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INCOME TAXES

9 Months Ended

Mar. 31, 2017

Income Tax Disclosure [Abstract]

NOTE 8. INCOME TAXES

Deferred income taxes are provided on a liability method whereby deferred tax assets and liabilities are recognized for temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. 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.

Significant management judgment is required in determining our provision for income taxes and the recoverability of our deferred tax assets. Such determination is based primarily on our historical taxable income, with some consideration given to our estimates of future taxable income by jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable. During the second quarter of fiscal 2017 we released approximately $3.8 million of valuation allowance, of which $3.3 million was treated as a discrete benefit during the quarter as the Company determined that it was more likely than not that it would generate sufficient levels of profitability to realize substantially all of its deferred tax assets. The remaining $0.5 million was included in the forecasted annual effective tax rate used to determine the tax expense recorded during the quarter. Due to the change in the annual forecast and the amount of deferred tax assets that are expected to be realized as a result of current year earnings, the tax benefit recorded during the second quarter as a discrete item related to the release of the valuation allowance was adjusted to $2.8 million. The remaining valuation release of approximately $0.9 million has been included in the computation of the Company’s annual effective tax rate. During the third quarter ended March 31, 2017, the Company adjusted its State NOL carryforwards, which amount to approximately $127,000. Additionally, the current quarter tax expense includes approximately $730,000 due primarily to the aforementioned change to the discrete benefit for the release of the beginning of the year valuation allowance due to an increase in expected income from continuing operations for the full fiscal year. In addition, there was an approximate $35,000 increase to tax expense for rate changes during the quarter.

As of March 31, 2017, we have accrued $441,000 of unrecognized tax benefits related to federal and state income tax matters. This entire balance is expected to reduce the Company’s income tax expense if recognized and result in a corresponding decrease in the Company’s effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


Balance at July 1, 2016		$	446
Additions based on tax positions related to the current year			14
Reductions for tax positions of prior years			(19	)
Balance at March 31, 2017		$	441

We recognize accrued interest and penalties related to unrecognized tax benefits when applicable. As of March 31, 2017, no interest or penalties applicable to our unrecognized tax benefits have been accrued since we have sufficient tax attributes available to fully offset any potential assessment of additional tax.

Pro-Dex and its subsidiaries are subject to U.S. federal income tax, as well as income tax of multiple state tax jurisdictions. We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended June 30, 2014 and later. Our state income tax returns are open to audit under the statute of limitations for the years ended June 30, 2013 and later. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.