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 made 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 reduced the corporate tax rate to 21%, effective January 1, 2018. The accounting for this portion of the TCJA 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:

	Fiscal Year Ended
	March 31,		March 31,
	2019		2018
Current:
Federal	$	-	$	-
State and local		-		1,500

Total current tax provision		-		1,500

Deferred:
Federal		-		(65,000	)
State and local		-		-

Total deferred tax benefit		-		(65,000	)

Total provision	$	-0-	$	(63,500	)

The approximate values of the components of the Company’s deferred taxes at March 31, 2019 and 2018 are as follows:

	March 31,			March 31,
	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	1,345,245		$	1,482,880
Tax credits		329,032			329,032
Charitable contributions		116			85
Legal damages		1,117,904			1,070,763
Allowance for doubtful accounts		1,576			1,587
Reserve for inventory obsolescence		104,626			88,878
Inventory capitalization		70,633			100,604
Vacation accrual		68,416			73,403
Warranty reserve		24,794			23,697
Deferred revenues		76,009			84,165
Stock options		15,687			15,801
Non-compete agreement		-			1,306
AMT credit		63,500			63,500
Depreciation		5,070			5,533
Deferred tax asset		3,222,608			3,341,234
Less valuation allowance		(3,159,108	)		(3,277,734,	)

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

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 $6,405,000 as of March 31, 2019. These carryforward losses are available to offset future taxable income, and begin to expire in the year 2027. New Jersey State NOL carryforwards approximate $5,526,000 as of March 31, 2019. 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 $3,159,108 was recorded at March 31, 2019.

A reconciliation of the income tax (benefit) provision at the statutory Federal tax rate of 21% and 31.55% for the years ended March 31, 2019 and 2018, respectively, to the income tax (benefit) provision recognized in the financial statements is as follows:

	March 31,			March 31,
	2019			2018

Income tax (benefit) provision – statutory rate	$	42,638		$	(1,383,723	)
Income tax expenses – state and local, net of federal benefit		1,027			(6,190	)
Permanent items		32,031			11,133
Change in value of warrants – permanent difference		9,135			(29,973	)
True-up of prior year’s deferred taxes		15,386			(10,228	)
Valuation allowance		(118,625	)		(349,875	)
Rate changes		3,102			1,697,766
Other		15,306			7,590

Income tax provision (benefit)	$	-0-		$	(63,500	)