9. Income Taxes

Open tax years related to federal and state income tax filings are for the years ended June 30, 2014, 2015, 2016 and 2017. The Company’s net operating loss carryforwards from closed years can be adjusted by the tax authorities when they are utilized in an open year. The Company files state tax returns in California, Florida, New Jersey, New York, Pennsylvania, Texas and various other states. During the current year, the Company received notification from the Internal Revenue Service of an examination for the year ended June 30, 2015. As of June 30, 2017, no significant preliminary audit findings were received by the Company and no reserves have been recorded. The Company’s foreign subsidiary, Misonix Ltd. filed tax returns in the United Kingdom. Open years related to the United Kingdom for filing are June 30, 2015, 2016 and 2017. As of June 30, 2017 and 2016, the Company has no material unrecognized tax benefits and no accrued interest and penalties.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:

Prior to June 30, 2014 and through March 31, 2015, the Company had a full valuation allowance recorded against deferred tax assets. As of the year ended June 30, 2015, the Company reduced the valuation allowance by $5,503,417. The change in the valuation allowance includes a $1,499,297 write-off of deferred tax assets against its corresponding valuation allowance. The write-off primarily pertains to the loss in tax benefit for net operating losses subject to limitations under federal tax law that precludes its utilization. In addition, during the fourth quarter of fiscal 2015, based on the Company’s consideration of all available positive and negative evidence including achieving cumulative profitable operating performance over the prior three years and the Company’s positive outlook for taxable income in the future, the Company reevaluated its deferred tax asset. Based upon the guidance under ASC 740, the Company concluded that it was more likely than not that the Company would realize the benefit of such deferred tax assets. The portion of the valuation allowance release attributable to income in future years resulted in the recognition of a tax benefit of $2,892,000 in continuing operations in the fourth quarter of fiscal 2015. The deferred tax asset will be realized against future income tax expense that would be payable in the absence of the net operating loss carryforward. The Company still maintains a full valuation allowance on all foreign net operating losses in the amount of $628,730.

At June 30, 2017, the Company has a gross deferred tax asset of $4,963,277. Based upon the guidance under ASC 740, after consideration of all available positive and negative evidence, the Company concluded that it was more likely than not that the Company would realize the benefit of its deferred tax assets. Accordingly, the Company concluded that no valuation allowance was required at June 30, 2017. This determination was primarily based on the Company’s forecasted taxable income for future periods. The forecast of future taxable income is based on judgments which the Company has made regarding its ability to grow revenue both domestically and internationally, its ability to control costs, its ability to introduce new products into the marketplace and its ability to achieve and maintain profitability.

As of June 30, 2017, the Company had approximately $10,781,000 of U.S. federal net operating loss carryforwards which expire in tax years between 2031 and 2037. Included in this amount are windfall tax benefits related to exercised stock options of approximately $2,571,000, the benefit of which will be recorded in equity when realized when the Company adopts ASU 2016-09 beginning in fiscal 2018. The Company has approximately $281,000 of research and development tax credit carryforwards which expire in the tax years between 2026 and 2037.  In addition, the Company has approximately $175,000 of alternative minimum tax credit which has an indefinite carryforward period. 

Significant components of the income tax expense (benefit) attributable to continuing operations are as follows:

The reconciliation of income tax expense (benefit) computed at the Federal statutory tax rates to income tax expense (benefit) is as follows: