NOTE 5 - INCOME TAXES

We account for income taxes under ASC 740, Income Taxes. The following table reflects income and loss from continuing operations by location, and the provision for income taxes for the applicable fiscal years ended March 31:


	2021		2020
U.S. operations	$	435,534	$	(403,419)
Foreign operations		(10,033)		(11,191)
Income (loss) before income taxes		425,511		(414,610)
Income tax provision (benefit)		104,880		(73,041)
Net income (loss)	$	320,631	$	(341,569)

The components of the provision (benefit) for income taxes consists of the following as of March 31:


	2021		2020
Current:
Federal		(76,185)		—
State		—		—
Total Current	$	(76,185)	$	—
Deferred:
Federal		148,151		(26,328)
State		32,914		(46,713)
Total Deferred	$	181,065	$	(73,041)
Income tax provision (benefit)	$	104,880	$	(73,041)

On March 27, 2020, the U.S. federal government passed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. Under the CARES Act, Alternative Minimum Tax, or AMT, credit refunds are accelerated and fully refundable in tax returns through the year 2019. As a result of this provision, the Company recovered all of the AMT credits as refunds in the amount of $121,000 over the last two fiscal years.

Our fiscal 2021 and 2020 taxes were measured at the U.S. statutory income tax rate of 21%. For the year ended March 31, 2021, the Company's tax expense was driven by certain reversing temporary differences, which reduced the Company’s net deferred tax assets. A reconciliation between income taxes computed at the U.S. federal statutory rate to the actual tax expense for income taxes reported in the Consolidated Statements of Operations and Comprehensive Income (Loss) follows for fiscal years ended March 31:


	2021			2020
U.S. statutory income tax	$	89,358		$	(87,068)
State income tax, net of federal benefit		11,366			(35,969)
Change in state NOL, net of federal benefit		(10,487)			31,208
Stock-based compensation		(4,830)			(17,587)
Change in valuation allowance		20,484			9,340
Global intangible income tax		—			28,045
Other		(1,011)			(1,010)
Provision (benefit) for income taxes	$	104,880		$	(73,041)
Effective tax rate*		24.6	%		17.6	%

*Effective tax rate is calculated by dividing the income tax provision by income (loss) before income taxes.

The following table summarizes the components of deferred income tax assets and liabilities at March 31:


	2021		2020
Deferred tax assets:
Net operating loss carryforward	$	3,571,600	$	3,704,185
Compensation		347,742		341,900
Stock based compensation awards		238,120		213,854
Other items not currently deductible		189,728		88,090
Depreciation		38,490		68,486
AMT tax credits		—		76,186
Total deferred tax assets		4,385,680		4,492,701
Valuation allowance		(1,731,100)		(1,710,616)
Net deferred tax assets		2,654,580		2,782,085
Deferred tax liabilities:
Contract accounting methods		(720,165)		(666,605)
Total deferred tax liabilities		(720,165)		(666,605)
Deferred taxes, net	$	1,934,415	$	2,115,480

In assessing the recoverability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We have determined that it is more likely than not that certain future tax benefits may not be realized. Accordingly, a valuation allowance has been recorded against deferred tax assets that are unlikely to be realized. Realization of the remaining deferred tax assets will depend on the generation of sufficient taxable income in the appropriate jurisdictions, the reversal of deferred tax liabilities, tax planning strategies and other factors prior to the expiration date of the carryforwards. A change in the estimates used to make this determination could require an increase or a reduction the valuation allowance currently recorded against those deferred tax assets.

The valuation allowance on deferred tax assets was approximately $1.7 million at March 31, 2021 and 2020. We believe that it is more likely than not that the benefit from certain state and foreign NOL carryforwards and other deferred tax assets will not be realized. In the event future taxable income is below management’s estimates or is generated in tax jurisdictions different than projected, the Company could be required to increase or decrease the valuation allowance for those deferred tax assets.

The following table summarizes carryforwards of net operating losses as of March 31, 2021:


			Begins to
	Amount		Expire:
Federal net operating losses	$	7,296,383	2026
State net operating losses	$	27,187,363	2032

The Internal Revenue Code provides for a limitation on the annual use of net operating loss carryforwards following certain ownership changes that could limit our ability to utilize these carryforwards on a yearly basis. We experienced an ownership change in connection with the acquisition of Ranor in 2006. Accordingly, our ability to utilize certain carryforwards relating to 2006 and prior is limited. Our remaining pre‑2006 net operating losses total approximately $0.4 million. At March 31, 2021, we have approximately $6.9 million of federal post‑2006 losses available for carryforward, without limitation. U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, we may not be able to take full advantage of these carryforwards for Federal or state income tax purposes.

We have not accrued any penalties with respect to uncertain tax positions. We file income tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions. Our foreign subsidiary files separate income tax returns in China, the foreign jurisdiction in which it is located. Tax years 2017 and forward remain open for examination. We recognize interest and penalties accrued related to income tax liabilities in selling, general and administrative expense in our Consolidated Statements of Operations and Comprehensive (Loss) Income.