12.

INCOME TAXES

Income taxes consisted of the following:

	Years ended September 30,
	2019		2018
Current tax provision
Federal	$	-	$	-
State		2,200		1,600
Total current tax provision		2,200		1,600
Deferred provision
Federal		484,500		2,017,900
State		85,500		356,100
Total deferred provision		570,000		2,374,000

Provision for income taxes	$	572,200	$	2,375,600

A reconciliation of income taxes at the federal statutory rate of

21%

to the effective tax rate was as follows:

	Years ended September 30,
	2019			2018
Income taxes computed at the federal statutory rate	$	715,000		$	(332,000	)
Change in valuation allowance		(5,000	)		2,711,000
Change in tax rate		-			6,754,000
Expired net operating loss carryforwards		-			441,000
Nondeductible compensation, interest expense and other		40,000			39,000
State income taxes, net of federal tax benefit		155,000			(41,000	)
Change in R&D credit carryover		(66,000	)		(133,000	)
Stock options and other prior year true-ups		(142,000	)		(499,000	)
Acquired deferred tax assets of Genasys Spain		(7,800	)		(6,564,400	)
Refundable Federal AMT Credit		28,000			-
State business credit utilization		(145,000	)		-
Provision for income taxes	$	572,200		$	2,375,600

The types of temporary differences between the tax basis of assets and liabilities and their approximate tax effects that give rise to a significant portion of the net deferred tax asset at

September

30,

2019

and

2018

were as follows:

	At September 30,
	2019			2018
Deferred tax assets
Net operating loss carryforwards	$	12,682,000		$	13,644,000
Research and development credit		5,856,000			5,805,000
Share-based compensation		506,000			532,000
Equipment		(78,000	)		(41,000	)
Patents		24,000			35,000
Accruals and other		1,222,000			818,000
State tax deduction		(6,000	)		(5,000	)
Federal AMT Credit		24,000			53,000
Allowances		169,000			133,000
Gross deferred tax asset		20,399,000			20,974,000
Less valuation allowance		(15,012,000	)		(15,017,000	)
Total deferred tax assets, net of valuation allowance	$	5,387,000		$	5,957,000

September

30,

2019,

the Company had net deferred tax assets of approximately

$5,387,000.

The deferred tax assets are primarily composed of federal and state NOL carryforwards and federal and state research and development (“R&D”) credit carryforwards. At

September

30,

2019,

the Company had federal NOL carryforwards of approximately

$44,398,000,

which expire from

2022

through

2037.

The Company also has an estimated

$2,257,000

and

$794,000

of federal and state R&D tax credits, respectively, at

September

30,

2019,

a portion of which will begin to expire in the

2020

tax year.

The Company reviews its ability to realize its deferred tax assets on a quarterly basis. In doing so, management considers historical and projected taxable income of the Company, along with any tax planning strategies and any other positive or negative evidence. Realization is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards and other deferred assets. The Company has sustained profitability over

seven

of the

ten

most recent fiscal years. In the past few years, the Company has developed products and expanded its marketing efforts into the mass notification market, which is a very large and growing market. While the Company is still in the early stages of market penetration, it has increased its confidence in forecasted taxable income based on growth opportunities in this market. It has also increased its forecasted revenues and taxable income for its directional product opportunities, where it is a leading player in the world market. As a result, during the quarter ended

September 30, 2015,

the Company determined it was more likely than

not

that a portion of the deferred tax assets will be realized and, accordingly, released a portion of the valuation allowance. While the Company has cumulative income from

2017

2019,

future profits are uncertain and a portion of the Company’s tax attributes

may

expire prior to utilization. The Company adjusted its deferred tax asset value in the quarter ended

September 30, 2019

and continues to maintain a valuation allowance of

$15,012,000.

Since future financial results

may

differ from previous estimates, periodic adjustments to the Company’s valuation allowances

may

be necessary.

As of

September 30, 2019,

the Company had

unrecognized tax benefits. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

The Company is subject to taxation in the U.S. and various state jurisdictions. All of the Company’s historical tax years are subject to examination by the Internal Revenue Service and various state jurisdictions due to the generation of NOL and credit carryforwards.

The Tax Cuts and Jobs Act (the “Act”) was enacted on

December 22, 2017.

The Act reduces the U.S. federal corporate tax rate from

35%

21%

effective

January 1, 2018.

Subsequently, the SEC issued Staff Accounting Bulletin (“SAB”)

118,

which allows for the recording of provisional amounts related to U.S. tax reform and subsequent adjustments related to U.S. tax reform during a measurement period

not

to exceed

one

year from the enactment date. Accordingly, the Company remeasured its net deferred tax assets on a provisional basis based on the rates at which they are expected to be realized in the future, which is generally

21%

resulting in a decrease to our net deferred tax assets of

$2,

74,000

for the year ended

September

30,

2018.

As of

September 30, 2019,

the Company’s accounting for the applicable elements of the legislation is complete and there were

material changes to the provisional amounts previously recorded.