(12)	Income Taxes

Income tax expense (benefit) for the years ended

October 31,

2016,

2015

and

2014

consists of:

Fiscal year ended October 31, 2016	Current			Deferred		Total
U.S. Federal	$	35,118		$	—	$	35,118
State		(29,219	)		—		(29,219	)
Totals	$	5,899		$	—	$	5,899

Fiscal year ended October 31, 2015	Current			Deferred		Total
U.S. Federal	$	(624,825	)	$	2,098,615	$	1,473,790
State		(120,917	)		129,509		8,592
Totals	$	(745,742	)	$	2,228,124	$	1,482,382

Fiscal year ended October 31, 2014	Current		Deferred			Total
U.S. Federal	$	666,517	$	(370,553	)	$	295,964
State		24,680		(52,971	)		(28,291	)
Totals	$	691,197	$	(423,524	)	$	267,673

Reported income tax expense for the years ended

October 31,

2016,

2015

and

2014

differs from the “expected” tax expense (benefit), computed by applying the U.S. Federal statutory income tax rate of

34%

to income before income taxes as follows:

	Years ended October 31,
	2016			2015			2014
“Expected” tax expense (benefit)	$	(610,332	)	$	(957,121	)	$	302,797
Increase (reduction) in income tax expense (benefit) resulting from:
Benefits from domestic manufacturing deduction		—			—			(61,024	)
State income taxes, net of federal benefit		(79,386	)		(78,880	)		(23,031	)
Loss of permanent deductions due to NOL carryback		—			35,636			—
Other differences, net		50,627			67,491			48,931
Change in valulation allowance		644,990			2,415,256			—
Reported income tax expense	$	5,899		$	1,482,382		$	267,673

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and deferred tax liabilities as of

October 31,

2016

and

2015

are presented below:

	October 31,
	2016			2015
Deferred tax assets:
Accounts receivable, due to allowances for doubtful accounts and sales returns	$	87,472		$	53,316
Inventories, due to allowance for damaged and slow-moving inventories and additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986		999,468			1,118,735
Liabilities recorded for accrued expenses, deductible for tax purposes when paid		67,758			65,213
Share-based compensation expense		134,653			131,487
Investment in Centric Solutions		6,984			114,118
Net operating loss carryforwards		1,958,734			1,437,611
Other		110,773			57,413
Total gross deferred tax assets		3,365,842			2,977,893
Valuation allowance		(3,060,246	)		(2,415,256	)
Net deferred tax assets		305,596			562,637
Deferred tax liabilities:
Plant and equipment, due to differences in depreciation and capital gain recognition		(301,590	)		(558,222	)
Other receivables, due to accrual for financial reporting purposes		(4,006	)		(4,415	)
Total gross deferred tax liabilities		(305,596	)		(562,637	)
Net deferred tax asset	$	—		$	—

As a result of the acquisition of AOS, the Company recorded certain deferred tax assets totaling

$1,517,605

(after purchase accounting adjustments), related to gross net operating loss (“NOL”) carryforwards of

$4,455,525,

estimated to be available after considering Internal Revenue Code Section

382

limitations. As of

October 31, 2016,

$1,680,000

of these gross NOL carryforwards remain unused and

may

be used to reduce future taxable income. These remaining gross NOL carryforwards begin to expire in fiscal year ending

October 31, 2028.

Additionally, we have federal and state gross NOL carryforwards of

$3,879,154

and

$1,463,694,

respectively; all of which originated during fiscal years

2016

and

2015,

and will not begin to expire until fiscal year

2030.

Included in these carryforwards is

$27,432

of net excess tax benefits from share based compensation for which shareholders’ equity will be increased when such benefits are realized.

For the years ended

October 31, 2016

and

2015,

the Company considered all positive and negative evidence available to assess whether it is “more likely than not” that some portion or all of the deferred tax assets will not be realized. For each year, the Company concluded that in accordance with the provisions of Accounting Standards Codification

740,

Income Taxes

, the negative evidence outweighed the objectively verifiable positive evidence. As a result, the Company established a valuation allowance of

$3,060,246

and

$2,415,256,

respectively, against net deferred tax assets existing as of

October 31, 2016

and

2015.

The Company estimates a liability for uncertain tax positions taken or expected to be taken in a tax return. The liability for uncertain tax positions is included in other noncurrent liabilities on the accompanying consolidated balance sheets.

A reconciliation of the unrecognized tax benefits for fiscal years

2016

and

2015

follows:

	October 31,
	2016			2015
Unrecognized tax benefits balance at beginning of year	$	79,322		$	168,756
Gross decreases for tax positions of prior years		(1,000	)		(88,050	)
Settlements with taxing authorities		—			(1,384	)
Unrecognized tax benefits balance at end of year	$	78,322		$	79,322

During fiscal year

2016,

the Company accrued interest of

$6,284

and reduced accrued penalties by

$250

related to unrecognized tax benefits. During fiscal year

2015,

the Company reduced accrued interest and penalties by

$35,873

and

$19,283,

respectively, related to unrecognized tax benefits. As of

October 31, 2016

and

2015,

the Company had approximately

$44,587

and

$38,553,

respectively, of accrued interest and penalties related to uncertain tax positions. The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized is

$43,191

and

$45,987

as of

October 31, 2016

and

2015,

respectively. The Company does not expect its unrecognized tax benefits to change significantly in the next

months.

The Company files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. The statute of limitations remains open for U.S. and certain state income tax examinations for years ended

October 31, 2013

through

October 31, 2015.