Educational Development Corp

6. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising our net deferred tax assets and liabilities as of February 28 (29), are as follows:

	FY2017			FY2016
Current:
Deferred tax assets:
Allowance for doubtful accounts	$	164,600		$	40,000
Inventory overhead capitalization		131,000			131,000
Inventory valuation allowance		9,500			9,500
Allowance for sales returns		72,200			38,000
Accruals		89,300			79,700

Deferred tax assets-current		466,600			298,200

Noncurrent:
Deferred tax assets (liabilities):
Inventory valuation allowance	$	104,500		$	114,000
Property, plant and equipment		(443,100	)		(63,100	)
Capital loss carryforward		163,600			163,600
Subtotal deferred tax assets (liabilities):		(175,000	)		214,500
Less valuation allowance		(163,600	)		(163,600	)

Net deferred tax assets (liabilities)-noncurrent	$	(338,600	)	$	50,900

Management has assessed the evidence to estimate whether sufficient future capital gains will be generated to utilize the existing capital loss carryforward. As no current expectation of capital gains exists, management has determined that a valuation allowance is necessary to reduce the carrying value of the capital loss carryforward deferred tax asset as it is “more likely than not” that such assets are unrealizable.

The amount of the deferred tax asset considered realizable, however, could be adjusted if future capital gains are generated during the carryforward period which ends February 28, 2019. Management has determined that no valuation allowance is necessary to reduce the carrying value of other deferred tax assets as it is “more likely than not” that such assets are realizable.

The amount of the deferred tax liability related to property, plant and equipment and current income tax (payable) receivable could be adjusted if a scheduled future cost segregation analysis, expected to be completed by the end of the second fiscal quarter 2018, results in changes which affect this liability. An estimate of the range of the change in deferred tax liability cannot be made at this time.

The components of income tax expense are as follows:

	February 28 (29),
	2017		2016
Current:
Federal	$	1,267,600	$	1,210,900
State		262,500		234,800
		1,530,100		1,445,700
Deferred:
Federal		186,200		(16,100	)
State		34,900		(3,000	)
		221,100		(19,100	)
Total income tax expense	$	1,751,200	$	1,426,600

The following reconciles our expected income tax expense utilizing statutory tax rates to the actual tax expense:

	February 28 (29),
	2017		2016
Tax expense at federal statutory rate	$	1,568,200	$	1,205,600
Federal income tax audit expense for 2012		-		67,900
State income tax–net of federal tax benefit		182,000		158,200
Other		1,000		(5,100	)
Total income tax expense	$	1,751,200	$	1,426,600

We file our tax returns in the U.S. and certain state jurisdictions. We are no longer subject to income tax examinations by tax authorities for fiscal years before 2013.

Based upon a review of our income tax filing positions, we believe that our positions would be sustained upon an audit and do not anticipate any adjustments that would result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded. We classify interest and penalties associated with income taxes as a component of income tax expense on the statement of earnings.