NOTE 11 - INCOME TAXES

The Company is subject to entity level taxation in certain states and is subject to U.S. Federal and state income taxes with respect to its allocable share of any taxable income of the LLC. The Company will be taxed at the prevailing corporate tax rates.

All income before taxes is recognized domestically. Income tax expense for FY18 and FY17 consists of:

	Fiscal Year Ended June 30, 2018
	(in thousands)
	Current		Deferred		Total
U.S. Federal	$	—	$	—	$	—
State and Local		2		—		2
	$	2	$	—	$	2

	Fiscal Year Ended June 30, 2017
	(in thousands)
	Current		Deferred		Total
U.S. Federal	$	—	$	—	$	—
State and Local		2		—		2
	$	2	$	—	$	2

The difference between income taxes computed using the statutory federal income tax rate and the Company’s effective tax rate are summarized as follows:

	June 30, 2018			June 30, 2017
	(in thousands)
Computed tax at statutory rate – continuing operations	$	336		$	328
State taxes, net of federal benefit		112			56
Loss from discontinued operations		(750	)		(464	)
Rate benefit as a LLC		91			52
Meals and entertainment		16			14
Stock-based compensation		32			22
Other permanent differences		10			—
Tax Cuts and Jobs Act Impact		1,480			—
Valuation allowance		(1,325	)		(6	)
Income tax expense	$	2		$	2

Components of deferred tax assets (liabilities) consist of the following:

	June 30, 2018			June 30, 2017
	(in thousands)
Deferred tax assets:
Accrued compensation	$	18		$	10
Stock-based compensation		39			44
Intangible assets		1,397			2,568
Net operating losses		1,101			1,354
Inventories		67			84
Other		6			6
Gross deferred tax assets		2,628			4,066
Valuation allowance		(2,542	)		(3,867	)
Total deferred tax assets, net of valuation allowance		86			199
Deferred tax liabilities:
Unrealized gain		(14	)		(2	)
Property and equipment		(72	)		(197	)
Total deferred tax liability		(86	)		(199	)
Net deferred taxes	$	—		$	—

In FY17, a valuation allowance of $3.9 million was recorded after assessing all the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. The assessment of future income of the Company did not change in FY18 and a valuation allowance continues to be recorded on the deferred tax assets in the amount of $2.5 million. The Company’s possible liability associated with the tax receivable agreement will not be recognized until the valuation allowance is partially or fully reversed.

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Among other changes is a permanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of the reduction in the corporate income tax rate, the Company has revalued its net deferred tax asset at December 31, 2017. The revaluation resulted in a reduction of our net deferred tax asset by $1.1 million, which was offset by a change in the valuation allowance of $1.1 million. Many of the Act's provisions become effective in our fiscal 2019, and the Company does not expect that the Act will have a significant impact on the results of operations.

The Company and the LLC are subject to annual California franchise tax. Truett-Hurst, Inc. files U.S. Federal and California income tax returns. The Company has gross federal and state net operating losses of approximately $3.8 million and $3.9 million, respectively. Both jurisdictions have expiration dates beginning in 2035.

For Truett-Hurst, Inc., U.S. federal and state tax returns associated with fiscal years 2015 through 2017 are currently open to examination. U.S. federal and state tax returns for the LLC associated with calendar year ended 2014 and fiscal years ended 2015 through 2017 are currently open to examination. There were no material uncertain tax positions and the Company does not expect major changes in the next twelve months.