(11) Income Taxes
Income tax benefit (provision) for the years ended June 30 consists of:
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| Current |
| Deferred |
| Total |
| 2017: |
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| U.S. federal |
| $ | - | $ | - | $ | - | ||||
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| State and local |
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| - |
| - |
| - | ||||
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| $ | - | $ | - | $ | - | ||||
| 2016: |
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| U.S. federal |
| $ | - | $ | 40,245 | $ | 40,245 | ||||
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| State and local |
| - |
| 24,306 |
| 24,306 | |||||
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| $ | - | $ | 64,551 | $ | 64,551 |
The actual income tax benefit (provision) differs from the “expected” tax benefit (provision) computed by applying the U.S. federal corporate income tax rate of 34% to income (loss) before income taxes for the years ended June 30, are as follows:
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| 2017 |
| 2016 |
| Expected tax benefit | $ | 634,574 | $ | 668,716 | ||||||
| State taxes, net of federal tax benefit |
| 57,176 |
| 63,844 | ||||||
| R&D tax credit |
| 40,000 |
| 86,659 | ||||||
| Valuation allowance |
| (772,288) |
| (744,724) | ||||||
| Incentive stock options |
| (11,284) |
| (6,105) | ||||||
| Other, net |
| 51,822 |
| (3,839) | ||||||
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| $ | - | $ | 64,551 | ||||||
Deferred income tax assets and liabilities related to the tax effects of temporary differences are as follow as of June 30:
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| 2017 |
| 2016 |
| Net deferred income tax assets (liabilities): |
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| Inventory capitalization for income tax purposes | $ | 92,681 | $ | 57,079 | |||||
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| Inventory reserve |
| 157,068 |
| 162,146 | |||||
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| Warranty reserve |
| 78,780 |
| 59,516 | |||||
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| Accrued product liability |
| 9,103 |
| 5,875 | |||||
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| Allowance for doubtful accounts |
| 149,110 |
| 151,730 | |||||
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| Property and equipment, principally due to differences in depreciation |
| (103,308) |
| (71,038) | |||||
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| Research and development credit carryover |
| 351,903 |
| 304,669 | |||||
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| Other intangibles |
| (45,256) |
| (62,448) | |||||
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| Deferred gain on sale lease-back |
| 846,061 |
| 863,370 | |||||
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| Operating loss carry forwards |
| 1,428,119 |
| 721,074 | |||||
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| Valuation allowance |
| (2,964,261) |
| (2,191,973) | |||||
| Total deferred income tax assets (liabilities) | $ | - | $ | - | ||||||
A valuation allowance is required when there is significant uncertainty as to the realizability of deferred income tax assets. The ability to realize deferred income tax assets is dependent upon the Company’s ability to generate sufficient taxable income within the carryforward periods as provided in the tax law for each tax jurisdiction. The Company has considered the following possible sources of taxable income when assessing the realization of its deferred income tax assets:
· future reversals of existing taxable temporary differences;
· future taxable income or loss, exclusive of reversing temporary differences and carryforwards;
· tax-planning strategies; and
· taxable income in prior carryback years.
The Company considered both positive and negative evidence in determining the need for a valuation allowance, including the following:
Positive evidence:
· Current forecasts indicate that the Company will generate pre-tax income and taxable income in the future. However, there can be no assurance that the new strategic plans will result in profitability.
· A majority of the Company’s tax attributes have indefinite carryover periods.
Negative evidence:
· The Company has several years of cumulative losses as of June 30, 2017.
The Company places more weight on objectively verifiable evidence than on other types of evidence and management currently believes that available negative evidence outweighs the available positive evidence. Management has therefore determined that the Company does not meet the "more likely than not" threshold that deferred income tax assets will be realized and has implemented a full valuation allowance against the tax benefit for fiscal years 2017 and 2016. Any reversal of the valuation allowance will favorably impact the Company’s results of operations in the period of reversal.
The anticipated accumulated NOL carry forward from fiscal year 2017 is approximately $3,577,000 that will begin to expire in 2038. The Company has no uncertain tax positions as of June 30, 2017.