Note 8 – Income Taxes

As of December 31, 2016, 2015 and 2014 the Company recorded income tax provision expense of $943,000, $434,000 and $129,000, respectively. The increase in 2016 is due to income from the PBRT system and operations of the Company’s subsidiaries. The increase in 2015 is due to income from operations of the Company’s subsidiaries. The loss incurred during the year ended December 31, 2015 on the write-down of the Company’s investment in equity securities is a capital loss which is treated as non-deducible expense for income tax provision purposes and as such, a full valuation allowance was recorded against this loss and the net impact to the provision was $0.

The components of the provision for income taxes as of December 31, 2016, 2015 and 2014 consist of the following:

	YEARS ENDED DECEMBER 31,
	2016		2015		2014
Current:
Federal	$	24,000	$	35,000	$	-
State		146,000		103,000		54,000
Foreign		-		-		-
Total current		170,000		138,000		54,000

Deferred:
Federal		680,000		353,000		(131,000)
State		93,000		(57,000)		40,000
Foreign		-		-		166,000
Total deferred		773,000		296,000		75,000

	$	943,000	$	434,000	$	129,000

Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2016 and 2015 are as follows:

	DECEMBER 31,
	2016		2015
Deferred tax liabilities:
Property and equipment	$	(7,595,000)	$	(6,831,000)

Total deferred tax liabilities		(7,595,000)		(6,831,000)

Deferred tax assets:
Net operating loss carryforwards		2,783,000		2,859,000
Accruals and allowances		193,000		172,000
Tax credits		380,000		356,000
Other – net		200,000		163,000
Capital loss carryover		1,228,000		1,217,000

Total deferred tax assets		4,784,000		4,767,000

Valuation allowance		(1,365,000)		(1,340,000)

Deferred tax assets net of valuation allowance		3,419,000		3,427,000

Net deferred tax liabilities	$	(4,176,000)	$	(3,404,000)

These amounts are presented in the financial statements as follows:

	DECEMBER 31,
	2016		2015

Deferred income taxes (non-current)	$	(4,176,000)	$	(3,404,000)

	$	(4,176,000)	$	(3,404,000)

The provision for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (34% in 2016, 2015 and 2014) to income before taxes as follows:

	YEARS ENDED DECEMBER 31,
	2016		2015		2014

Computed expected federal income tax	$	637,000	$	(360,000)	$	(280,000)
State income taxes, net of federal benefit		169,000		(55,000)		66,000
Non-deductible expenses		42,000		40,000		21,000
Change in valuation allowance		25,000		792,000		416,000
Other		70,000		17,000		(94,000)

	$	943,000	$	434,000	$	129,000

At December 31, 2016, the Company has a net operating loss carryforward for federal income tax return purposes of approximately $7,589,000 which expire between 2022 and 2034. The Company has net operating loss carryforwards for state income tax purposes of approximately $1,041,000 that begin to expire in 2029. The Company has net operating loss carryforwards for Peru and UK income tax purposes of approximately $541,000 that begin to expire in 2017.

Utilization of the domestic NOL and tax credit forwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by the Internal Revenue Code Section 382, as well as similar state provisions. In general, an “ownership change,” as defined by the code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. Any limitation may result in expiration of all or a portion of the NOL or tax credit carryforwards before utilization.

At December 31, 2016, the Company has a capital loss carryforward for federal income tax return purposes of approximately $3,316,000 which starts to expire in 2018. The Company has capital loss carryforwards for state income tax purposes of approximately $150,000 which starts to expire in 2018.

Due to the uncertainty that the Company will generate capital gains in future years to utilize its capital loss carryforward, a valuation allowance has been placed against the deferred tax asset. Due to uncertainty surrounding the realization of impairment losses, capital losses and foreign operating losses in future years, the Company has placed a valuation allowance against a portion of its net domestic and foreign deferred tax assets. The net valuation allowance increased by $25,000, $792,000, and $416,000 for the tax years ended December 31, 2016, 2015, and 2014, respectively.

The tax return years 2012 through 2016 remain open to examination by the major domestic taxing jurisdictions to which the Company is subject. Net operating losses generated on a tax return basis by the Company for calendar years 1999 through 2004, 2009, 2010, 2012, 2014, 2015, and 2016 remain open to examination by the major domestic taxing jurisdictions.

The Company has adopted accounting standards which prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Additionally, these accounting standards specify that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities. The Company has made no reclassifications between current taxes payable and long term taxes payable under this guidance. Also, the Company had no amounts of unrecognized tax benefits that, if recognized, would affect its effective income tax rate for the years ended December 31, 2016, 2015 and 2014.

The Company’s policy for deducting interest and penalties is to treat interest as interest expense and penalties as taxes. As of December 31, 2016, the Company had no amount accrued for the payment of interest and penalties related to unrecognized tax benefits.