7. Income Taxes

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TJCA makes broad changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) eliminating the corporate alternative minimum tax; (3) creating a new limitation on deductible interest expense; (4) creating the base erosion and anti-abuse tax, a new minimum tax; (5) limitation on the deductibility of certain executive compensation; (6) enhancing the option to claim accelerated depreciation deductions on qualified property, and (7) changing the rules related to uses and limitations of NOLs in tax years beginning after December 31, 2017.

The TCJA reduces the corporate tax rate to 21%, effective January 1, 2018. The accounting for this portion of the TCJA has caused a reduction to the net deferred tax assets before valuation allowance of approximately $1.2 million for the year ended March 31, 2018. However, as discussed below, the Company maintains a full valuation allowance against its deferred tax assets. As a result, the $1.2 million reduction to the Company’s deferred tax assets is offset by a corresponding $1.2 million reduction in the Company’s valuation allowance, resulting in no net impact to the Company’s tax provision.

Income tax (benefit) provision:

	Fiscal Year Ended
	March 31,			March 31,
	2018			2017
Current:
Federal	$	-		$	(1,018	)
State and local		1,500			1,500

Total current tax provision		1,500			482

Deferred:
Federal		(65,000	)		2,643,357
State and local		-			276

Total deferred tax provision		(65,000	)		2,643,633

Total provision	$	(63,500	)	$	2,644,115

The approximate values of the components of the Company’s deferred taxes at March 31, 2018 and 2017 are as follows:

	March 31,			March 31,
	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	1,482,880		$	1,645,868
Tax credits		329,032			329,032
Charitable contributions		85			102
Legal damages		1,070,763			956,000
Allowance for doubtful accounts		1,587			2,561
Reserve for inventory obsolescence		88,878			112,671
Inventory capitalization		100,604			105,998
Vacation accrual		73,403			133,276
Warranty reserve		23,697			64,340
Deferred revenues		84,165			162,757
Stock options		15,801			25,494
Non-compete agreement		1,306			5,941
AMT credit		63,500			66,106
Depreciation		5,533			18,412
Deferred tax asset		3,341,234			3,628,558
Less valuation allowance		(3,277,734,	)		(3,628,558	)

Deferred tax asset, net	$	63,500		$	-0-

The recognized deferred tax asset is based upon the expected utilization of its benefit from future taxable income. The Company has federal net operating loss (“NOL”) carryforwards of approximately $7,018,000 as of March 31, 2018. These carryforward losses are available to offset future taxable income, and begin to expire in the year 2027. New Jersey State NOL carryforwards approximate $6,119,000 as of March 31, 2018. New Jersey State NOL carryforwards expire in 20 years, and certain of these amounts begin to expire in 2030.

The foregoing amounts are management’s estimates, and the actual results could differ from those estimates. Future profitability in this competitive industry depends on continually obtaining and fulfilling new profitable sales agreements and modifying products. The inability to obtain new profitable contracts or the failure of the Company’s engineering development efforts could reduce estimates of future profitability, which could affect the Company’s ability to realize the deferred tax assets. It is management’s belief that the deferred tax assets is not more likely than not to be fully realized, and as a result, a valuation allowance of $3,277,734 was recorded at March 31, 2018.

A reconciliation of the income tax (benefit) provision at the statutory Federal tax rate of 31.55% to the income tax (benefit) provision recognized in the financial statements is as follows:

	March 31,			March 31,
	2018			2017

Income tax (benefit) provision – statutory rate	$	(1,383,723	)	$	(711,344	)
Income tax expenses – state and local, net of federal benefit		(6,190	)		(2,404	)
Permanent items		11,133			12,870
Change in value of warrants – permanent difference		(29,973	)		(109,209	)
True-up of prior year’s deferred taxes		(10,228	)		(25,178	)
Valuation allowance		(349,875	)		3,490,778
Rate changes		1,697,766			(7,776	)
Other		7,590			(3,622	)

Income tax provision (benefit)	$	(63,500	)	$	2,644,115