Entity information:
(
12
)
Income Taxes
 
Income tax expense (benefit) for the years ended
October
 
31,
2017,
2016
and
2015
consists of:
 
Fiscal year ended October 31, 2017
  
Current
    
Deferred
    
Total
  
U.S. Federal
   $
—
     $
—
     $
—
  
State
    
(5,438
 )    
—
      
(5,438
 )
Totals
   $
(5,438
 )   $
—
     $
(5,438
 )
 
Fiscal year ended October 31, 2016
  
Current
    
Deferred
    
Total
  
U.S. Federal
   $
35,118
     $
—
     $
35,118
  
State
    
(29,219
 )    
—
      
(29,219
 )
Totals
   $
5,899
     $
—
     $
5,899
  
 
Fiscal year ended October 31, 2015
  
Current
    
Deferred
    
Total
  
U.S. Federal
   $
(624,825
 )   $
2,098,615
     $
1,473,790
  
State
    
(120,917
 )    
129,509
      
8,592
  
Totals
   $
(745,742
 )   $
2,228,124
     $
1,482,382
  
 
Reported income tax expense for the years ended
October
 
31,
2017,
2016
and
2015
differs from the “expected” tax expense (benefit), computed by applying the U.S. Federal statutory income tax rate of
34%
to income before income taxes as follows:
 
   
Years ended October 31,
  
   
2017
    
2016
    
2015
  
“Expected” tax benefit
   $
(593,031
 )   $
(610,332
 )   $
(957,121
 )
Increase (reduction) in income tax benefit resulting from:
                        
State income taxes, net of federal benefit
    
(29,422
 )    
(79,386
 )    
(78,880
 )
Loss of permanent deductions due to NOL carryback
    
—
      
—
      
35,636
  
Other differences, net
    
54,686
      
50,627
      
67,491
  
Change in valulation allowance
    
562,329
      
644,990
      
2,415,256
  
Reported income tax expense (benefit)
   $
(5,438
 )   $
5,899
     $
1,482,382
  
 
The tax effects of temporary differences that give rise to significant portions of the Company
’s deferred tax assets and deferred tax liabilities as of
October 
31,
2017
and
2016
are presented below:
 
   
October 31,
  
   
2017
    
2016
  
Deferred tax assets:
                
Accounts receivable, due to allowances for doubtful accounts and sales returns
   $
71,085
     $
87,472
  
Inventories, due to allowance for damaged and slow-moving inventories and additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986
    
1,088,631
      
999,468
  
Liabilities recorded for accrued expenses, deductible for tax purposes when paid
    
114,713
      
67,758
  
Share-based compensation expense
    
265,027
      
134,653
  
Investment in Centric Solutions
    
—
      
6,984
  
Net operating loss carryforwards
    
2,099,195
      
1,958,734
  
Other
    
118,119
      
110,773
  
Total gross deferred tax assets
    
3,756,770
      
3,365,842
  
Valuation allowance
    
(3,622,575
 )    
(3,060,246
 )
Net deferred tax assets
    
134,195
      
305,596
  
Deferred tax liabilities:
                
Plant and equipment, due to differences in depreciation and capital gain recognition
    
(130,626
 )    
(301,590
 )
Other receivables, due to accrual for financial reporting purposes
    
(3,569
 )    
(4,006
 )
Total gross deferred tax liabilities
    
(134,195
 )    
(305,596
 )
Net deferred tax asset
   $
—
     $
—
  
 
As a result of the acquisition of AOS, the Company recorded certain deferred tax assets totaling
$1,517,605
(after purchase accounting adjustments), related to gross net operating loss (“NOL”) carryforwards of
$4,455,525,
estimated to be available after considering Internal Revenue Code Section
382
limitations. As of
October 31,
201
7,
$1,680,000
of these gross NOL carryforwards remain unused and
may
be used to reduce future taxable income. These remaining gross NOL carryforwards begin to expire in fiscal year ending
October 31, 2028.
 
Additionally,
the Company has federal and state gross NOL carryforwards of
$4,203,483
and
$1,462,204,
respectively; all of which originated beginning with fiscal year
2015,
and will
not
begin to expire until fiscal year
2030.
 
For the years ended
October 31,
201
7
and
2016,
the Company considered all positive and negative evidence available to assess whether it is “more likely than
not”
that some portion or all of the deferred tax assets will
not
be realized. For each year, the Company concluded that in accordance with the provisions of Accounting Standards Codification
740,
Income Taxes
, the negative evidence outweighed the objectively verifiable positive evidence. As a result, the Company established a valuation allowance of
$3,622,575
and
$3,060,246,
respectively, against net deferred tax assets existing as of
October 31, 2017
and
2016.
 
The Company estimates a liability for uncertain tax positions taken or expected to be taken in a tax return. The liability for uncertain tax positions is included in other noncurrent liabilities on the accompanying consolidated balance sheets.
 
 
A reconciliation of the unrecognized ta
x
benefits for fiscal years
2017
and
2016
follows:
 
   
October 31,
  
 
  
2017
    
2016
  
Unrecognized tax benefits balance at beginning of year
   $
78,322
     $
79,322
  
Gross decreases for tax positions of prior years
    
(12,773
 )    
(1,000
 )
Unrecognized tax benefits balance at end of year
   $
65,549
     $
78,322
  
 
During fiscal year
201
7,
the Company reduced accrued interest and penalties by
$4,633
and
$3,194,
respectively, related to unrecognized tax benefits. During fiscal year
2016,
the Company accrued interest of
$6,284
and reduced accrued penalties by
$250,
respectively, related to unrecognized tax benefits. As of
October 31, 2017
and
2016,
the Company had approximately
$36,761
and
$44,587,
respectively, of accrued interest and penalties related to uncertain tax positions. The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized is
$36,336
and
$43,191
as of
October 31, 2017
and
2016,
respectively. The Company does
not
expect its unrecognized tax benefits to change significantly in the next
12
months.
 
The Company files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. The statute of limitations remains open for U.S. and certain state income tax examinations for years ended
October 31,
201
4
through
October 31, 2016.