8. Income Taxes

12 Months Ended

Oct. 31, 2016

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 2016 and 2015 is as follows:                                                                                                          

	2016		2015
	Amount	Percent	Amount	Percent
U.S. statutory tax	$     349,000	34.0%	$     230,000	34.0%
Stock compensation	125,000	12.2	82,000	12.1
Meals and entertainment	14,000	1.4	16,000	2.3
State tax, net of federal benefit	102,000	9.9	70,000	10.4
Income tax expense (benefit), net	$     590,000	57.6%	$     398,000	58.8%

The effective tax rate for fiscal year 2016 was 57.6%, as compared to 58.8% in fiscal year 2015. The statutory income tax expense at 34% for fiscal year 2016 was $349,000. This varies from actual income tax expense of $590,000 primarily due to permanent differences of meals and entertainment and ISO stock compensation of $139,000, state income of taxes of $33,000 (net of federal benefit), and a change to the state deferred tax rate of $69,000.

The tax effect of temporary differences that give rise to deferred tax assets and liabilities as of October 31, 2016 and 2015 is as follows:

	2016	2015
Deferred tax assets and liabilities:
Net operating loss carry-forward	$ 1,894,000	$ 2,481,000
Accrued vacation	-	133,000
Allowance for doubtful accounts receivable	19,000	18,000
Stock compensation-nonqualified	198,000	186,000
Depreciation	(441,000)	(608,000)
Deferred tax assets and liabilities	$ 1,670,000	$  2,210,000

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, 2016 was approximately $1,485,000, 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 for fiscal years ended October 31, 2016 and 2015 is as follows:

	2016	2015
Current:
Federal	$              -	$              -
State	50,000	36,000
Income tax provision-current	$     50,000	$     36,000
Deferred:
Federal	$   471,000	$   316,000
State	69,000	46,000
Total income tax expense (benefit), net	$   590,000	$   398,000

At October 31, 2016, the Company had available a federal net operating loss carry-forward of $6,341,000 for income tax purposes, which will expire in various tax years from fiscal year 2022 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. At October 31, 2015, the Company had available a federal net operating loss carry-forward of $7,847,000 for income tax purposes, which will expire in various tax years from fiscal year 2022 through fiscal year 2033.

At October 31, 2016 and 2015, the Company did not have any uncertain tax positions. As permitted by ASC 740-10, the Company’s accounting policy is to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax provision. The Company’s tax return years that are subject to examination by taxing authorities are fiscal years 2013 through 2016.