Note 8. Income Taxes
Components of the provision for income taxes for the years ended June 30, 2017 and 2016 were as follows:
| Years Ended June 30, | ||||||||
| 2017 | 2016 | |||||||
| Current | $ | 1,407,000 | $ | 1,173,000 | ||||
| Deferred | (117,000 | ) | (343,000 | ) | ||||
| Total | $ | 1,290,000 | $ | 830,000 | ||||
The total income tax expense differed from the expected tax expense, computed by applying the federal statutory rate to the Company’s pretax income, as follows:
| Years Ended June 30, | ||||||||
| 2017 | 2016 | |||||||
| Tax expense at statutory federal rate | $ | 1,197,000 | $ | 1,034,000 | ||||
| State income tax expense, net of federal tax effect | 131,000 | 114,000 | ||||||
| Change in valuation allowance on deferred tax assets | — | (308,000 | ) | |||||
| Change in uncertain tax positions | (32,000 | ) | (6,000 | ) | ||||
| Other permanent items | (6,000 | ) | (4,000 | ) | ||||
| Income tax expense | $ | 1,290,000 | $ | 830,000 | ||||
The effective tax rates for the years ended June 30, 2017 and 2016 were 36.7% and 27.3%, respectively.
For the year ended June 30, 2017, the Company recorded an income tax expense of $1,290,000. This amount included a current tax expense of $1,439,000, a deferred benefit of $117,000 and a discrete tax benefit of $32,000 as a result of the lapse of the statute of limitations on uncertain tax positions.
For the year ended June 30, 2016, the Company recorded an income tax expense of $830,000. This amount included a current tax expense of $1,179,000, a deferred benefit of $55,000 and a discrete tax benefit of $294,000, due primarily to the Company’s release of the full valuation allowance against all of its net U.S. net federal and state deferred tax assets during the year.
The significant components of deferred income taxes were as follows:
| June 30, | ||||||||
| 2017 | 2016 | |||||||
| Deferred tax assets (liabilities): | ||||||||
| Revenue recognition and accounts receivable | $ | 143,000 | $ | 154,000 | ||||
| Accrued liabilities | 280,000 | 282,000 | ||||||
| Property and equipment | (534,000 | ) | (518,000 | ) | ||||
| Finite-life intangible assets | 6,000 | (17,000 | ) | |||||
| Stock options | 443,000 | 326,000 | ||||||
| Tax credits and net operating loss carryforwards | 46,000 | 43,000 | ||||||
| Other | 76,000 | 73,000 | ||||||
| Net deferred tax assets | $ | 460,000 | $ | 343,000 | ||||
As of June 30, 2017, the Company has state net operating loss carryforwards of $2,000 which, if unused, will expire in calendar 2034. The Company has state tax credit carryforwards of $45,000 and which if unused, will expire in years 2027 and 2032.
The Company assesses whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, using a “more likely than not” standard. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the likelihood of realization of deferred tax assets. In making such assessments, more weight was given to evidence that could be objectively verified. Future sources of taxable income considered in determining the amount of recorded valuation allowance included:
| ● | Taxable income in prior carryback years, if carryback is permitted under the tax law; | |
| ● | Future reversals of existing taxable temporary differences, excluding those related to indefinite-lived intangible assets; | |
| ● | Tax planning strategies; and | |
| ● | Future taxable income exclusive of reversing temporary differences and carryforwards. |
Based on the evaluation of these factors the Company evaluated all positive and negative evidence, as described above, in determining if the valuation allowance is fairly stated. At December 31, 2015, the Company determined that, based on the profitability it had achieved, historical cumulative profits and estimates of future income, there was sufficient positive evidence to conclude that the likelihood of realization of deferred tax assets outweigh the negative evidence. The full valuation allowance was released, which resulted in the recognition of $288,000 in net deferred tax assets and a decrease in income tax expense for the year ended June 30, 2016.
The Company applies the accounting standard for uncertain tax positions pursuant to which a more-likely-than-not threshold is utilized to determine the recognition and derecognition of uncertain tax positions. Once the more-likely-than-not threshold is met, the amount of benefit to be recognized is the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such a change. The Company does not believe there will be significant changes to the estimates in the next 12 month period. Due to the complexity of some of these uncertainties, the ultimate settlement may result in payments that are different from The Company’s current estimate of tax liabilities, resulting in the recognition of additional charges or benefits to income tax expense.
Changes in the Company’s unrecognized tax benefits were approximately as follows:
| Years Ended June 30, | ||||||||
| 2017 | 2016 | |||||||
| Beginning balance of unrecognized tax benefits | $ | 32,000 | $ | 38,000 | ||||
| Lapse of statute of limitations | (32,000 | ) | (6,000 | ) | ||||
| Ending balance of unrecognized tax benefits | $ | — | $ | 32,000 | ||||
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the fiscal years ended June 30, 2017 and 2016, the amount of recognized interest expense, net of tax benefit, and accrued interest on a gross basis was insignificant. The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. With limited exceptions, tax years prior to fiscal 2014 are no longer open to federal, state and local examination by taxing authorities.