16. Income Taxes

The income tax expense from the Company’s continuing operations for the years ended March 31 is as follows:

	Years Ended March 31,
	2014			2013			2012
Current tax expense
Federal	$	4,564,000		$	31,226,000		$	5,081,000
State		614,000			3,368,000			319,000
Foreign		599,000			336,000			228,000
Total current tax expense		5,777,000			34,930,000			5,628,000

Deferred tax expense (benefit)
Federal		2,477,000			(25,074,000	)		1,224,000
State		(162,000	)		(2,706,000	)		542,000
Foreign		(759,000	)		282,000			(9,000	)
Total deferred tax (benefit) expense		1,556,000			(27,498,000	)		1,757,000
Total income tax expense	$	7,333,000		$	7,432,000		$	7,385,000

Deferred income taxes from the Company’s continuing operations consist of the following at March 31:

	2014			2013
Assets
Accounts receivable valuation	$	3,926,000		$	4,713,000
Allowance for customer incentives		1,343,000			1,222,000
Inventory obsolescence reserve		1,070,000			966,000
Stock options		1,426,000			1,488,000
Cancellation of indedtedness		-			20,510,000
Intangibles, net		796,000			704,000
Deferred core revenue		2,885,000			2,259,000
Claims payable		88,000			175,000
Accrued compensation		1,787,000			1,786,000
Net operating losses		9,117,000			190,000
Other		2,217,000			2,320,000

Total deferred tax assets	$	24,655,000		$	36,333,000
Liabilities
Prepaid expenses	$	(331,000	)	$	(642,000	)
Property and equipment, net		(298,000	)		(391,000	)
Estimate for returns		(916,000	)		(219,000	)
Other		(1,866,000	)		(2,281,000	)
Total deferred tax liabilities	$	(3,411,000	)	$	(3,533,000	)
Net deferred tax assets	$	21,244,000		$	32,800,000
Net current deferred income tax asset	$	18,630,000		$	30,851,000
Net long-term deferred income tax assets		2,614,000			1,949,000
Total	$	21,244,000		$	32,800,000

At March 31, 2014 current deferred income tax liabilities of $137,000 are included in other current liabilities in the consolidated balance sheet. At March 31, 2013, current deferred income tax liabilities of $145,000 are included in other current liabilities and $428,000 of long-term deferred income tax liabilities are included in other liabilities in the consolidated balance sheet.

At March 31, 2014, the Company had federal and state net operating loss carryforwards of $26,100,000 and $22,300,000, respectively. The utilization of these net operating loss carryforwards may be permanently limited due to Internal Revenue Code Section 382 in the Unites States. Prior to the utilization of such losses, the Company will perform further analysis to determine the amount subject to limitation. Additionally, in certain states the suspension of the usage of the net operating losses may apply. The net operating loss carryforwards expire between fiscal years 2020 and 2032.

The U.S. operating loss carryforwards include $5,800,000 of losses attributable to windfall stock option deductions. A net benefit of approximately $2,200,000 will be recorded to additional paid-in capital when realized as a reduction to income taxes payable.

Realization of the Company's deferred tax assets is dependent upon the Company’s ability to generate sufficient taxable income. Management reviews the Company's deferred tax assets on a jurisdiction by jurisdiction basis to determine whether it is more likely than not that the deferred tax assets will be realized. Management believes that it is more likely than not that future taxable income will be sufficient to realize the recorded deferred tax assets. In evaluating this ability, management considers long-term agreements, including Remanufactured Core purchase obligations, with the Company’s major customers that expire at various dates through March 2019. Management also periodically compares its forecasts to actual results. Even though there can be no assurance that the forecasted results will be achieved, the history of income in all other jurisdictions provides sufficient positive evidence that no valuation allowance is needed.

For the fiscal years ended March 31, 2014, 2013, and 2012, the primary components of the Company’s income tax expense were (i) the current liability due to federal, state and foreign income taxes, (ii) foreign income taxed at rates that are different from the federal statutory rate, (iii) non-deductible expenses in connection with the fair value adjustments on the warrants, and (iv) impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m). A tax benefit of $10,530,000 is contained within the income from the discontinued operations as disclosed in Note 3 above.

The difference between the income tax expense at the federal statutory rate and the Company’s effective tax rate from the Company’s continuing operations is as follows:

	Years Ended March 31,
	2014			2013			2012

Statutory federal income tax rate		34	%		34	%		34	%
State income tax rate, net of federal benefit		2	%		2	%		3	%
Change in deferred tax rate		(2	)%		-	%		(1	)%
Foreign income taxed at different rates		(7	)%		-	%		(3	)%
Warrants		26	%		-	%		-	%
Non-deductible executive compensation		2	%		-	%		-	%
Uncertain Tax Positions		(2	)%		-	%		-	%
Other income tax		-	%		(2	)%		1	%

		53	%		34	%		34	%

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions with varying statutes of limitations. At March 31, 2014, the Company is under examination in the U.S. by the Internal Revenue Service for fiscal years 2011 through 2013 and by the State of California for fiscal years 2008 through 2010. The Company is not under examination in any another jurisdiction. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits from the Company’s continuing operations is as follows at March 31:

	2014			2013			2012
Balance at beginning of period	$	827,000		$	634,000		$	576,000
Additions based on tax positions related to the current year		71,000			227,000			116,000
Additions for tax positions of prior year		-			-			18,000
Reductions for tax positions of prior year		(358,000	)		(34,000	)		(76,000	)
Settlements		-			-			-

Balance at end of period	$	540,000		$	827,000		$	634,000

At March 31, 2014, 2013 and 2012, there are $387,000, $597,000 and $480,000 of unrecognized tax benefits that if recognized would affect the annual effective tax rate.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as part of income tax expense. During the fiscal years ended March 31, 2014, 2013 and 2012, the Company recognized approximately ($9,000), $32,000, and $6,000 in interest and penalties. The Company had approximately $112,000 and $121,000 for the payment of interest and penalties accrued at March 31, 2014 and 2013, respectively.