NOTE 12. INCOME TAXES

The Company and its non-Canadian subsidiaries file a consolidated U.S. federal income tax return. USCAN and Galileo file separate tax returns in Canada. The current applicable U.S. statutory rate for the consolidated U.S. federal income tax return is approximately 34 percent and the current applicable Canadian statutory rate for the Canadian subsidiaries is approximately 26.5 percent. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes, resulting from the use of the liability method of accounting for income taxes. The Company has not recognized deferred income taxes on undistributed earnings of Galileo since such earnings are considered to be reinvested indefinitely.

For U.S. federal income tax purposes at June 30, 2017, the Company has charitable contribution carryovers totaling approximately $147,000 with $68,000; $34,000; $19,000; $5,000; and $21,000 expiring in fiscal years 2018, 2019, 2020, 2021, and 2022, respectively. The Company has U.S. federal net operating loss carryovers of $4.7 million with $2.0 million expiring in fiscal year 2035 and $2.7 million expiring in fiscal year 2036. For Canadian income tax purposes, Galileo has cumulative eligible capital carryovers of $254,000 with no expiration and net operating loss carryovers of $66,000; $120,000; $45,000; $123,000 and $7,000 expiring in fiscal 2025, 2027, 2030, 2036, and 2037, respectively. If certain changes in the Company’s ownership should occur, there could be an annual limitation on the amount of net operating loss carryovers that could be utilized.

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. At June 30, 2017, and 2016, a valuation allowance of $3.3 million and $3.1 million, respectively, was included to fully reserve for net operating loss carryovers, other carryovers and book/tax differences in the balance sheet.

The Company’s components of income (loss) before tax by jurisdiction are as follows:

	Year ended June 30,
(dollars in thousands)	2017			2016			2015
United States	$	(188	)	$	(3,496	)	$	(3,400	)
Canada		(339	)		(213	)		246
Total	$	(527	)	$	(3,709	)	$	(3,154	)

The reconciliation of income tax computed for continuing operations at the U.S. federal statutory rates to income tax expense is as follows:

	Year ended June 30,
(dollars in thousands)	2017			% of Pretax			2016			% of Pretax			2015			% of Pretax
Tax expense (benefit) at statutory rate - continuing operations	$	(179	)		34.0	%	$	(1,255	)		34.0	%	$	(1,045	)		34.0	%
Valuation allowance		144			(27.3	)%		1,067			(28.9	)%		1,857			(60.4	)%
Income from controlled foreign corporation		33			(6.3	)%		51			(1.4	)%		-			0.0	%
Other		19			(3.6	)%		131			(3.6	)%		10			(0.3	)%
Total tax expense (benefit) - continuing operations	$	17			(3.2	)%	$	(6	)		0.1	%	$	822			(26.7	)%

Components of total tax expense (benefit) are as follows:

	Year ended June 30,
(dollars in thousands)	2017		2016			2015
Continuing Operations
Current tax expense (benefit) - U.S. Federal	$	6	$	-		$	(21	)
Current tax expense (benefit) - Non-U.S.		11		(6	)		36
Deferred tax expense - U.S. Federal		-		-			807
Total tax expense (benefit) - continuing operations		17		(6	)		822

Discontinued Operations
Current tax benefit - U.S. Federal		-		-			-
Total tax expense (benefit)	$	17	$	(6	)	$	822

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s deferred assets and liabilities using the effective U.S. statutory tax rate are as follows:

	Year ended June 30,
(dollars in thousands)	2017			2016
Book/tax differences in the balance sheet
Trading securities	$	316		$	321
Prepaid expenses		(92	)		(73	)
Accumulated depreciation		166			142
Available-for-sale securities		228			436
Other investments		355			83
Accrued expenses		126			99
Product start-up costs		117			63
Stock-based compensation expense		6			6
Tax Carryovers
Net operating loss carryover		1,690			1,953
Cumulative eligible capital carryover		67			67
Charitable contributions carryover		50			43
Capital loss carryover		255			-
Valuation Allowance		(3,284	)		(3,140	)
Net deferred tax asset	$	-		$	-

In November 2015, the FASB issued accounting guidance that simplifies the presentation of deferred income taxes. The guidance requires that deferred tax balances be classified as non-current in a statement of financial position. The Company adopted this guidance effective September 30, 2016, on a prospective basis. As a full reserve valuation allowance is recorded for deferred tax balances, adoption of the guidance did not result in any changes or reclassifications in the Consolidated Balance Sheets as of September 30, 2016. No prior periods were retrospectively adjusted.