18.	INCOME TAXES

The components of income tax expense (benefit) were as follows:

	Year Ended March 31,
	2018			2017
Current:
Federal	$	(133,000	)	$	1,124,000
State		183,000			128,000
Foreign		156,000			132,000
Total current		206,000			1,384,000
Deferred:
Federal		(14,000	)		(592,000	)
State		3,000			(67,000	)
Total deferred		(11,000	)		(659,000	)

Total	$	195,000		$	725,000

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

30.8%

and

34%

for fiscal years ended

March 31, 2018

and

March 31, 2017

each respectively as shown in the following table:

	Year Ended March 31,
	2018					2017
Expected Federal income tax expense U.S. statutory rate	$	818,000		30.8	%	$	(1,434,000	)	34.0	%
State income taxes, net of Federal benefit		129,000		4.9	%		40,000		-0.9	%
Permanent differences, other		21,000		0.8	%		156,000		-3.7	%
Dividend received deduction		-		0.0	%		(302,000	)	7.2	%
Section 831(b) benefit		(320,000	)	-12.1	%		(281,000	)	6.7	%
Change in valuation allowance		(1,116,000	)	-42.1	%		3,868,000		-91.8	%
Domestic production activities deductions		(15,000	)	-0.6	%		(64,000	)	1.5	%
Income attributable to minority interest - Contrail Aviation		(79,000	)	-3.0	%		(45,000	)	1.1	%
Bargain purchase gain		(155,000	)	-5.8	%		-		0.0	%
Tax rate change applied to deferreds		2,297,000		86.6	%		-		0.0	%
Deferred benefit for outside basis difference recorded on Delphax CFC's		(811,000	)	-30.6	%		(1,015,000	)	24.1	%
Deferred benefit for increase in Canadian tax credits for Dephax		(149,000	)	-5.6	%
Recognition of AMT credit as tax receivable		(311,000	)	-11.7	%		-		0.0	%
Deferred state income taxes, net of Federal benefit for Delphax		-		0.0	%		(102,000	)	2.4	%
Other differences, net		(114,000	)	-4.3	%		(96,000	)	2.3	%

Income tax expense	$	195,000		7.3	%	$	725,000		-17.1	%

Delphax, which generated a loss for the period ended

March 31, 2018

and

March 31, 2017

not

included in Air T, Inc.’s consolidated tax return and accounts for

$973,000

and

$3,212,000

of the above valuation allowance effect for each year, respectively. Changes in unrealized losses related to available-for-sale securities accounted for the remaining valuation allowance effect for each year. Deferred tax assets and liabilities consisted of the following as of

March 31:

	2018			2017

Inventory reserves	$	50,000		$	785,000
Accrued vacation		343,000			475,000
Stock option compensation		67,000			108,000
Property and equipment		264,000			169,000
Warranty reserve		25,000			39,000
Accounts and notes receivable reserve		103,000			290,000
Employee severance reserve		549,000			460,000
Net operating loss carryforwards		6,083,000			6,461,000
Federal/Canadian tax credits		4,486,000			4,648,000
263A inventory capitalization		-			10,000
Unrealized gains/losses and outside basis difference for CFC's		2,324,000			1,995,000
Intangibles		25,000			43,000
Outside basis difference					-
Other		69,000			78,000
Total deferred tax assets		14,388,000			15,561,000

Deferred revenue		(11,000	)		(35,000	)
Prepaid expenses		(337,000	)		(505,000	)
263A inventory capitalization		(28,000	)		-
Bargain purchase gain		(179,000	)		-
Gain on marketable securities (OCI)		(72,000	)		(94,000	)
Outside basis difference		(270,000	)		(34,000	)
Total deferred tax liabilities		(897,000	)		(668,000	)

Net deferred tax asset (liability)	$	13,491,000		$	14,893,000

Less valuation allowance		(13,583,000	)		(14,698,000	)

Net deferred tax asset (liability)	$	(92,000	)	$	195,000

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 years subject to examination for the Company’s federal return are the fiscal

2014

through

2016

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

2013

through

2016

tax years. As of

March 31, 2018

and

2017,

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, 2018

and

2017,

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, 2018

and

2017.

As described in Note

10,

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

2013.

Delphax maintains a

September 30

fiscal year. As of

September 30, 2016,

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

$9.7

million and

$14.5

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.

As previously noted, the TCJA repealed the corporate alternative minimum tax and made any minimum tax credit carryforwards to the extent

not

utilized refundable for tax years beginning after

December 31, 2017.

As a result, Delphax will be able to receive a refund of its minimum tax credit carryforward of

$311,000

beginning in their fiscal year ended

September 30, 2019.

Previously, a valuation allowance was established against the minimum tax credit carryforward. As a result of the TCJA relating to the refundability of the minimum tax credit carryforward, an income tax benefit was recognized by the Company during the current period and a long-term income tax receivable was established. 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. Furthermore, Delphax is currently undergoing bankruptcy proceedings with their Canadian entity (see Note

) and intends to liquidate both the United Kingdom and French entities too. The Company anticipates those proceedings will be completed within the next fiscal year. Upon completion, any remaining tax attributes, including net operating losses and credit carryforwards in each respective jurisdiction will be lost. The Company has recorded an outside basis difference in the stock of these entities of

$2.3

million which is the estimated loss that will be recognized in the United States upon their liquidation. See additional information regarding Delphax Canada in Note

10.

The returns for the fiscal year ended

September 30, 2017

have

not

yet been filed.

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 tax attributes, the Company has established a full valuation allowance of

$13.0

million at

March 31, 2018

and

$14.0

million at

March 31, 2017.

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.