NOTE 5 - Income Taxes

 

The provision for income taxes is comprised of the following (in thousands):

 

		For the Years Ended June 30,
		2017			2016			2015
Current income taxes:
Federal		$	280		$	(31)		$	(49)
State			55			27			35
			335			(4)			(14)
Deferred income tax provision			361			375			230
Provision for income taxes		$	696		$	371		$	216

 

A reconciliation of the U.S. Federal statutory income tax rate to our actual effective tax rate on earnings before income taxes is as follows for the years ended June 30, (dollars in thousands):

 

		2017							2016							2015
		Amount			% of Pre-tax Income				Amount			% of Pre-tax Income				Amount			% of Pre-tax Income
Tax at Federal statutory rate		$	2,140			34.0	%		$	2,089			34.0	%		$	1,721			34.0	%
Increases (decreases) in taxes resulting from:
Meals and entertainment			68			1.1	%			61			1.0	%			66			1.3	%
State income taxes, net of Federal income tax benefit			28			0.4	%			20			0.3	%			21			0.4	%
Foreign source income not subject to tax			(1,286)			(20.4)	%			(1,278)			(20.8)	%			(1,069)			(21.1)	%
R&D Credit refund			(286)			(4.5)	%			(415)			(6.8)	%			(328)			(6.5)	%
Undistributed foreign earnings			—			—	%			(90)			(1.4)	%			(93)			(1.8)	%
Other, net			32			0.5	%			(16)			(0.3)	%			(102)			(2.0)	%
Effective tax rate		$	696			11.1	%		$	371			6.0	%		$	216			4.3	%

 

Deferred tax assets and deferred tax liabilities at June 30, 2017 and 2016 are as follows (in thousands):

 

		Deferred Tax Assets (Liabilities)
		2017			2016
Accounts receivable		$	26		$	26
Inventories			586			564
Accrued Liabilities			453			400
Stock based compensation expense			28			154
Intangibles			(258)			(14)
R&D credit			1,427			1,214
Property, plant and equipment			(579)			(503)
Other deferred tax liabilities			(1,039)			(702)
			644			1,139
Valuation allowance			—			—
Net deferred tax assets		$	644		$	1,139

 

The Company has identified the United States and New York State as its major tax jurisdictions. The fiscal 2012 and forward years are still open for examination.

 

During the year ending June 30, 2017 the Company increased its reserve for uncertain income tax positions by $35,000. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes. As of June 30, 2017, the Company had accrued interest totaling $0 and $183,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. The Company uses the flow through method to account for investment tax credits earned on eligible research and development expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax expense.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

		Tax			Interest			Total
Balance of gross unrecognized tax benefits as of July 1, 2015		$	102		$	—		$	102
Increases to unrecognized tax benefits resulting from the generation of additional R&D credits			46			—			46
Balance of gross unrecognized tax benefits as of June 30, 2016			148		$	—			148
Increases to unrecognized tax benefits resulting from the generation of additional R&D credits			35			—			35
Balance of gross unrecognized tax benefits as of June 30, 2017		$	183		$	—		$	183

 

The Company plans to permanently reinvest a substantial portion of its foreign earnings and as such has not provided US corporate taxes on the permanently reinvested earnings. As of June 30, 2017, the Company had approximately $12.4 million of undistributed earnings of foreign subsidiaries.