8. Income Taxes

12 Months Ended

Oct. 31, 2013

Notes

8. Income Taxes

8. Income Taxes

The Company’s provision for income taxes in each fiscal year consists of current federal, state, and local minimum taxes.

A reconciliation of the U.S statutory tax rate to the Company’s effective tax rate for fiscal years 2013 and 2012 is as follows:

	2013		2012
	Amount	Percent	Amount	Percent
U.S. statutory tax	$     217,000	34.0%	$     369,000	34.0%
Decrease in valuation allowance	-	-	(2,306,000)	(212.5)
Permanent differences (1)	77,000	12.1            4.7	74,000	6.8       5.9
State tax, net of federal benefit	62,000		64,000
Other, net	-	-	23,000	2.1
Income tax expense (benefit), net	$356,000	55.8%	$(1,776,000)	(163.7)%

(1) Permanent differences are comprised of stock compensation of $63,000 and $56,000, as well as other permanent differences of $14,000 and $18,000 in fiscal years 2013 and 2012, respectively.

The tax effect of temporary differences that give rise to deferred tax assets and liabilities as of October 31, 2013 and 2012 is as follows:

	2013	2012
Deferred tax assets and liabilities:
Net operating loss carry-forward	$ 3,665,000	$ 4,263,000
AMT credits	-	15,000
Accrued vacation	115,000	112,000
Allowance for doubtful accounts receivable	11,000	32,000
Stock compensation-nonqualified	111,000	75,000
Depreciation	(854,000)	(1,095,000)
Deferred tax assets and liabilities	$ 3,048,000	$ 3,402,000

In accordance with accounting standards, the Company has not recorded a deferred tax asset related to the net operating losses resulting from the exercise of disqualifying stock options in the accompanying financial statements. The cumulative amount of unrecognized tax benefits from the exercise of stock options at October 31, 2013 was approximately $1,063,000, and if the Company is able to utilize this benefit in the future, it would result in a credit to additional paid-in capital.

The income tax expense (benefit) for fiscal years ended October 31, 2013 and 2012 is as follows:

	2013	2012
Current:
Federal	$     (14,000)	$      14,000
State	16,000	21,000
Income tax provision-current	2,000	35,000
Deferred:
Federal	303,000	(1,369,000)
State	51,000	(442,000)
Total income tax expense (benefit), net	$    356,000	$(1,776,000)

At October 31, 2013, the Company had available a federal net operating loss carry-forward of $10,224,000 for income tax purposes, which will expire in various tax years from fiscal year 2020 through fiscal year 2033. The Company evaluates whether a valuation allowance related to deferred tax assets is required each reporting period. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. During fiscal year 2012, the Company reversed the remaining valuation allowance of $2,306,000 related to deferred tax assets, as it was determined that it is more likely than not these assets will be realized. This determination was primarily based on cumulative positive earnings in recent years and projected taxable income in the future. In evaluating whether or not to realize a deferred tax asset, the Company considered all available positive and negative evidence, including past operating results and a forecast of future taxable income. 

The Company’s tax return years that are subject to examination by taxing authorities are fiscal years 1996 through 2005 and fiscal years 2010 through 2013.