2.          INCOME TAXES

 

Income tax expense (benefit) for the years ended December 31, 2017 and 2016 consists of the following:

 

The Tax Cut and Jobs Act of 2017 (the “Tax Reform Act”) was enacted December 22, 2017.  This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of 34% and 35% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the newly enacted rate. This revaluation resulted in a benefit of $115,000 to income tax expense in continuing operations and a corresponding reduction in the deferred tax liability. The other provisions of the Tax Reform Act did not have a material impact on the 2017 consolidated financial statements.

 

 

 

The expected provision benefit for income taxes, computed by applying the U.S. federal income tax rate of 34% in 2017 and 2016 to income (loss) before taxes, is reconciled to income benefit as follows:

 

 

Net deferred tax liabilities consist of the following as of December 31, 2017 and 2016:

 

 

The Company’s federal net operating loss carryforward and research and development credit carryover as of December 31, 2017 was $167,000 and $40,000, respectively, and will begin to expire in 2036.  The Company’s state net operating loss carryforwards at December 31, 2017 total $834,000 and begin expiring in 2026.  The Company has state research and development credit carryforwards as of December 31, 2017 of $115,000. 

 

The valuation allowance balance of $91,000 and $60,000 at December 31, 2017 and 2016, relates entirely to Minnesota research and development credit carryforwards that the Company does not expect to utilize and begin to expire in 2028.  The change in the valuation allowance was $31,000 in 2017 and $15,000 in 2016.  Approximately $15,000 of the $31,000 change in 2017 is a result of recording the impact of the revaluation on these credits and corresponding increase in valuation allowance related to the Tax Reform Act discussed above.

 

It has been the Company’s policy to recognize interest and penalties related to uncertain tax positions in income tax expense.  As of December 31, 2017 and 2016, there was no liability for unrecognized tax benefits.

 

The Company is subject to federal and state taxation. As of December 31, 2017, with few exceptions, the Company is no longer subject to examination prior to tax year 2014.