Note5. Income Taxes

Income tax (expense) benefit consisted of the following:

	Year Ended October 31,
	2015			2014			2013
Current (expense) benefit:
Federal	$	198,327		$	(1,864,570	)	$	1,565,286
State		31,640			(416,620	)		434,027
Deferred benefit (expense)		(321,666	)		2,281,190			(1,894,167	)
Income tax benefit (expense) continuing operations		(91,699	)		-			105,146
Intra-period tax allocation benefit (expense) discontinued operations		-			-			(105,146	)
Total income tax benefit (expense)	$	(91,699	)	$	-		$	-

Deferred tax assets and liabilities are as follows:

	October 31,
	2015			2014
Deferred tax assets:
Allowance for doubtful accounts	$	176,254		$	238,975
Net operating loss carry forward		1,764,429			1,656,051
Accrued vacation		174,853			174,543
Accrued bonuses		31,039			23,507
Other accrued assets		332,970			186,240
Other accrued liabilities		122,076			122,586
Intangible assets		-			-
Gross deferred tax assets		2,601,621			2,401,902

Deferred tax liabilities:
Property and equipment		(947,984	)		(1,336,905	)
Intangible assets		(635,345	)		(507,009	)
Gross deferred tax liability		(1,583,329	)		(1,843,914	)
Net deferred tax asset before valuation allowance		1,018,292			557,988

Valuation allowance:
Beginning balance		557,988			2,003,440
Change during the period		460,304			(1,445,452	)
Ending balance		1,018,292			557,988
Net deferred tax asset	$	-		$	-

A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate for continuing operations is as follows:

	Year Ended October 31,
	2015		2014		2013

Statutory federal income tax rate	34.0	%	(34.0	)%	(34.0	)%
State taxes, net of federal benefit	1.9		(7.6	)	(1.8	)
Change in valuation allowance	(28.2	)	42.8		265.8
Disallowed deferred tax asset-related party	-		-		(220.1	)
Selling expenses	(0.4	)	(1.2	)	(1.4	)
CODI, insolvency exemption debt basis	-		-		3.1
Goodwill	10.6		-		(10.3	)
Other	(26.2	)	-		0.6
Effective tax rate, (expense) benefit	(8.3	)%	-	%	1.9	%

The Company excluded debt cancellation from cancellation of debt income (“CODI”) from the income tax liability in 2013 in accordance with applicable Internal Revenue Service guidelines regarding insolvency where the amount of debt cancellation excluded from gross ordinary income is applied to attribute reductions. The insolvency calculation is based on IRS guidelines associated with liabilities in excess of the fair market value of assets immediately prior to the debt cancellation. The attribute reductions are ordered and reduce net operating losses, various credits, capital losses, and asset basis among other attribute reductions if applicable and necessary. As a result of the CODI exception provided in Internal Revenue Code Section 108 the Company reduced its net operating losses, applicable credits and asset basis in accordance with the applicable ordering rules.

In 2014, as a result of the attribute reductions to exclude the Company’s CODI from taxable income in 2013, the company incurred $6.4 million of attribute recapture income for tax purposes. As such, the Company used net operating loss carry forwards to offset this attribute recapture income. A decrease in the Company’s deferred tax asset valuation allowance in a like amount of the tax liability arising from the Company's taxable income was used to offset any income tax liability.

During fiscal 2015, the Company finalized its position on its 2014 income tax liability after researching applicable Alternative Minimum Tax (“AMT”) rules and determined it owed $92,000 in federal income taxes. The $92,000 tax liability was paid in the third quarter of 2015. AMT taxes paid can be carried forward as a credit against future regular taxable income. The Company had determined that a full valuation allowance against deferred tax assets was warranted at October 31, 2015. Given this, the Company increased its valuation allowance by $92,000 to neutralize the deferred tax asset associated with its AMT payment made during fiscal 2015. This increase in the valuation allowance was reflected on the income statement as an income tax expense.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers a multitude of factors in assessing the utilization of its deferred tax assets including the reversal of deferred tax liabilities, projected future taxable income and other assessments, which may have an impact on financial results. The Company currently intends to maintain a full valuation allowance on its deferred tax assets until sufficient positive evidence related to sources of future taxable income exists.

The Company’s effective tax rate for continuing operations for 2015 was an expense of 8.3%, 2014 was 0.0% compared to a benefit of 1.9% in 2013. The primary difference in tax rate for 2015 was the change in valuation allowance previously discussed. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate and may be impacted by increases or decreases in the valuation allowance for deferred tax assets.

The Company paid $92,000 in income taxes during fiscal 2015 as previously discussed. This payment can be used as a credit against future taxable income. The Company did not pay or was not refunded any income taxes for the years ended October 31, 2014 or 2013.