NOTE 3
INCOME TAXES
The provision for income taxes is as follows:
| Year ended May 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Current |
$ | 28,009 | $ | 20,002 | $ | 10,087 | ||||||
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Deferred |
(356,169 | ) | (533,357 | ) | 3,558 | |||||||
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Change in valuation allowance |
356,169 | 533,357 | (3,558 | ) | ||||||||
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Total provision for income taxes |
$ | 28,009 | $ | 20,002 | $ | 10,087 | ||||||
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Deferred tax assets are comprised of the following components:
| 2017 | 2016 | |||||||
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Basis difference of assets |
$ | 307,846 | $ | 321,511 | ||||
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Inventory related items |
287,543 | 276,887 | ||||||
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Other reserves and liabilities |
122,083 | 119,460 | ||||||
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Net operating loss carryforward |
1,723,418 | 1,369,399 | ||||||
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General business and other credit carryforward |
449,048 | 454,246 | ||||||
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Other deferred items, net |
20,667 | 12,933 | ||||||
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Gross deferred tax assets |
2,910,605 | 2,554,436 | ||||||
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Deferred tax asset valuation allowance |
(2,910,605 | ) | (2,554,436 | ) | ||||
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Net deferred tax asset |
$ | 0 | $ | 0 | ||||
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Deferred tax assets are evaluated and a valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company has recorded a substantial deferred tax asset related to temporary differences between book and tax bases of assets and liabilities. During the years ended May 31, 2017, 2016 and 2015, the Company increased its valuation allowance $356,169, $533,357 and $3,558 respectively, as a result of the increase in the Company’s deferred tax assets. The Company has provided a full valuation allowance against all of its deferred tax assets as the recent losses have been given more weight than projected future income when determining the need for a valuation allowance.
The Company has federal net operating loss carryforwards of approximately $4.0 million which begin to expire in 2030 along with the federal general business and other credit carryforwards. The Company has state net operating loss carryforwards of approximately $4.6 million which begin to expire in 2024.
The provision for income taxes differs from the amount of income taxes determined by applying the U.S. statutory federal tax rate to pre-tax loss due to the following:
| Year ended May 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Statutory federal tax rate |
(34.0 | )% | (34.0 | )% | (34.0 | )% | ||||||
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State taxes, net of federal benefit |
(4.4 | ) | (4.4 | ) | (4.4 | ) | ||||||
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Change in deferred tax valuation allowance |
34.1 | 35.7 | 3.8 | |||||||||
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Stock-based compensation |
2.2 | 1.2 | 28.1 | |||||||||
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R&E tax credits |
1.6 | 0.7 | (21.6 | ) | ||||||||
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Effect of foreign income tax rates |
(0.3 | ) | 1.1 | 11.1 | ||||||||
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Permanent and other differences |
3.5 | 1.0 | 29.1 | |||||||||
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Effective tax rate |
2.7 | % | 1.3 | % | 12.1 | % | ||||||
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Each year the Company files income tax returns in the various federal, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the taxing authorities. Positions challenged by the taxing authorities may be settled or appealed by the Company. As a result, there is an uncertainty in income taxes recognized in the Company’s financial statements in accordance with ASC Topic 740. The Company applies this guidance by defining criteria that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement, derecognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure, and transition. The liability for unrecognized tax benefits was $0 as of May 31, 2017 and 2016.
Interest and penalties associated with uncertain tax positions are recognized as components of the “Provision for income taxes.” The liability for payment of interest and penalties was $0 as of May 31, 2017 and 2016.
Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax years ended May 31, 2014 and after are subject to examination. In the United Kingdom, tax years ended May 31, 2012 and after are subject to examination. In Canada, tax years ended May 31, 2014 and after are subject to examination.