Truett-Hurst, Inc.

NOTE 12 - INCOME TAXES

THI is subject to entity level taxation in certain states and is subject to U.S. Federal and state income taxes with respect to its allocable share of any taxable income of the LCC. THI will be taxed at the prevailing corporate tax rates.

All income before taxes is recognized domestically. Income tax expense for FY17 and FY16 consists of:

	Fiscal Year Ended June 30, 2017
	(in thousands)
	Current		Deferred		Total
U.S. Federal	$	—	$	—	$	—
State and Local		2		—		2
	$	2	$	—	$	2

	Fiscal Year Ended June 30, 2016
	(in thousands)
	Current		Deferred		Total
U.S. Federal	$	—	$	—	$	—
State and Local		2		—		2
	$	2	$	—	$	2

The difference between income taxes computed using the 34% statutory federal income tax rate and the Company’s effective tax rate are summarized as follows:

	June 30, 2017			June 30, 2016
	(in thousands)
Computed tax at statutory rate	$	(68	)	$	(170	)
State taxes, net of federal benefit		(12	)		(29	)
Rate benefit as a LLC		52			88
Meals and entertainment		14			7
Stock-based compensation		22			88
Other permanent differences		—			1
Valuation allowance		(6	)		17
Income tax expense	$	2		$	2

Components of deferred tax assets (liabilities) consist of the following:

	June 30, 2017			June 30, 2016
	(in thousands)
Deferred tax assets:
Accrued compensation	$	10		$	24
Stock-based compensation		44			49
Intangible assets		2,568			3,146
Sales returns		—			121
Net operating losses		1,354			1,193
Inventories		84
Unrealized loss		—			28
Other		6			96
Gross deferred tax assets		4,066			4,657
Valuation allowance		(3,867	)		(4,128	)
Total deferred tax assets, net of valuation allowance		199			529
Deferred tax liabilities:
Inventories		—			(254	)
Unrealized gain		(2	)		—
Property and equipment		(197	)		(275	)
Total deferred tax liability		(199	)		(529	)
Net deferred taxes	$	—		$	—

In FY16, a valuation allowance of $4.1 million was recorded after assessing all the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. The assessment of future income of the Company did not change in FY17 and a valuation allowance continues to be recorded on the deferred tax assets in the amount of $3.9 million. The Company’s possible liability associated with the tax receivable agreement will not be recognized until the valuation allowance is partially or fully reversed.

THI and the LLC are subject to annual California franchise tax. Truett-Hurst, Inc. files U.S. Federal and California income tax returns. The Company has gross federal and state net operating losses of $3.4 million and $3.5 million, respectively. Both jurisdictions have expiration dates beginning in 2035.

For Truett-Hurst, Inc., U.S. federal and state tax returns associated with fiscal years 2014 through 2016 are currently open to examination. U.S. federal and state tax returns for LLC associated with calendar years ended 2013 through 2014 and fiscal years ended 2015 through 2016 are currently open to examination. There were no material uncertain tax positions and the Company does not expect major changes in the next twelve months.