17.	INCOME TAXES

The components of income tax expense were as follows:

	Year Ended March 31,
	2016			2015
Current:
Federal	$	1,817,000		$	1,209,000
State		316,000			159,000
Foreign		171,000			(65,000	)
Total current		2,304,000			1,303,000
Deferred:
Federal		152,000			(315,000	)
State		(61,000	)		(57,000	)
Total deferred		91,000			(372,000	)

Total	$	2,395,000		$	931,000

Income tax expense was different from the amount computed by applying the statutory federal income tax rate of

34%

as shown in the following table:

	Year Ended March 31,
	2016					2015
Expected Federal income tax expense U.S. statutory rate	$	2,092,000		34.0	%	$	1,161,000		34.0	%
State income taxes, net of Federal benefit		169,000		2.7	%		67,000		2.0	%
Permanent differences, other		47,000		0.8	%		42,000		1.2	%
Section 831(b) benefit		(316,000	)	-5.1	%		(364,000	)	-10.6	%
Change in valuation allowance		557,000		9.0	%
Domestic production activities deductions		(193,000	)	-3.1	%		(107,000	)	-3.1	%
Other differences, net		39,000		0.6	%		132,000		3.8	%
Income tax expense	$	2,395,000		38.9	%	$	931,000		27.3	%

Delphax, which generated a loss for the period from

November 24, 2015

through

March 31, 2016

and is

not

included in the Air T, Inc.

’s consolidated tax returns, is the source of the above valuation allowance effect.

Deferred tax assets and liabilities consisted of the following as of:

	March 31,
	2016			2015

Inventory reserves	$	504,000		$	115,000
Accrued vacation		439,000			244,000
Stock option compensation		141,000			47,000
Warranty reserve		74,000			85,000
Accounts and notes receivable reserve		181,000			83,000
Net operating loss carryforwards		5,353,000			-
Federal credits		4,784,000			-
263A inventory capitalization		60,000			145,000
Other		112,000			79,000
Total deferred tax assets		11,648,000			798,000

Deferred Revenue		(52,000	)		-
Prepaid expenses		(563,000	)		(473,000	)
Property and equipment		(70,000	)		(463,000	)
Intangibles		(388,000	)		-
Total deferred tax liabilities		(1,073,000	)		(936,000	)
Net deferred tax (liability) asset	$	10,575,000		$	(138,000	)
Less Valuation Allowance		(10,830,000	)		-
Net deferred tax (liability) asset after Valuation Allowance	$	(255,000	)	$	(138,000	)

The deferred tax items are reported on a net current and non-current basis in the accompanying fiscal

2016

and

2015

consolidated balance sheets according to the classification of the underlying asset and liability.

The Company accounts for uncertain tax positions in accordance with accounting principles generally accepted in the United States of America. The Company has analyzed filing positions in all of the federal, state and international jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The periods subject to examination for the Company

’s federal return are the fiscal

2012

through

2014

tax years. The periods subject to examination for the Company’s state returns are generally the fiscal

2011

through

2014

tax years. As of

March 31, 2016

and

2015,

the Company did

not

have any unrecognized tax benefits. The Company does

not

believe there will be any material changes in unrecognized tax positions over the next

twelve

months.

It is the Company

’s policy to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of

March 31, 2016

and

2015,

the Company did

not

have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the years ended

March 31, 2016

and

2015.

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

$6.0

million and

$7.9

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

$4.5

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. The Company is currently evaluating whether the investment in Delphax by Air T resulted in an ownership change for purposes

of Section

382.

The Company anticipates completing this analysis prior to filing it’s

first

quarterly report for fiscal year

2017.

Should there be an ownership change for purposes of Section

382

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

$10,273,000.

The corresponding valuation allowance at

March 31, 2016

was approximately

$10,830,000.

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 against Delphax’s net deferred tax assets.

U.S. income tax has

not

been recognized on the excess of the amount for ﬁnancial reporting over the tax basis of investments in foreign subsidiaries for Delphax that is indeﬁnitely reinvested outside the United States. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is

not

practicable because of the complexities of the hypothetical calculation.