The Company records its deferred taxes under the liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are determined based on multi-national, multi-jurisdictional nature of the Company’s operations. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax assets consisted of the following as of July 31, 2017 and 2016.
| July 31, | July 31, | |||||||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Commission expenses | $ | 425,797 | $ | 393,890 | ||||
| Loss carryforwards | 172,145 | 273,144 | ||||||
| Allowance for doubtful accounts | 143,554 | 51,450 | ||||||
| Other | 84,564 | 70,245 | ||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | – | (18,461 | )
| |||||
| Others | (10,529 | ) | (9,689 | ) | ||||
| Valuation allowance | (26,209 | ) | (28,224 | ) | ||||
| Net deferred tax assets | $ | 789,322 | $ | 732,355 | ||||
The income tax provision differs from the amount of income tax determined by applying the applicable income tax rate to pretax income from continuing operations for the years ended July 31, 2017 and 2016 due to the following.
| July 31, | July 31, | |||||||
| 2017 | 2016 | |||||||
| Income tax expense (benefit) based on book income at Japanese statutory rate | $ | (418,479 | ) | $ | (649,395 | ) | ||
| IRS tax penalty | 210,000 | – | ||||||
| Loss on credit recorded | – | 486,383 | ||||||
| Entertainment expense | 80,914 | 90,679 | ||||||
| Additional taxes | 3,966 | 5,988 | ||||||
| Tax rate difference between current tax and deferred tax assets | 3,539 | (14,263 | ) | |||||
| Others | 23,444 | 16,053 | ||||||
| Total income tax provision | $ | (96,616 | ) | $ | (64,555 | ) | ||
The Company classifies income tax penalties and interest, if any, as part of other general and administrative expenses in the accompanying consolidated statements of operations. The Company had accrued penalties of $600,000 as of July 31, 2017 resulting from the failure to timely file required returns in the US from 2013 through 2016. There were no accrued penalties as of July 31, 2016.
The Company's tax years for its Federal and State US jurisdictions which are currently open for examination are the years of 2013 - 2016. The Company’s tax years in Japanese jurisdictions are open for examination are the years of 2012 – 2016.