2. INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 2017 and 2016 consists of the following:

The Tax Cut and Jobs Act of 2017 (the “Tax Reform Act”) was enacted December 22, 2017. This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of 34% and 35% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the newly enacted rate. This revaluation resulted in a benefit of $115,000 to income tax expense in continuing operations and a corresponding reduction in the deferred tax liability. The other provisions of the Tax Reform Act did not have a material impact on the 2017 consolidated financial statements.


	2017		2016

Current:
Federal	$	(5,000)	$	(72,000)
State		9,000		7,000
		4,000		(65,000)
Deferred - Federal		(302,000)		61,000
	$	(298,000)	$	(4,000)

The expected provision benefit for income taxes, computed by applying the U.S. federal income tax rate of 34% in 2017 and 2016 to income (loss) before taxes, is reconciled to income benefit as follows:


	2017		2016

Expected provision for federal income taxes	$	(178,000)	$	(23,000)
State income taxes, net of federal benefit		2,000		7,000
Non-deductible meals, entertainment, and life insurance		29,000		27,000
Research and development credit		(38,000)		(32,000)
Change in valuation allowance		16,000		15,000
Tax rate change adjustment related to Tax Reform Act		(115,000)		-
Prior year true-ups and other		(14,000)		2,000
	$	(298,000)	$	(4,000)

Net deferred tax liabilities consist of the following as of December 31, 2017 and 2016:


	2017		2016

Deferred tax liabilities:
Accrued vacation	$	19,000	$	32,000
Inventories reserve		46,000		66,000
Allowance for doubtful accounts		2,000		4,000
Allowance for sales returns		9,000		15,000
Research and development credit carryforward		131,000		77,000
Accrued self-insured medical		1,000		3,000
Property and equipment		(242,000)		(499,000)
Intangible assets		(65,000)		(92,000)
Net operating loss		40,000		-
Other		6,000		8,000
Valuation allowance		(91,000)		(60,000)
Net deferred tax liabilities	$	(144,000)	$	(446,000)

The Company’s federal net operating loss carryforward and research and development credit carryover as of December 31, 2017 was $167,000 and $40,000, respectively, and will begin to expire in 2036. The Company’s state net operating loss carryforwards at December 31, 2017 total $834,000 and begin expiring in 2026. The Company has state research and development credit carryforwards as of December 31, 2017 of $115,000.

The valuation allowance balance of $91,000 and $60,000 at December 31, 2017 and 2016, 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 $31,000 in 2017 and $15,000 in 2016. Approximately $15,000 of the $31,000 change in 2017 is a result of recording the impact of the revaluation on these credits and corresponding increase in valuation allowance related to the Tax Reform Act discussed above.

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, 2017 and 2016, there was no liability for unrecognized tax benefits.

The Company is subject to federal and state taxation. As of December 31, 2017, with few exceptions, the Company is no longer subject to examination prior to tax year 2014.