14.

INCOME TAXES

The provision for income taxes for the fiscal years ended

August

31,

2020

and

2019

was approximately as follows:

	Fiscal Year Ended August 31,
	2020			2019
Current:
Federal	$	—		$	—
State		23,000			48,000
Foreign		1,226,000			902,000
		1,249,000			950,000
Deferred:
Federal		1,501,000			(315,000	)
State		101,000			(21,000	)
Foreign		(177,000	)		228,000
		1,425,000			(108,000	)
	$	2,674,000		$	842,000

Reconciliations of the expected federal income tax at the statutory rate of

21.0%

with the provisions for income taxes for the fiscal years ended

August 31, 2020

and

2019

were approximately as follows:

	Fiscal Year Ended August 31,
	2020			2019
Tax computed at statutory rates	$	365,000		$	1,398,000
State income tax, net of federal benefit		23,000			27,000
Tax effect on equity in income of international joint ventures		(888,000	)		(1,490,000	)
Tax effect of foreign operations		641,000			672,000
Deemed repatriation		108,000			204,000
Research and development credit		(368,000	)		(133,000	)
Valuation allowance		2,797,000			133,000
Stock based compensation		189,000			208,000
Non-controlling interest		(55,000	)		(74,000	)
Other		(138,000	)		(103,000	)
	$	2,674,000		$	842,000

The Company has

not

provided U.S. income taxes or foreign withholding taxes with respect to its portion of the cumulative undistributed earnings of certain foreign subsidiaries and joint ventures that are essentially permanent in duration. As a result of the

2017

tax law changes, U.S. federal income taxes on dividends received from the Company's foreign subsidiaries and joint ventures after

December 31, 2017

have been generally eliminated. However, the Company continues to be subject to foreign withholding taxes upon repatriation of any undistributed earnings that are

not

essentially permanent in duration. The Company recorded a tax benefit of approximately

$76,000

and tax expense of approximately

$4,000

during fiscal

2020

and fiscal

2019,

respectively, representing changes in the deferred tax liability for foreign withholding taxes to be paid with respect to the portion of the cumulative undistributed earnings of foreign subsidiaries and joint ventures that the Company determined were

not

essentially permanent in duration.

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. The tax effect of the temporary differences and tax carryforwards comprising the net deferred taxes shown on the consolidated balance sheets as of

August

31,

2020

and

2019

was approximately as follows:

	August 31,
	2020			2019
Accrued compensation	$	173,500		$	153,400
Inventory costs		64,000			60,900
Other accrued expenses		74,900			39,700
Lease liability		147,500			-
Goodwill and other intangible assets		581,200			688,400
Stock-based compensation		397,300			299,300
Foreign tax credit carryforward		5,790,500			5,790,500
Other credit and loss carryforwards		4,824,200			3,631,700
Total deferred tax assets		12,053,100			10,663,900
Valuation allowance		(11,561,700	)		(8,764,300	)
Total deferred tax assets after valuation allowance		491,400			1,899,600
Property and equipment		(50,700	)		(111,900	)
Right-of-use asset		(147,500	)		-
Other		(83,400	)		(153,400	)
Total deferred tax liabilities		(281,600	)		(265,300	)
Net deferred tax assets	$	209,800		$	1,634,300

As of

August 31, 2020,

the Company had foreign tax credit carryforwards of approximately

$5,790,500,

which will begin to expire if

not

utilized prior to

August 31, 2021.

In addition, the Company had federal and state tax credit carryforwards of

$3,312,400

as of

August 31, 2020

which began to expire in fiscal

2021.

These federal and state tax credit carryforwards consist primarily of federal and Minnesota research and development credit carryforwards. The Company also has a deferred tax asset of

$1,260,600

for federal and state net operating loss carryforwards as of

August 31, 2020.

The federal net operating loss carryforward has an indefinite carryforward period. The Company has a deferred tax asset of

$251,200

for foreign net operating loss carryforwards,

$229,200

of which has an indefinite carryforward period.

The Company records a tax valuation allowance to reduce deferred tax assets to the amount expected to be realized when it is more likely than

not

that some portion or all of its deferred tax assets will

not

be realized.

As of

August 31, 2020,

the Company determined based on all available evidence, including historical data and projections of future results, that it is more likely than

not

that its domestic deferred tax assets, including its foreign tax credit carryforward and federal and Minnesota research and development credit carryforwards will

not

be realized. The Company determined that its domestic deferred tax assets, including its federal and state net operating loss carryforwards, foreign tax credit carryforwards, and federal and Minnesota research and development credit carryforwards will

not

be realized due to the absence of objectively verifiable sources of taxable income. On the basis of this evaluation, the Company has recorded a valuation allowance of

$11,561,700

August 31, 2020

to recognize only the portion of the deferred tax assets that is more likely than

not

to be realized. The net deferred tax asset as of

August 31, 2020

relates entirely to non-US deferred tax assets which are expected to be realized by offset of deferred tax liability for withholding tax on cumulative undistributed earnings in foreign subsidiaries and joint ventures that the Company determined were

not

essentially permanent.

As of

August 31, 2019,

the Company determined it was still in a position that a full valuation allowance was

not

necessary and recorded a valuation allowance of

$5,790,500

with respect to the foreign tax credit carryforwards and a valuation allowance of

$2,973,800

with respect to federal and state tax credit carryforwards that was determined would

not

be utilized prior to expiration. The Company determined that its foreign tax credit carryforward would

not

be realized due to insufficient foreign source taxable income within the carryforward period and the fact that for ordering purposes the foreign tax credit carryforward is

not

allowed to be utilized until after any current year foreign tax credits are utilized. The Company determined that its federal and Minnesota research and development credit carryforwards would

not

be realized due to insufficient federal and Minnesota taxable income within the carryforward period after considering the foreign tax credit utilization. The change in the valuation allowance totaled

$2,797,000

and

$133,000

for the years ended

August 31, 2020

and

2019,

respectively.

The following is a tabular reconciliation of the total amounts of approximated unrecognized tax benefits:

	Fiscal Year Ended August 31,
	2020		2019
Gross unrecognized tax benefits – beginning balance	$	248,000	$	242,000
Gross increases – prior period tax positions		15,200		1,000
Gross increases – current period tax positions		15,000		5,000
Gross unrecognized tax benefits – ending balance	$	278,200	$	248,000

The entire amount of unrecognized tax benefits would affect the effective tax rate if recognized. It is

not

expected that the amount of unrecognized tax benefits will change significantly in the next

months.

The Company recognizes interest related to unrecognized tax benefits and penalties as income tax expense. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. There was

liability for the payment of interest and penalties as of both

August 31, 2020

and

August 31, 2019.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. With few exceptions, as of

August 31, 2020,

the Company is

longer subject to federal, state, local, or foreign examinations by tax authorities for years prior to

August 31, 2017.