ROYAL HAWAIIAN ORCHARDS, L.P.

(

)

INCOME TAXES

The components of the Partnership

’s gross income tax expense (benefit) for the years ended

December 31, 2017

and

2016

were as follows (in thousands):

The provision for income taxes equates to the

3.5%

federal tax rate applied to gross income (revenues less cost of revenues) for the years ended

December 31, 2017

and

2016.

The components of the net deferred income tax liability reported on the consolidated balance sheets as of

December 31, 2017

and

2016

are as follows (in thousands):

	2017			2016
Deferred tax assets:
Intangible assets	$	111		$	111
Inventory		31			31
Royal net operating losses		2,000			3,600
Gross deferred tax assets		2,142			3,742
Deferred income tax liabilities:
Land, orchards, and equipment		(1,156	)		(1,156	)
Gross deferred tax liabilities		(1,156	)		(1,156	)
Valuation allowance		(2,000	)		(3,600	)
Net deferred income tax liabilities	$	(1,014	)	$	(1,014	)

Royal is subject to taxation as a C Corporation at the

35%

federal tax rate and

6.9%

blended state tax rate on the corporation

’s taxable income (loss) and a federal tax rate of

21%

and

blended state tax rate for taxable income after

2017.

As a result of the losses incurred by Royal for the years ended

December 31, 2017

and

2016,

the Partnership recorded a deferred tax asset of

$2.0

million (adjusted for new tax rate) and

$3.6

million, respectively, against which the Partnership recorded a valuation allowance equal to

100%

of the deferred tax asset due to the uncertainty regarding future realization.