NOTE 6 - INCOME TAXES

The provision for income tax expense consists of:


	Years Ended September 30,
	2014		2013
Current:
Federal	$	667,000	$	(48,000	)
State		65,000		146,000

Total current		732,000		98,000

Deferred
Federal		190,000		(447,000	)
State		18,000		(43,000	)

Total deferred		208,000		(490,000	)


Income tax expense (benefit)	$	940,000	$	(392,000	)

A reconciliation of the federal statutory tax rate to the total tax provision is as follows:


	Years Ended September 30,
	2014			2013
Federal income taxes computed at the statutory rate		34.0	%		34.0	%
State income taxes, net of federal benefit		3.3	%		3.3	%
Research & development tax refunds & credits		(5.6	%)		(33.6	%)
Dividend received deduction		(6.1	%)		(3.0	%)
Domestic international sales corporation benefits		(4.2	%)		(1.8	%)
Tax-exempt interest income		(1.8	%)		(1.4	%)
Other, net		1.7	%		(3.7	%)

Effective income tax rate		21.3	%		(6.2	%)

Deferred tax assets and liabilities consist of the following:


	Years Ended September 30,
	2014			2013
Deferred Tax Assets:
Accrued liabilities and reserves	$	288,000		$	338,000
Allowance for doubtful accounts		91,000			115,000
Inventory		186,000			202,000
R&D tax credits carryforwards		671,000			805,000
Non-deductible stock compensation		194,000			178,000
Net operating losses carryforwards		58,000			59,000
Other		24,000			57,000

Gross Deferred Tax Assets		1,512,000			1,754,000


Deferred and Other Tax Liabilities:
Unrealized gain on investments		(798,000	)		(736,000	)
Percentage of completion		(104,000	)		—
Property, plant and equipment		(964,000	)		(1,179,000	)
Unrecognized tax benefits		(300,000	)		(300,000	)
Other		(39,000	)		(23,000	)

Gross Deferred and Other Tax Liabilities		(2,205,000	)		(2,238,000	)

Net Deferred Income and Other Tax Liabilities	$	(693,000	)	$	(484,000	)

Total income taxes paid in fiscal 2014 and 2013 were $1,981,000 and $202,000, respectively.

Generally Accepted Accounting Principles (“GAAP”) prescribes a comprehensive model for the financial recognition, measurement, classification, and disclosure of uncertain tax positions. GAAP contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Significant judgment is required in evaluating the Company’s uncertain tax position and determining the Company’s provision for taxes. Although the Company believes the reserves of unrecognized tax benefits (“UTB’s”) are reasonable, no assurance can be given that the final outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provision and accruals. The Company adjusts these reserves in light of changing facts and circumstances. As of September 30, 2014 and 2013, the Company had UTB’s of $300,000. There were no additional accruals of UTB’s during fiscal years ended September 30, 2014 and 2013.

The Company recognizes interest and penalties accrued related to UTB’s as a component of income tax expense. There were no additional accruals of interest expense nor penalties during fiscal years ended September 30, 2014 and 2013. It is reasonably possible that the amount of the UTB’s with respect to certain unrecognized tax positions will increase or decrease during the next 12 months. The Company does not expect the change to have a material effect on its results of operations or its financial position. The only expected potential reason for change would be the normal expiration of the statute of limitations or the ultimate results stemming from any examinations by taxing authorities. If recognized, the entire amount of UTB’s would have an impact on the Company’s effective tax rate.

The Company received favorable IRS rulings on its research and development tax credits (“R&D Credits”) on amended returns filed for tax years 2006 through 2010 (fiscal years 2007 through 2011). In total, the Company received tax refunds of $827,000 related to R&D Credits for tax years 2006 through 2008 and recorded additional R&D Credits of $1,302,000 related to tax years 2009 through 2012 (fiscal years 2010 through 2013). R&D Credits of $2,129,000 are included in the Company’s income tax benefit of $392,000 in the consolidated statement of operations for the year ended September 30, 2013. Of the $1,302,000 in R&D Credits, $497,000 reduced the Company’s current federal income taxes payable for the year ended September 30, 2013 and $805,000 is included as R&D Credits carry-forwards in the net deferred income and other tax liabilities of $484,000 in the consolidated balance sheet as of September 30, 2013. An additional $313,000 of the remaining $805,000 reduced the Company’s current federal income taxes payable for the year ended September 30, 2014, leaving $492,000 in R&D Credits carryforwards in the net deferred income and other tax liabilities of $693,000 in the consolidated balance sheet as of September 30, 2014. The $492,000 of R&D Credits carryforwards expire in fiscal years 2031 through 2033. The tax rate for fiscal 2014 was negatively impacted by the exclusion of R&D Credits given that Congress has not extended the R&D Credits to 2014 as of September 30, 2014.

During fiscal 2014, the Company also received $244,000 of Florida state research and development credits. $65,000 of these credits reduced the Company’s state income taxes payable in fiscal 2014 and $179,000 is included in the net deferred income and other tax liabilities of $693,000 in the consolidated balance sheet as of September 30, 2014. The $179,000 of Florida state research and development credits carry-forwards expire in fiscal 2019.

The Company files U.S. federal income tax returns, as well as income tax returns in various states. The Company’s U.S. federal income tax returns and most state returns, filed for tax years prior to fiscal year ended September 30, 2010 are no longer subject to examination by taxing authorities due to the expiration of the statute of limitations. The statute of limitations for the Company’s U.S. federal income tax return for the fiscal year ended September 30, 2010 has been extended and will remain open to examination through December 31, 2014.