2. INCOME TAXES

Income tax expense for the years ended December 31, 2015 and 2014 consists of the following:


	2015		2014

Current:
Federal	$	62,000	$	332,000
State		10,000		15,000
		72,000		347,000
Deferred		18,000		(77,000)
	$	90,000	$	270,000

The expected provision for income taxes, computed by applying the U.S. federal income tax rate of 34% in 2015 and 2014 to income before taxes, is reconciled to income tax expense as follows:


	2015		2014

Expected provision for federal income taxes	$	77,000	$	312,000
State income taxes, net of federal benefit		7,000		15,000
Domestic manufacturers deduction		(6,000)		(33,000)
Non-deductible meals, entertainment, and life insurance		29,000		21,000
Research and development credit		(15,000)		(31,000)
Valuation allowance released on capital loss utilized		—		(17,000)
Other		(2,000)		3,000
	$	90,000	$	270,000

Net deferred tax liabilities consist of the following as of December 31, 2015 and 2014:


	2015		2014

Deferred tax assets:
Accrued vacation	$	26,000	$	23,000
Inventories reserve		126,000		129,000
Allowance for doubtful accounts		5,000		4,000
Allowance for sales returns		37,000		13,000
Research and development credit carryforward		45,000		30,000
Accrued self-insured medical		1,000		9,000
Less valuation allowance		(45,000)		(30,000)
		195,000		178,000
Deferred tax liabilities
Property and equipment		(494,000)		(462,000)
Intangible assets		(86,000)		(83,000)
Net deferred tax liabilities	$	(385,000)	$	(367,000)

The deferred tax amounts described above have been included in the accompanying balance sheet as of December 31, 2015 and 2014 as follows:


	2015		2014

Current assets	$	195,000	$	178,000
Noncurrent liabilities		(580,000)		(545,000)

	$	(385,000)	$	(367,000)

The valuation allowance balance of $45,000 and $30,000 at December 31, 2015 and 2014, respectively relates entirely to Minnesota research and development credit carryforwards that the Company does not expect to utilize and begin to expire in 2028. The change in the valuation allowance was $15,000 and $296,000 in 2015 and 2014, respectively.

It has been the Company’s policy to recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2015 and 2014, there was no liability for unrecognized tax benefits.

The Company is subject to federal and state taxation. The material jurisdictions that are subject to examination by tax authorities primarily include Minnesota and the United States, for tax years 2012, 2013, 2014, and 2015.