NOTE 11 — PROVISION FOR INCOME TAXES
The Company accounts for taxes in accordance with ASC 740, “Income Taxes”, which requires the recognition of tax benefits or expense on the temporary differences between the tax basis and book basis of its assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled.
The Company’s income tax expense for the years ended March 31, 2017, 2016 and 2015 consists primarily of federal and state and local taxes attributable to GCP, which does not file a consolidated income tax return with the Company. Effective with the acquisition of the additional 20.1% of GCP as described in Note 4, GCP will file as part of the U.S. federal consolidated income tax group for periods subsequent to the acquisition.
The components of income before the provision (benefit) for income taxes are as follows:
| Year Ended March 31, 2017 |
Year Ended March 31, 2016 |
Year Ended March 31, 2015 |
||||||||||
| Domestic Operations | $ | 945,985 | $ | (385,672 | ) | $ | (2,285,380 | ) | ||||
| Foreign Operations | (251,663 | ) | 129,814 | 90,466 | ||||||||
| Total | $ | 694,322 | $ | (255,858 | ) | $ | (2,194,914 | ) | ||||
The provision (benefit) for income taxes is comprised of the following:
| Year Ended March 31, 2017 |
Year Ended March 31, 2016 |
Year Ended March 31, 2015 |
||||||||||
| Current provision (benefit) | ||||||||||||
| Federal | $ | 1,617,000 | $ | 1,183,000 | $ | 608,589 | ||||||
| State | (784,000 | ) | 397,000 | 382,232 | ||||||||
| Foreign | - | - | - | |||||||||
| Total current provision (benefit) | $ | 833,000 | $ | 1,580,000 | $ | 990,821 | ||||||
| Deferred provision (benefit) | ||||||||||||
| Federal | $ | (540,000 | ) | $ | (148,152 | ) | $ | 214,958 | ||||
| State | 9,702 | 19,000 | 73,220 | |||||||||
| Foreign | (115,000 | ) | - | - | ||||||||
| Total deferred provision (benefit) | $ | (645,298 | ) | $ | (129,152 | ) | $ | 288,178 | ||||
| Total provision (benefit) | ||||||||||||
| Federal | $ | 1,077,000 | $ | 1,034,848 | $ | 823,547 | ||||||
| State | (774,298 | ) | 416,000 | 455,452 | ||||||||
| Foreign | (115,000 | ) | - | - | ||||||||
| Total provision (benefit) | $ | 187,702 | $ | 1,450,848 | $ | 1,278,999 | ||||||
The effective income tax rate varies from the current statutory federal income tax rate of 34% as follows:
| Years ended March 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| % | % | % | ||||||||||
| Computed expected tax benefit, at 34% | (34.00 | ) | (34.00 | ) | (34.00 | ) | ||||||
| Permanent items | (29.70 | ) | 176.0 | 3.10 | ||||||||
| Share based compensation | (48.46 | ) | 0.00 | 0.00 | ||||||||
| Change in valuation allowance* | 73.68 | 371.5 | 81.8 | |||||||||
| Effect of foreign operations | (67.87 | ) | 12.20 | 1.8 | ||||||||
| Increase in unrecognized tax benefit | (1.65 | ) | 0.00 | 0.00 | ||||||||
| Intercompany profit | 0.0 | 13.90 | 2.60 | |||||||||
| Other | (2.34 | ) | 0.0 | 0.0 | ||||||||
| State and local taxes, net of federal benefit | 83.31 | 27.5 | 3.0 | |||||||||
| Effective tax rate | (27.03 | )% | 567.10 | % | 58.30 | % | ||||||
*Change in valuation allowance includes state NOL and deferred tax true-ups.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
| March 31, | ||||||||
| 2017 | 2016 | |||||||
| Deferred income tax assets: | ||||||||
| Foreign currency transactions | $ | - | $ | 144,000 | ||||
| Accounts receivable | 112,000 | 103,000 | ||||||
| Inventory | 1,204,000 | 857,000 | ||||||
| Share based compensation | 665,000 | 679,000 | ||||||
| U.S. federal and state net operating losses | 29,374,000 | 33,585,000 | ||||||
| Foreign net operating losses | 1,511,000 | 2,003,000 | ||||||
| Other | 245,000 | 2,000 | ||||||
| Total gross assets | 33,111,000 | 37,373,000 | ||||||
| Less: Valuation allowance | (32,621,000 | ) | (37,355,000 | ) | ||||
| Total deferred tax asset | $ | 490,000 | $ | 18,000 | ||||
| Deferred income tax liability: | ||||||||
| Intangible assets | $ | (994,000 | ) | $ | (1,222,000 | ) | ||
| Fixed assets | (6,000 | ) | - | |||||
| Other | (48,766 | ) | - | |||||
| Total deferred tax liability | (1,048,766 | ) | (1,222,000 | ) | ||||
| Net deferred tax liability | $ | (558,766 | ) | $ | (1,204,000 | ) | ||
In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating loss carryforwards can be utilized. The Company considers the level of historical taxable income, scheduled reversal of temporary differences, tax planning strategies and projected future taxable income in determining whether a valuation allowance is warranted. Based on historic operating losses and projected future income, the Company concluded that its net deferred tax assets are not realizable on a more-likely-than-not basis. As such, the Company maintained a full valuation allowance against its net deferred tax assets. The Company’s valuation allowance decreased by $4,734,000 during fiscal 2017.
In accordance with ASC 350-10, the Company does not amortize indefinite lived-intangible assets for financial reporting purposes. The deferred tax liability of $559,000 relates to the tax effects of differences between the financial reporting and tax basis of intangible assets.
As of March 31, 2017, the Company had U.S. federal net operating loss carryforwards of approximately $83,446,000 for U.S. tax purposes, which expire in Fiscal 2023 through 2037, if not utilized. The annual utilization of the net operating loss carryforwards may be limited in future years due to the “change in ownership provisions” set forth in Section 382 of the Internal Revenue Code. The Company also has Irish net operating loss carryforwards of approximately $12,092,000, which have an indefinite life.
As of March 31, 2017, the Company has not provided for U.S. federal and foreign withholding taxes on any excess of financial reporting over the tax basis of investments in foreign subsidiaries, as such earnings are indefinitely reinvested overseas. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. Due to the complexities of the tax laws and assumptions that would have to be made, it is not practicable to estimate the amounts of income tax provisions that may be required.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:
| Balance at March 31, 2016 | $ | - | ||
| Additions based on tax positions taken in the current and prior years | 18,000 | |||
| Settlements | - | |||
| Decreases based on tax positions taken in prior years | - | |||
| Other | - | |||
| Balance at March 31, 2017 | $ | 18,000 |
Of the amounts reflected above at March 31, 2017, the entire amount would reduce our effective tax rate if recognized. The Company records accrued interest and penalties related to income tax matters in general and administrative expenses. For the year ended March 31, 2017, interest and penalties on unrecognized tax benefits were $2,000. The Company does not believe that the amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.
Tax years 2013 through 2017 remain open to examination by federal and state tax jurisdictions. The Company has various foreign subsidiaries for which tax years 2011 through 2017 remain open to examination in certain foreign tax jurisdictions.