NOTE 11—INCOME TAXES

 

Income tax expense (benefit) from continuing operations in the consolidated statements of operations and comprehensive (loss) income consists of:

 

		Years Ended December 31,
		2017			2016
Current:
Federal		$	(373,000)		$	766,000
State and local			36,000			208,000
Foreign			62,000			41,000
Total current			(275,000)			1,015,000
Deferred:
Federal			980,000			(3,638,000)
State and local			(63,000)			(308,000)
Foreign			(7,000)			(24,000)
Total deferred			910,000			(3,970,000)
Totals		$	635,000		$	(2,955,000)

 

The Company has state net operating loss carryforwards of $2,893,000, which expire through 2037.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

 

The Company calculated its best estimate of the impact of the 2017 Act in our year-end income tax provision in accordance with its understanding of the 2017 Act and guidance available as of the date of this filing and as a result recorded $643,000 as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $588,000. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $55,000 based on cumulative foreign earnings of $352,000.

 

The 2017 Act also puts in place new tax laws that will apply prospectively, which include, but are not limited to, (1) implementing a base erosion and anti-abuse tax, (2) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (3) a new provision designed to tax currently in the U.S. global intangible low-taxed income (“GILTI”) of foreign subsidiaries, which allows for the possibility of utilizing foreign tax credits to offset the income tax liability (subject to some limitations), and (4) a lower effective U.S. tax rate on certain revenues from sources outside the U.S.

 

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. In accordance with SAB 118, the Company has determined that the $588,000 of the deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $55,000 of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional and a reasonable estimate at December 31, 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

 

Deferred tax assets (liabilities) consist of:

 

		December 31,
		2017			2016
Deferred tax assets:
Bad debt reserves		$	15,000		$	28,000
Inventory reserves			570,000			1,185,000
Warranty and other reserves			121,000			255,000
Stock-based compensation			240,000			485,000
Goodwill			1,066,000			1,962,000
Acquisition costs			58,000			—
Net operating losses - state			66,000			—
Other			8,000			11,000
			2,144,000			3,926,000
Deferred tax (liabilities):
Prepaid expenses			(152,000)			(177,000)
Depreciation			(481,000)			(720,000)
Intangibles			(639,000)			(1,236,000)
Net deferred tax assets		$	872,000		$	1,793,000

The components of (loss) income from continuing operations before income taxes consisted of the following:

 

		Years ended December 31,
		2017			2016
United States operations		$	(476,000)		$	(8,790,000)
International operations			227,000			152,000
Income before tax		$	(249,000)		$	(8,638,000)

 

A reconciliation of the Federal statutory rate to the total effective tax rate applicable to (loss) income from continuing operations is as follows:

 

		Years ended December 31,
		2017			2016
Federal income tax computed at statutory rates			(34.0)	%		(34.0)	%
(Decrease) increase in taxes resulting from:
State and local taxes, net of Federal tax benefit			(7.2)			(0.8)
Permanent differences - net			11.6			0.3
Foreign rate differential			(9.2)			(0.4)
Tax Cuts and Jobs Act of 2017			257.6			—
Share based compensation			46.4			—
Other			(10.2)			0.7
Income tax (benefit) expense			255.0	%		(34.2)	%

 

The Company follows the authoritative guidance issued by the FASB that pertains to the accounting for uncertain tax matters. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

 

Balance January 1, 2016		$	432,000
Lapse of statute of limitations			(143,000)
Interest accrual			22,000
Balance at January 1, 2017			311,000
Lapse of statute of limitations			(311,000)
Balance December 31, 2017		$	—

 

 

The Company files a consolidated Federal tax return. The Company and certain of its subsidiaries file tax returns in various U.S. state jurisdictions. Its foreign subsidiary, UAT, files in the United Kingdom. With few exceptions, the years that remain subject to examination are the years ended December 31, 2014 through December 31, 2016. During the current year, the Company received notification from the Internal Revenue Service of an examination for the year ended December 31, 2015. As of December 31, 2017, no significant preliminary audit findings were received by the Company and no reserves have been recorded.

 

Interest and penalties, if any, related to income tax liabilities are included in income tax expense.