INCOME TAXES

12 Months Ended

Mar. 31, 2019

NOTE 11 - INCOME TAXES

We account for income taxes under the provisions of FASB ASC 740,

Income Taxes

. The following table reflects income from continuing operations by location, and the provision for income taxes and the effective tax rate for the applicable fiscal years ended March 31:

	2019		2018
U.S. operations	$	1,390,485	$	316,520
Foreign operations		133,548		242,058
Income before income taxes		1,524,033		558,578
Income tax expense		423,357		824,486
Net income (loss)	$	1,100,676	$	(265,908	)

The income tax expense consists of the following as of March 31:

	2019		2018
Current
Federal	$	-	$	(896	)
State		-		-
Total Current	$	-	$	(896	)
Deferred
Federal		252,482		907,531
State		170,875		(82,149	)
Total Deferred	$	423,357	$	825,382
Income tax expense	$	423,357	$	824,486

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:

	2019			2018
U.S. statutory income tax	$	320,047		$	172,012
State income tax, net of federal benefit		63,933			(22,672	)
Stock based compensation		30,497			8,764
Change in valuation allowance		(32,642	)		(24,159	)
Tax Act rate change impact on deferred taxes		-			703,251
Other		41,522			(12,710	)
Income tax expense	$	423,357		$	824,486
Effective tax rate*		27.8	%		147.6	%

*Effective tax rate is calculated by dividing the income tax expense by income before income taxes.

Our fiscal 2019 taxes were measured at the new lower U.S. statutory income tax rate of 21%. The Tax Act of 2017 reduced the maximum U.S. statutory income tax rate from 35% to 21%, effective January 1, 2018. With the enactment of the Tax Act of 2017, our fiscal 2018 financial results included a re-measurement of our U.S. deferred tax assets at the new lower 21% U.S. statutory income tax rate. U.S. tax law requires that taxpayers with a fiscal year that begins before and ends after the effective date of a rate change calculate a blended tax rate based on the pro rata number of days in the fiscal year before and after the effective date. As a result, for the fiscal year ended March 31, 2018, the Company’s U.S. income tax rate was 30.79%. For the year ended March 31, 2018, the Company's effective tax rate differed from the U.S, statutory income tax rate primarily as a result of the increase in deferred federal tax expense attributable to the recalculation of the Company's net deferred tax assets and associated valuation allowance to reflect the impact of the corporate income tax rate decrease included in the Tax Act. This reduced the Company's net deferred tax assets by approximately $0.7 million, which was recorded as additional income tax expense for the fiscal year ended March 31, 2018.

On December 22, 2017, Staff Accounting Bulletin No. 118, or SAB 118, was issued to provide guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740,

Income Taxes

. We finalized our analysis within the measurement period in accordance with SAB 118 after completing a review of additional guidance issued by the Internal Revenue Service and tax accounting estimates made at March 31, 2018. During the year ended March 31, 2019, we did not make any changes to the provisional amounts recorded in our March 31, 2018 Annual Report on Form 10-K in connection with the Tax Act.

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

	2019			2018
Deferred Tax Assets:
Compensation	$	334,090		$	358,439
AMT tax credits		60,841			121,682
Other liabilities not currently deductible		94,207			96,769
Stock based compensation awards		224,975			285,411
Net operating loss carryforward		3,814,321			3,397,921
Valuation allowance		(1,701,276	)		(1,733,918	)
Total Deferred Tax Assets	$	2,827,158		$	2,526,304
Deferred Tax Liabilities:
Contract accounting methods	$	(751,723	)	$	-
Accelerated depreciation		(71,089	)		(480,006	)
Total Deferred Tax Liabilities	$	(822,812	)	$	(480,006	)
Net Deferred Tax Asset	$	2,004,346		$	2,046,298

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 in deferred tax assets if they become realizable.

The valuation allowance on deferred tax assets was approximately $1.7 million at March 31, 2019 and 2018. 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 the valuation allowance for deferred tax assets. This would result in an increase in the Company’s effective tax rate.

The following table summarizes carryforwards of net operating losses as of March 31, 2019:

	Amount		Begins to Expire:
Federal net operating losses	$	8,278,972		2026
State net operating losses	$	27,915,086		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 $0.5 million. As such, at March 31, 2019, we have approximately $7.7 million of 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 2016 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 Income.