TECHPRECISION CORP

NOTE 9 - INCOME TAXES

We account for income taxes under the provisions of FASB ASC 740, Income Taxes. The following table reflects income (loss) from continuing operations by location, and the provision and benefit for income taxes and the effective tax rate for the applicable fiscal years ended March 31:

	2017		2016
U.S. operations	$	2,268,906	$	1,409,487
Foreign operations		(23,056)		(51,801)
Income from operations before tax		2,245,850		1,357,686
Income tax benefit		(2,834,319)		(768)
Net income	$	5,080,169	$	1,358,454

The income tax benefit consists of the following as of March 31:

	2017		2016
Current
Federal	$	37,361	$	9,032
State		—		(9,800)
Total Current	$	37,361	$	(768)
Deferred
Federal		(2,320,258)		—
State		(551,422)		—
Total Deferred	$	(2,871,680)	$	(768)
Income tax benefit	$	(2,834,319)	$	(768)

Reconciliation between income taxes computed at the U.S. federal statutory rate to the actual tax benefit for income taxes reported in the Consolidated Statements of Operations and Comprehensive Income for fiscal years ended March 31:

	2017		2016
Federal statutory income tax	$	763,589	$	461,613
State income tax, net of federal benefit		41,603		(6,468)
Change in valuation allowance		(3,580,148)		(485,846)
Stock based compensation		—		23,096
Other		(59,363)		6,887
Income tax benefit	$	(2,834,319)	$	(768)

We adopted the new presentation of deferred taxes requiring deferred income tax assets and liabilities to be classified as noncurrent in our Consolidated Balance Sheets in the fourth quarter of fiscal 2016, on a prospective basis. The following table summarizes the components of deferred income tax assets and liabilities:

	2017		2016
Deferred Tax Assets:
Compensation	$	162,571	$	307,427
Loss on uncompleted contracts		58,409		180,521
Foreign currency translation adjustment		5,508		5,455
Other liabilities not currently deductible		364,569		265,455
Share based compensation awards		245,811		92,744
Net operating loss carryforward		4,093,968		4,950,542
Valuation allowance		(1,537,726)		(5,117,874)
Total Deferred Tax Assets	$	3,393,110	$	684,270
Deferred Tax Liabilities:
Accelerated depreciation	$	(521,430)	$	(684,270)
Total Deferred Tax Liabilities	$	(521,430)	$	(684,270)
Net Deferred Tax Asset	$	2,871,680	$	—

In assessing the recoverability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We have determined that it is more likely than not that certain future tax benefits may not be realized. Accordingly, a valuation allowance has been recorded against deferred tax assets that are unlikely to be realized. Realization of the remaining deferred tax assets will depend on the generation of sufficient taxable income in the appropriate jurisdictions, the reversal of deferred tax liabilities, tax planning strategies and other factors prior to the expiration date of the carryforwards. A change in the estimates used to make this determination could require an increase in deferred tax assets if they become realizable.

The valuation allowance on deferred tax assets at March 31, 2017 was $1.5 million as compared to $5.1 million at March 31, 2016, a decrease of $3.6 million. The decrease was primarily related to the release of a valuation allowance on deferred tax assets which are no longer required primarily as a result of achieving sustained profitability in certain tax jurisdictions. We believe that it is more likely than not that the benefit from certain state and foreign NOL carryforwards and other deferred tax assets will not be realized. In recognition of this risk, we have provided a valuation allowance of $1.5 million on these items. In the event future taxable income is below management’s estimates or is generated in tax jurisdictions different than projected, the Company could be required to increase the valuation allowance for deferred tax assets. This would result in an increase in the Company’s effective tax rate.

The following table summarizes carryforwards of net operating losses and tax credits as of March 31, 2017:

			Begins to
	Amount		Expire:
Federal net operating losses	$	6,589,720		2026
Federal alternative minimum tax credits	$	122,578		Indefinite
State net operating losses	$	26,022,238		2032

The Internal Revenue Code provides for a limitation on the annual use of net operating loss carryforwards following certain ownership changes that could limit our ability to utilize these carryforwards on a yearly basis. We experienced an ownership change in connection with the acquisition of Ranor in 2006. Accordingly, our ability to utilize certain carryforwards relating to 2006 and prior is limited. Our remaining pre-2006 net operating losses total approximately $1.2 million. As such, at March 31, 2017, we have approximately $5.4 million of post-2006 losses available for carryforward, without limitation. U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, we may not be able to take full advantage of these carryforwards for Federal or state income tax purposes.

We have not accrued any penalties with respect to uncertain tax positions. We file income tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions. Our foreign subsidiary files separate income tax returns in China, the foreign jurisdiction in which it is located. Tax years 2013 and forward remain open for examination. We recognize interest and penalties accrued related to income tax liabilities in selling, general and administrative expense in our Consolidated Statements of Operations and Comprehensive Income.