10. Income Taxes:
| 2017 | 2016 | |||||||
| Current tax provision: | ||||||||
| Federal | $ | 803,200 | $ | 1,609,500 | ||||
| State | 800 | 500 | ||||||
| Total current tax provision | 804,000 | 1,610,000 | ||||||
| Deferred tax provision: | ||||||||
| Federal | (146,500 | ) | (51,500 | ) | ||||
| State | (500 | ) | (500 | ) | ||||
| Total deferred tax provision | (147,000 | ) | (52,000 | ) | ||||
| Total tax provision | $ | 657,000 | $ | 1,558,000 | ||||
A reconciliation of provision for income taxes at the statutory rate to income tax provision at the Company's effective rate is as follows:
| 2017 | 2016 | |||||||
| Computed tax provision at the expected statutory rate | $ | 1,015,800 | $ | 1,960,500 | ||||
| State income tax - net of Federal tax benefit | 500 | 400 | ||||||
| Tax effect of permanent differences: | ||||||||
| Research tax credits | (273,000 | ) | (266,000 | ) | ||||
| Other permanent differences | (93,700 | ) | (165,700 | ) | ||||
| Other | 7,400 | 28,800 | ||||||
| Total tax provision | $ | 657,000 | $ | 1,558,000 | ||||
| Effective income tax rate | % | % | ||||||
Significant components of the Company's deferred tax assets and liabilities consist of the following:
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for doubtful receivables | $ | 37,400 | $ | 6,700 | ||||
| Tax inventory adjustment | 213,000 | 95,500 | ||||||
| Allowance for obsolete inventory | 505,800 | 463,600 | ||||||
| Accrued vacation | 77,800 | 73,700 | ||||||
| Accrued commissions | 20,900 | 7,200 | ||||||
| Warranty reserve | 51,800 | 45,400 | ||||||
| Stock options issued for services | 320,100 | 273,000 | ||||||
| Total deferred tax assets | 1,226,800 | 965,100 | ||||||
| Deferred tax liabilities: | ||||||||
| Excess tax depreciation | (797,685 | ) | (682,985 | ) | ||||
| Net deferred tax assets | $ | 429,115 | $ | 282,115 | ||||
Realization of the deferred tax assets is dependent on generating sufficient taxable income at the time temporary differences become deductible. The Company provides a valuation allowance to the extent that deferred tax assets may not be realized. A valuation allowance has not been recorded against the deferred tax assets since management believes it is more likely than not that the deferred tax assets are recoverable. The Company considers future taxable income and potential tax planning strategies in assessing the need for a potential valuation allowance. The amount of the deferred tax assets considered realizable however, could be reduced in the near term if estimates of future taxable income are reduced. The Company will need to generate approximately $3.6 million in taxable income in future years in order to realize the deferred tax assets recorded as of May 31, 2017 of $1,226,800.
The Company and its subsidiary file consolidated Federal and State income tax returns. As of May 31, 2017, the Company had State investment tax credit carryforwards of approximately $275,000 expiring through May 31, 2023.
.
| 32 |