10,290
Permanent difference in ERC income		(98,814	)		-
Tax rate differential on foreign earnings		21,109			(83,954	)
Change in valuation allowance		2,026,133			55,375
Other		420			1,453
Tax provision	$	1,030,474		$	57,304

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

	2023			2022
NOL Federal Carryforward	$	867,443		$	238,955
State NOL Carryforward		341,237			181,943
Inventory differences to Inventory valuation		623,021			415,404
Stock option compensation expense		183,732			117,159
Right of use liabilty		118,227			-
Business interest limitation		138,335			62,801
Allowance for doubtful accounts		42,871			31,619
Reserve for estimated returns		89,070			79,109
Accrued vacation		13,786			10,143
		2,417,722			1,137,133
Less: valuation allowance		(2,104,157	)		(78,024	)
Net deferred tax asset		313,565			1,059,109
Depreciable and amortizable assets		(133,630	)		(117,595	)
Right of use asset		(111,216	)
Prepaid expenses		(68,719	)		(48,955	)
Net deferred tax liability		(313,565	)		(166,550	)
	$	-		$	892,559

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. On March 31, 2023, 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 valuation allowance of approximately $2.1 million 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, cumulative net loss during the past three years and projected earnings for fiscal year 2024 and in the future.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022

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 ownership.