TANDY LEATHER FACTORY INC

. INCOME TAXES

The provision for income taxes consists of the following:

	201 7			201 6		201 5
Current provision:
Federal	$	3,090,997		$	3,108,894	$	3,045,292
State		309,249			486,565		482,186
		3,400,246			3,595,459		3,527,478

Deferred provision (benefit):
Federal		(665,181	)		183,520		212,563
State		(23,692	)		21,591		76,607
		(688,873	)		205,111		289,170

	$	2,711,373		$	3,800,570	$	3,816,648

December 22, 2017,

Tax Cuts

and Jobs Act (the “Tax Act”) was enacted. Except for certain provisions, the Tax Act is effective for tax years beginning on or after

January 1, 2018.

As a fiscal year U.S. taxpayer, the majority of the provisions will apply in

2018,

such as the lowering of the U.S. federal corporate income tax rate to

21%,

eliminating the domestic manufacturing deduction, creating new taxes on certain foreign sourced income and introducing new limitations on certain business deductions. Additionally, because the Tax Act was enacted in

2017,

we were required to record

$340,782

of net income tax expense in the

fourth

quarter of

2017

as follows:

Transition tax on deemed repatriation of certain foreign earnings*	$	514,454
Foreign Withholding Taxes *		290,128
Remeasuring deferred tax position at the lowered income tax rate**		(463,800	)
	$	340,782

*classified as part of the Federal current provision

**classified as part of the Federal deferred benefit

The above amounts were

recorded based on reasonable estimates and our current interpretation of the Tax Act. We are still accumulating and processing data to finalize the underlying calculations and expect regulators to issue further guidance. As such, our estimates

may

subsequently change.

Income before income taxes is earned in the following tax jurisdictions:

	201 7			201 6			201 5
United States	$	6,372,585		$	9,070,894		$	9,272,854
United Kingdom		(171,608	)		(81,987	)		(43,567	)
Canada		1,055,783			1,034,027			813,824
Australia		(88,096	)		82,622			48,633
Spain		(5,540	)		97,273			127,309
	$	7,163,124		$	10,202,829		$	10,219,053

The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows:

	201 7		201 6
Deferred income tax assets:
Capitalized inventory costs	$	198,616	$	265,454
Warrants and share-based compensation		29,047		44,151
Accrued expenses, reserves, and other		44,075		65,631
Total deferred income tax assets	$	271,738	$	375,236

Deferred income tax liabilities:
Property and equipment depreciation	$	1,008,485	$	1,728,265
Goodwill and other intangible assets amortization		155,175		227,767
Transition tax on deemed repatriation of foreign earnings		473,298		-
Total deferred income tax liabilities	$	1,636,958	$	1,956,032

The effective tax rate differs from the statutory rate as follows:

	201 7			201 6			201 5
Statutory rate – Federal US income tax		34	%		34	%		34	%
State and local taxes		6	%		6	%		6	%
Impact of Tax Act		4	%		-			-
Non-U.S. income tax at different rates		(1	%)		-			-
Domestic production activities deduction		(2	%)		(1	%)		(1	%)
Other, net		(3	%)		(2	%)		(2	%)
Effective rate		38	%		37	%		37	%

We file a consolidated U.S. income tax return as well as state tax returns on a consolidated, combined,

or stand-alone basis, depending on the jurisdiction. We are

longer subject to U.S. federal income tax examinations by tax authorities for years prior to the tax year ended

December 2015.

Depending on the jurisdiction, we are

longer subject to state examinations by tax authorities for years prior to the

December 2014

and

December 2015

tax years.