Income Taxes

The components of income (loss) before income tax and income tax expense (benefit) are comprised of the following:



	For the Years Ended September 30,
	2016			2015
	(Amounts in thousands)
Income (loss) before income tax:
U.S.	$	3,418		$	576
Foreign	182			(560		)
	$	3,600		$	16
Income tax expense (benefit):
Current:
Federal	$	303		$	(4	)
State	118			24
Foreign	159			152
	580			172
Deferred:
Federal	400			(36		)
State	46			67
Foreign	(30		)	23
	416			54
	$	996		$	226

As of September 30, 2016, management assessed the positive and negative evidence in the U.S operations, and estimated we will have sufficient future taxable income to utilize the existing deferred tax assets. Significant objective positive evidence included the cumulative profits that we realized over the most recent years. This evidence enhances our ability to consider other subjective evidence such as our projections for future growth. Other factors we considered are the likelihood for continued royalty income in future years, and our expectation that the TS segment will continue to be profitable in future years. On the basis of this evaluation, as of September 30, 2016, we have concluded that our U.S. deferred tax asset is more likely than not to be realized. It should be noted however, that the amount of the deferred tax asset realized could be adjusted in future years, if estimates of taxable income during the carryforward periods are reduced, or if objective negative evidence in the form of cumulative losses is present.

The recording and ultimate reversal of valuation allowances for our deferred tax asset requires significant judgment associated with past and projected performance. In assessing the realizability of deferred tax assets, we consider our taxable future earnings and the expected timing of the reversal of temporary differences. We recorded a valuation allowance which reduced the gross deferred tax asset to an amount that we believed was more likely than not to be realized because of the cumulative losses incurred in the U.K. in recent years represented sufficient negative evidence to record a valuation allowance against certain deferred tax assets.

We continue to maintain a full valuation allowance against our U.K. deferred tax assets as we have experienced cumulative losses and do not have any indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards. To the extent that actual experience deviates from our assumptions, our projections would be affected and hence our assessment of realizability of our deferred tax assets may change.

Reconciliation of federal statutory rate and income tax expense (benefit) to the Company's effective tax rate and actual income tax expense (benefit) is as follows:



	For the Years Ended September 30,
	2016					2015
	(Dollar amounts in thousands)
Computed “expected” tax expense	$	1,224		34.0	%	$	5		34.0	%
Increases (reductions) in taxes resulting from:
State income taxes, net of federal tax benefit	124			3.5	%	79			492.8	%
Foreign operations	67			1.9	%	359			2,243.8	%
Permanent differences	(20		)	(0.6	)%	14			89.3	%
Stock based compensation	—			—	%	1			4.3	%
Uncertain tax liability adjustment	8			0.2	%	(54		)	(337.5	)%
Research & development credit	(344		)	(9.6	)%	(91		)	(568.8	)%
Other items	(63		)	(1.7	)%	(87		)	(543.8	)%
Income tax expense	$	996		27.7	%	$	226		1,414.1	%

For the years ended September 30, 2016 and 2015, temporary differences, which give rise to deferred tax assets (liabilities), are as follows:



	September 30, 2016			September 30, 2015
	(Amounts in thousands)
Deferred tax assets:
Pension	$	2,896		$	2,023
Intangibles	315			409
Other reserves and accruals	671			618
Inventory reserves and other	470			724
State credits, net of federal benefit	313			253
Federal and state net operating loss carryforwards	61			71
Foreign net operating loss carryforwards	1,704			2,093
Foreign tax credits	7			7
Depreciation and amortization	(203		)	(126		)
Gross deferred tax assets	6,234			6,072
Less: valuation allowance	(3,180		)	(3,048		)
Realizable deferred tax asset	3,054			3,024
Gross deferred tax liabilities	—			—
Net deferred tax assets	$	3,054		$	3,024

The deferred tax valuation allowance increased by approximately $132 thousand, as shown above. In assessing the realizability of deferred tax assets, the Company considers its taxable future earnings and the expected timing of the reversal of temporary differences. Accordingly, the Company has recorded a valuation allowance which reduces the gross deferred tax asset to an amount which management believes will more likely than not be realized. The valuation allowance was determined by assessing both positive and negative evidence whether it is more likely than not that deferred tax assets are realizable. Such assessment is done on a jurisdiction-by-jurisdiction basis. The Company's inability to project future profitability beyond fiscal year 2016 and the cumulative losses incurred in recent years in the U.K. represent sufficient negative evidence to record a valuation allowance against certain deferred tax assets.

As of September 30, 2016 and 2015, the Company had U.S. net operating loss carryforwards for state tax purposes of approximately $0.4 million and $0.4 million, respectively, which are available to offset future taxable income through 2032.

As of September 30, 2016, the Company had state research and development tax credit carry-forwards in the amount of $417 thousand that expire in years 2024 through 2029. The Company also had other state tax credit carry-forwards of $58 thousand available to reduce future state tax expense which has unlimited carryover status.

As of September 30, 2016 the Company concluded that a net increase of $59 thousand of the valuation allowance was appropriate. As part of the Company’s analysis, the Company evaluated, among other factors, its recent history of generating taxable income in state jurisdictions and its near-term forecasts of future taxable income. The net increase in the Company’s valuation allowance of $59 thousand is to reserve for state tax credit carry-forwards that the Company believes will expire unused.

As of September 30, 2016, the Company had U.K. net operating loss carryforwards of approximately $8.5 million that have an indefinite life with no expiration.

Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $1.1 million and $2.5 million at September 30, 2016 and 2015, respectively. The Company's policy is that its undistributed foreign earnings are indefinitely reinvested and, accordingly, no U.S. federal and state deferred tax liabilities have been recorded.

In addition, the calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. The Company records liabilities for estimated tax obligations in the U.S. and other tax jurisdictions. These estimated tax liabilities include the provision for taxes that may become payable in the future.

As of September 30, 2016, the total amount of uncertain tax liabilities was $202 thousand. We recognized $7 thousand of interest and potential penalties accrued related to unrecognized tax benefits in our provision for income taxes.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:



	For the Year Ended September 30, 2016		For the Year Ended September 30, 2015
	(Amounts in thousands)
Balance, beginning of year	$	195	$	249
Increases in tax positions in the current year	—		—
Settlements	—		(72		)
Lapse in statute of limitations	—		—
Accrued penalties and interest	7		18
Balance, end of period	$	202	$	195

We file income tax returns in the U.S. federal jurisdictions and various state and foreign jurisdictions. The Company has reviewed the tax positions taken on returns filed domestically and in its foreign jurisdictions for all open years, generally fiscal 2013 through 2016, and believes that tax adjustments in any audited year will not be material, except for the uncertain tax position described above.