Entity information:
17.
INCOME TAXES
 
The components of income tax expense were as follows:
 
 
   
Year Ended March 31,
 
   
2017
    
2016
  
Current:
                
Federal
   $
1,124,000
     $
1,817,000
  
State
    
128,000
      
316,000
  
Foreign
    
132,000
      
171,000
  
Total current
    
1,384,000
      
2,304,000
  
Deferred:
                
Federal
    
(592,000
 )    
152,000
  
State
    
(67,000
 )    
(61,000
 )
Total deferred
    
(659,000
 )    
91,000
  
                 
Total
   $
725,000
     $
2,395,000
  
 
Income tax expense was different from the amount computed by applying the statutory federal income tax rate of
34%
as shown in the following table:
 
   
Year Ended March 31,
  
   
2017
    
2016
  
Expected Federal income tax expense
U.S. statutory rate
   $
(1,434,000
 )    
34.0
 %   $
2,092,000
      
34.0
 %
State income taxes, net
of Federal benefit
    
40,000
      
-0.9
 %    
169,000
      
2.7
 %
Permanent differences, other
    
156,000
      
-3.7
 %    
47,000
      
0.8
 %
Dividend received deduction
    
(302,000
 )    
7.2
 %    
-
      
0.0
 %
Section 831(b) benefit
    
(281,000
 )    
6.7
 %    
(316,000
 )    
-5.1
 %
Change in valuation allowance
    
3,868,000
      
-91.8
 %    
557,000
      
9.0
 %
Domestic production activities deductions
    
(64,000
 )    
1.5
 %    
(193,000
 )    
-3.1
 %
Income attributable to minority interest - Contrail Aviation
    
(45,000
 )    
1.1
 %    
-
      
0.0
 %
Deferred benefit for outside basis difference recorded on Delphax CFC's
    
(1,015,000
 )    
24.1
 %    
-
      
0.0
 %
Deferred state income taxes, net of Federal benefit for Delphax
    
(102,000
 )    
2.4
 %    
-
      
0.0
 %
Other differences, net
    
(96,000
 )    
2.3
 %    
39,000
      
0.6
 %
Income tax expense
   $
725,000
      
-17.1
 %   $
2,395,000
      
38.9
 %
 
 
Delphax, which generated
losses for the periods ended
March 31, 2017
and
March 31, 2016
is
not
included in Air T, Inc.’s consolidated tax return, accounts for
$3,212,000
and
$557,000
of the above valuation allowance effect for each period, respectively.
 
Deferred tax assets and liabilities consisted of the following as of
March 31:
 
   
Year Ended March 31,
  
   
2017
    
2016
  
Inventory reserves
  $
785,000
     $
504,000
  
Accrued vacation
   
475,000
      
439,000
  
Stock option compensation
   
108,000
      
141,000
  
Property and equipment
   
169,000
      
-
  
Warranty reserve
   
39,000
      
74,000
  
Accounts and notes receivable reserve
   
290,000
      
181,000
  
Employee severance reserve
   
460,000
      
-
  
Net operating loss carryforwards
   
6,461,000
      
5,353,000
  
Federal/Canadian tax credits
   
4,648,000
      
4,784,000
  
263A inventory capitalization
   
10,000
      
60,000
  
Unrealized gains/losses and outside basis difference for CFC's
   
1,995,000
      
-
  
Intangibles
   
43,000
      
-
  
Other
   
78,000
      
112,000
  
Total deferred tax assets
    
15,561,000
      
11,648,000
  
                 
Deferred revenue
   
(35,000
 )    
(52,000
 )
Prepaid expenses
   
(505,000
 )    
(563,000
 )
Property and equipment
   
-
      
(70,000
 )
Intangibles
   
-
      
(388,000
 )
Gain on marketable securities (OCI)
   
(94,000
 )    
-
  
Outside basis difference
   
(34,000
 )    
-
  
Total deferred tax liabilities
    
(668,000
 )    
(1,073,000
 )
Net deferred tax asset (liability)
   $
14,893,000
     $
10,575,000
  
Less valuation allowance
    
(14,698,000
 )    
(10,830,000
 )
Net deferred tax asset (liability) after valuation allowance
   $
195,000
     $
(255,000
 )
 
The deferred tax items are reported on a net current and non-current basis in the accompanying fiscal
2017
and
2016
consolidated balance sheets according to the classification of the underlying asset and liability.
 
The Company accounts for uncertain tax positions in accordance with accounting principles generally accepted in the United States of America. The Company has analyzed filing positions in all of the federal, state and international jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The periods subject to examination for the Company
’s federal return are the fiscal
2013
through
2015
tax years. The periods subject to examination for the Company’s state returns are generally the fiscal
2012
through
2015
tax years. As of
March 31, 2017
and
2016,
the Company did
not
have any unrecognized tax benefits. The Company does
not
believe there will be any material changes in unrecognized tax positions over the next
twelve
months.
 
It is the Company
’s policy to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of
March 31, 2017
and
2016,
the Company did
not
have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the years ended
March 31, 2017
and
2016.
 
As described in Note
8,
effective on
November 24, 2015,
Air T, Inc. purchased interests in Delphax. With an equity investment level by the Company of approximately
38%,
Delphax is required to continue filing a separate United States corporate tax return. Furthermore, Delphax has
three
foreign subsidiaries located in Canada, France, and the United Kingdom which file tax returns in those jurisdictions. With few exceptions, Delphax is
no
longer subject to examinations by income tax authorities for tax years before
2012.
 
Delphax maintains a
September 30
fiscal year. As of
September 30, 2016,
Delphax and its subsidiaries had estimated foreign and domestic tax loss carryforwards of
$6.3
million and
$13.2
million, respectively. As of that date, they had estimated foreign res
earch and development credit carryforwards of
$4.3
million, which are available to offset future income tax. The credits and net operating losses expire in varying amounts beginning in the year
2023.
Domestic alternative minimum tax credits of approximately
$311,000
are available to offset future income tax with
no
expiration date. The Company does
not
believe its investment in Delphax by Air T resulted in an ownership change for purposes of Section
382.
Should there be an ownership change for purposes of Section
382
or any equivalent foreign tax rules, the utilization of the previously mentioned carryforwards will be significantly limited. In the event of bankruptcy proceedings involving Delphax or Delphax Canada, any remaining tax attributes, including net operating losses and credit carryforwards in each respective jurisdiction will be lost.  The Company has recorded an outside basis difference in the stock of these entities of
$2.9
million which is the estimated loss that will be recognized in the United States upon their liquidation. See further information regarding Delphax Canada developments in Notes
8,
10,
and
24.
 
The provisions of ASC
740
require an assessment of both positive and negative evidence when determining whether it is more likely than
not
that deferred tax assets will be recovered. In accounting for the Delphax tax attributes, the Company has established a full valuation allowance of
14.0
million at
March 31, 2017
and
10.8
million at
March 31, 2016.
The cumulative losses incurred by Delphax in recent years was the primary basis for the Company
’s determination that a full valuation allowance should be established against Delphax’s net deferred tax assets.