6. Income Taxes

6 Months Ended

Jun. 30, 2016

6. Income Taxes

Our income tax expense reconciles to an income tax expense resulting from applying an assumed statutory federal income rate of 34% to income before income taxes as follows ($ in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Income tax expense at federal statutory rate	$	487		$	652		$	687		$	1,082

Increase (decrease) in taxes resulting from:
Domestic production activities deduction		(38	)		(17	)		(58	)		(47	)
Research and development credit		(32	)		-			(63	)		-
Incentive stock options		19			-			35			-
State taxes, net of federal benefit		28			22			30			38
Increase in reserve for uncertain tax positions		4			(51	)		10			(51	)
Other		11			(12	)		20			21
Income tax expense per the statement of operations	$	479		$	594		$	661		$	1,043

We claim the research and experimentation tax credit, or R&D tax credit, on our tax returns and have included the effect of those credits in our provisions for income taxes. The Internal Revenue Service, or IRS, has completed its routine examination of our tax returns through 2010 with their findings resulting in a larger portion of the R&D tax credit we claimed being allowed than we had previously estimated. Our tax returns for 2011 and later remain subject to examination by the IRS. We believe it more-likely-than-not that examination of those tax returns for 2011 and later could result in a portion of the R&D tax credits we claimed for those years not being allowed by the IRS. After considering the effects of these items collectively, as of June 30, 2016, we have a reserve of $100,000 against R&D tax credits claimed on our tax returns for 2011 and later due to the uncertainty of sustaining those credits.

As of June 30, 2016, we had federal income tax net operating loss carry forwards of $356,000 available to offset future federal taxable income, if any. These carry forwards expire in 2030 and 2031. We have recorded a deferred tax asset for the estimated future tax benefits we believe we will realize from the application of these carryforwards against future taxable income.

We have a capital loss carryforward of $3.2 million available for use through 2017 to offset future capital gains for federal income tax purposes. We also have approximately $138,000 of research and development activities tax credits available to offset future Texas franchise tax expense through 2037. We have not recorded a deferred tax asset for these carryforwards due to the uncertainty of the whether or not we will have items in our tax computations in future periods against which to apply these carryforwards.

In November 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-17, Income Tax: Balance Sheet Classification of Deferred Taxes. ASU 2015-07 requires that all deferred tax assets and liabilities for a tax jurisdiction, along with any related valuation allowance, be classified as noncurrent on the balance sheet. We have implemented this ASU in the accompanying financial statements. This implementation resulted in the previously reported current deferred tax asset of $406,000 as of June 30, 2015, being reclassified and combined with the previously reported non-current deferred asset of $346,000 as of that date to yield a non-current deferred tax asset balance of $752,000 being reported as of June 30, 2015.