TALON INTERNATIONAL, INC.

NOTE

- INCOME TAXES

The components of the provision for income taxes included in the consolidated statements of operations are as follows:

	Years Ended December 31,
	2016			2015		2014
Current:
Federal	$	-		$	-	$	-
State		(129	)		3,294		5,596
Foreign		280,429			190,181		445,696
Total current		280,300			193,475		451,292
Deferred:
Federal		491,014			56,835		259,028
State		328,380			4,051		68,214
Foreign		(2,369	)		7,300		(22,168	)
Total deferred		817,025			68,186		305,074
Total	$	1,097,325		$	261,661	$	756,366

A reconciliation of the statutory Federal income tax rate with the Company’s effective income tax rate is as follows:

	Years Ended December 31,
	2016			2015			2014
Current:
Federal statutory rate		34.0	%		34.0	%		34.0	%
State taxes, net of federal benefit		10.4			0.6			3.7
Change in effective foreign tax rate		3.1			(4.1	)		(12.5	)
Foreign dividend, net of foreign tax credit		-			3.8			21.1
Other permanent differences		3.6			6.2			8.8
Change in valuation allowance		1.4			(14.6	)		(1.9	)
Change in uncertainty in income taxes		-			-			-
Other		(0.1	)		8.0			3.7
Total		52.4	%		33.9	%		56.9	%

Net income before income taxes is as follows:


	Years Ended December 31,
	2016		2015		2014

Domestic	$	1,466,325	$	574,028	$	(151,579	)
Foreign		625,878		198,960		1,480,014
Total	$	2,092,203	$	772,988	$	1,328,435

The primary components of temporary differences which give rise to the Company’s deferred tax being presented as part of Deferred income tax assets, net (in long term assets), or Deferred income tax liabilities (in long term liabilities) in the Company’s Consolidated Balance Sheet are as follows:

	December 31,
	2016			2015
Net deferred income taxes:
Net operating loss carry-forward	$	4,989,624		$	5,840,011
Intangible assets, net		(1,426,909	)		(1,304,246	)
Property and equipment, net		(16,058	)		(62,447	)
Related party interest		127,779			4,486
Credit carryforwards		1,212,818			1,019,565
Stock awards expense		317,041			351,375
Payroll		52,664			240,915
Other		62,303			17,393
Total		5,319,262			6,107,052
Less: Valuation allowance		(98,281	)		(69,046	)
Net deferred income taxes	$	5,220,981		$	6,038,006
Presented as part of:
Current deferred income tax assets, net	$	-		$	-
Deferred income tax assets, net	$	5,224,018		$	6,043,412
Deferred income tax liabilities	$	(3,037	)	$	(5,406	)

For the years ended

December

31,

2016,

2015

and

2014

there were

unrecognized tax benefits as a result of tax positions taken during a prior period or during the current period, and there were

decreases in the unrecognized tax benefits relating to settlements with taxing authorities.

December

31,

2016

and

2015,

the Company had Federal net operating loss carry-forwards (or “NOLs”) of approximately

$12.6

million and

$14.3

million, respectively, and State NOLs of

$15.0

million and

$18.4

million, respectively. The Federal NOL and State NOL are available to offset future taxable income through

2032.

Section

382

of the Internal Revenue Code places a limitation on the ability to realize net operating losses in future periods if the ownership of the Company has changed more than

50%

within a

three

-year period.

The provisions of ASC

740

require the establishment of a valuation allowance unless, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred tax asset will be realized. An important factor in determining whether a deferred tax asset will be realized in accordance with ASC

740

is whether there has been sufficient income realized in recent years and whether sufficient income is expected to be realized in future years to utilize the deferred tax asset.

The Company maintains a valuation allowance for its deferred tax assets until evidence exists to support the modification of the allowance. At the end of each period, the Company reviews supporting evidence, including the performance against sales and income projections, to determine if a modification of the valuation allowance is warranted. If it is determined that it is more likely than not that the Company will be not be able to recognize all or a greater portion of its deferred tax assets, the Company will at that time increase the valuation allowance.

2016

the Company did not include in its consolidated U.S. federal tax provision a deemed dividend and related gross-up due to earnings from the Company’s Hong Kong foreign subsidiary.

2015

the Company included in its consolidated U.S. federal tax provision approximately

$150,000

deemed dividend and related gross-up due to earnings from the Company’s Hong Kong foreign subsidiary.

2014

the Company included in its consolidated U.S. federal tax return

$1.4

million deemed dividend and related gross-up due to earnings from the Company’s Hong Kong foreign subsidiary.

Tax years subject to examination by the tax authorities for Talon International, Inc. for Federal returns (US) are

2013

through

2016,

for Talon International, Inc. State returns (US) are

2013

through

2016,

and for the foreign subsidiaries,

2007

through

2016.