3.	Income Tax es

Income taxes have been provided using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The income tax provision for the

nine

-month period ended

December 31, 2015

differs from the federal statutory rate partially due to the effect of state income taxes, the federal domestic production activities deduction, and the Company

’s share of Delphax’s consolidated net loss. The effective tax rate for the

nine

-month period ended

December 31, 2015

also reflects the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary afforded under Section

831

(b). During the

nine

-month periods ended

December 31, 2015

and

2014,

the Company recorded income tax expense of

$2,867,000

and

$1,495,000,

respectively. For the

three

-month period ended

December 31, 2015,

the tax expense was

$1,499,000

compared to

$691,000

of tax expense recorded for the prior comparable quarter.

As described in Note

effective on

November 24, 2015,

Air T, Inc. purchased interests in Delphax. With an equity investment level by the Company of approximately

38%,

Delphax is required to continue filing a separate United States corporate tax return. Furthermore, Delphax has

three

foreign subsidiaries located in Canada, France, and the United Kingdom which file tax returns in those jurisdictions. With few exceptions, Delphax is

longer subject to examinations by income tax authorities for tax years before

2011.

Delphax maintains a

September 30

fiscal year. As of

September 30, 2015,

Delphax and its subsidiaries had estimated foreign and domestic tax loss carryforwards of

$13.9

million and

$8.0

million, respectively. As of that date, they had estimated foreign research and development credit carryforwards of

$3.9

million, which are available to offset future income tax. The credits and net operating losses expire in varying amounts beginning in the year

2023.

Domestic alternative minimum tax credits of approximately

$325,000

are available to offset future income tax with

expiration date. Should there be an ownership change for purposes of Section

382

or any equivalent foreign tax rules, the utilization of the previously mentioned carryforwards

may

be significantly limited.

The provisions of ASC

740

require an assessment of both positive and negative evidence when determining whether it is more-likely-than-

not

that deferred tax assets will be recovered. In accounting for the Delphax acquisition on

November 24, 2015,

the Company established a full valuation allowance against Delphax

’s net deferred tax assets of approximately

$11,661,000.

The corresponding valuation allowance at

December 31, 2015

was approximately

$12,003,000.

The cumulative losses incurred by Delphax in recent years was the primary basis for the Company’s determination that a full valuation allowance should be established.