Note 10—Income Taxes

The components of income from continuing operations before income taxes are as follows:


	Years Ended January 31,
	2014		2013
(In thousands)
Domestic	$	537	$	1,850
Foreign		875		1,035

	$	1,412	$	2,885

The components of the provision (benefit) for income taxes from continuing operations are as follows:


	Years Ended January 31,
	2014			2013
(In thousands)
Current:
Federal	$	930		$	425
State		179			(237	)
Foreign		297			366

		1,406			554


Deferred:
Federal		(1,044	)		253
State		(174	)		38
Foreign		(13	)		2

		(1,231	)		293

	$	175		$	847

The provision (benefit) for income taxes from continuing operations differs from the amount computed by applying the statutory federal income tax rate of 34% in fiscal 2014 and 35% in fiscal 2013 to income before income taxes due to the following:


	Years Ended January 31,
	2014			2013
(In thousands)
Income tax provision at statutory rate	$	480		$	1,010
State taxes, net of federal tax effect		(74	)		114
Change in valuation allowance		27			(49	)
Change in reserves related to ASC 740 liability		(59	)		(197	)
Meals and entertainment		38			55
Domestic production deduction		(30	)		(60	)
Share-based compensation		36			26
Tax-exempt income		(22	)		(16	)
R&D credits		(114	)		(106	)
Foreign rate differential		(26	)		(22	)
Other permanent differences and miscellaneous, net		(81	)		92

	$	175		$	847

The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows:


	January 31,
	2014			2013
(In thousands)
Deferred Tax Assets:
Inventory	$	1,792		$	1,258
Stock-Based Compensation		535			403
State R&D Credits		258			231
Compensation Accrual		493			349
ASC 740 Liability Federal Benefit		290			361
Deferred Service Contract Revenue		181			106
Warranty Reserve		137			135
Reserve for Doubtful Accounts		127			117
Foreign Tax Credit		213			—
Other		119			166

		4,145			3,126
Deferred Tax Liabilities:
Accumulated Tax Depreciation in Excess of Book Depreciation		830			532
Deferred Gain on Asset Held for Sale		897			—
Currency Translation Adjustment		173			189
Other		78			63

		1,978			784

Subtotal		2,167			2,342
Valuation Allowance		(258	)		(231	)

Net Deferred Tax Assets	$	1,909		$	2,111

In fiscal 2014, we reclassified $1,151,000 from non-current liabilities of discontinued operations to deferred taxes.

At January 31, 2014, we have state net operating loss carryforwards of $392,000, which can be used to offset future tax liabilities and expire at various dates beginning in fiscal 2014.

The valuation allowance at January 31, 2014 relates to certain state research and development tax credit carryforwards which are expected to expire unused. The change in the valuation allowance in 2014 is an increase of approximately $27,000 and represents an increase in the reserve due to the generation of research and development credits during the current year, net of federal benefit. The change in the valuation allowance in 2013 was a decrease of approximately $49,000 and represents a reduction in the reserve due to the expiration of research and development credit expensed during the year net of federal benefits.

The Company reasonably believes that it is possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. A reconciliation of unrecognized tax benefits, excluding interest and penalties follows:


	2014			2013
(In thousands)
Balance at February 1	$	941		$	780
Increases in prior period tax positions		31			16
Increases in current period tax positions		42			386
Reductions related to lapse of statute of limitations		(299	)		(241	)

Balance at January 31	$	715		$	941

If the $715,000 is recognized, $425,000 would decrease the effective tax rate in the period in which each of the benefits is recognized and the remainder would be offset by a reversal of deferred tax assets.

During fiscal 2014 and 2013 the Company recognized $68,000 of expense and $105,000 of benefit, respectively, related to interest and penalties, which are included as a component of income tax expense in the accompanying statement of income. At January 31, 2014 and 2013, the Company had accrued potential interest and penalties of $416,000 and $348,000, respectively.

The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company is no longer subject to U.S. federal examinations prior to 2010.

On September 13, 2013, the Treasury Department and the Internal Revenue Service released final regulations that provided guidance on the application of IRC Section 263(a) for amounts paid to acquire, produce, or improve tangible property, as well as the rules for materials and supplies and proposed regulations addressing dispositions and general asset accounts. The final regulations are generally effective for tax years beginning on or after January 1, 2014. We are currently evaluating the impact of these new regulations and do not expect them to have a material impact to our financial statements.

At January 31, 2014, the Company has indefinitely reinvested $3,462,000 of the cumulative undistributed earnings of its foreign subsidiary in Germany, all of which would be subject to U.S. taxes if repatriated to the U.S. Through January 31, 2014, the Company has not provided deferred income taxes on the undistributed earnings of this subsidiary because such earnings are considered to be indefinitely reinvested. Non-U.S. income taxes are, however, provided on these undistributed earnings.