NOTE 6—INCOME TAXES

The provision for income tax expense (benefit) consists of:


	Years Ended September 30,
	2015			2014
Current:
Federal	$	261,000		$	667,000
State		37,000			65,000

Total current		298,000			732,000

Deferred:
Federal		(1,871,000	)		190,000
State		(154,000	)		18,000

Total deferred		(2,025,000	)		208,000

Income tax expense (benefit)	$	(1,727,000	)	$	940,000

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


	Years Ended September 30,
	2015			2014
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		(5.2	%)		(5.6	%)
Dividend received deduction		—			(6.1	%)
Domestic international sales corporation benefits		(5.8	%)		(4.2	%)
Other, net		(0.4	%)		(0.1	%)

Effective income tax rate		(48.7	%)		21.3	%

Deferred tax assets and liabilities consist of the following:


	September 30,
	2015			2014
Deferred Tax Assets:
Accrued liabilities and reserves	$	255,000		$	288,000
Allowance for doubtful accounts		133,000			91,000
Inventory		—			186,000
R&D tax credits carryforwards		1,114,000			671,000
Stock-based compensation		194,000			194,000
Net operating losses carryforwards		48,000			58,000
Unrealized loss on investments		1,023,000			—
Other		14,000			24,000

Gross Deferred Tax Assets		2,781,000			1,512,000

Deferred and Other Tax Liabilities:
Unrealized gain on investments		—			(798,000	)
Inventory		(43,000	)		—
Percentage of completion		(415,000	)		(104,000	)
Property and equipment		(806,000	)		(964,000	)
Unrecognized tax benefits		(150,000	)		(300,000	)
Other		(36,000	)		(39,000	)

Gross Deferred and Other Tax Liabilities		(1,450,000	)		(2,205,000	)

Net Deferred and Other Income Tax Assets (Liabilities)	$	1,331,000		$	(693,000	)

The Company has evaluated the available evidence and the likelihood of realizing the benefit of its deferred tax asset as of September 30, 2015. Based on this evaluation, the weight of available evidence supports the conclusion that the Company, more likely than not, will realize all of the benefit of its deferred tax assets. Should the factors underlying management’s analysis change, future valuation adjustments to the Company’s net deferred tax asset may be necessary. If future losses are incurred, it may be necessary to record a valuation allowance related to the Company’s net deferred tax asset recorded as of September 30, 2015. It cannot presently be estimated what, if any, changes to the valuation of our deferred tax asset may be deemed appropriate in the future.

Total income taxes paid in fiscal 2015 and 2014 were $200,000 and $1,981,000, 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, 2015 and 2014, the Company had UTB’s of $150,000 and $300,000, respectively. There were no additional accruals of UTB’s during fiscal years ended September 30, 2015 and 2014.

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, 2015 and 2014. 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.

As of September 30, 2013 the Company had $805,000 in research and development tax credits (“R&D Credits”) carry-forwards. Of this amount, $313,000 reduced the Company’s current federal income taxes payable for the year ended September 30, 2014, leaving $492,000 in R&D Credits carry-forwards in the net deferred and other income tax liabilities of $693,000 in the consolidated balance sheet as of September 30, 2014. After the Company’s 2014 federal income tax return was filed, there was a net increase adjustment in R&D Credits carry-forwards of $275,000 taking the total to $767,000 from the original estimate of $492,000. In fiscal 2015, additional net R&D Credits carry-forwards of $133,000 were added bringing the total R&D Credits carry-forwards to $900,000 at September 30, 2015. The $900,000 of R&D Credits carry-forwards, which are included in net deferred and other income tax assets of $1,114,000 at September 30, 2015, expire in fiscal years 2031 through 2034.

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 was included in the net deferred and other income tax liabilities of $693,000 in the consolidated balance sheet as of September 30, 2014. After the Company’s 2014 state income tax return was filed, there was a net increase adjustment in the Florida state research and development credits of $35,000 taking the total carry-forwards to $214,000 from the original estimate of $179,000. The $214,000 of Florida state research and development credits carry-forwards, which are included in net deferred and other income tax assets of $1,114,000 at September 30, 2015, expire in fiscal 2019. The Company did not receive any Florida state research and development credits in fiscal 2015.

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, 2012 are no longer subject to examination by taxing authorities due to the expiration of the statute of limitations.