NOTE 11 - INCOME TAXES

12 Months Ended

Jun. 30, 2017

Income Tax Disclosure [Abstract]

NOTE 11 - INCOME TAXES

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017, 2016 and 2015

NOTE 11 - INCOME TAXES

ASC topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a corporate tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as unrecognized benefits. A liability is recognized (or amount of net operating loss carryforward or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC topic 740.

In accordance with ASC topic 740, interest costs related to unrecognized tax benefits are required to be calculated (if applicable) and would be classified as “Interest expense, net. Penalties if incurred would be recognized as a component of “Selling, general and administrative” expenses.

The Company files corporate income tax returns in the United States (federal) and in various state and local jurisdictions. In most instances, the Company is no longer subject to federal, state and local income tax examinations by tax authorities for years prior to 2013.

The Company has recorded a deferred tax asset of $17,861,777 and a deferred tax liability of $331,527 as of June 30, 2017, primarily relating to its net operating loss carryforwards of approximately $98,327,000 available to offset future taxable income through 2030. The net operating losses begin to expire in 2021 for federal tax purposes and in 2016 for state income tax purposes.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of year end, due to our ability to sustain profitable levels of income in the U.S. federal tax jurisdiction, management determined that there is sufficient positive evidence to conclude that it is more than likely than not that such deferred taxes of $5.0 million are realizable. It therefore reduced the valuation allowance accordingly.

The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which temporary differences become deductible or when such net operating losses can be utilized. The Company considers projected future taxable income, the regulatory environment of the industry, and tax planning strategies in making this assessment. At present, the Company believes that it is more likely than not that the benefits from certain NOL carryforwards, will not all be fully realized. In recognition of this inherent risk, a valuation allowance was established for the partial value of the deferred tax asset.

A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of the remainder of the valuation.

Components of the benefit for income taxes are as follows:

	Years Ended June 30,
	2017			2016			2015
Current:
Federal	$	250,000		$	360,496		$	114,683
State		357,235			—			29,313
Federal deferred taxes		(4,552,702	)		(4,368,901	)		(2,353,124	)
State deferred taxes		(416,967	)		(278,866	)		(403,393	)
	$	(4,362,434	)	$	(4,287,271	)	$	(2,612,521	)

A reconciliation of the federal statutory income tax rate to the Company's effective tax rate as reported is as follows:

	Years Ended June 30,
	2017			2016			2015
Taxes at federal statutory rate		35.0	%		35.0	%		35.0	%
State and local income taxes (benefit), net of federal benefit		4.0	%		6.0	%		6.0	%
Permanent differences		0.1	%		0.2	%		0.2	%
(Decrease) increase in the valuation allowance		(73.0	)%		(89.8	)%		(65.4	)%
True ups		5.0	%		(0.0	)%		(3.2	)%
Effective income tax rate		(28.9	)%		(48.6	)%		(27.4	)%

As of June 30, 2017, the Company has net operating loss (“NOL”) carryforwards of approximately $98,327,000 that will be available to offset future taxable income. The utilization of certain of the NOLs is limited by separate return limitation year rules pursuant to Section 1502 of the Internal Revenue Code.

The Company has, for federal income tax purposes, research and development tax credit carryforwards aggregating $4,261,000. The Company also has $1,292,000 in alternative minimum tax credits.

In addition, for New York State income tax purposes, the Company has tax credit carryforwards aggregating approximately $1,121,000 which, are accounted for under the flow-through method. The tax credit was written off due to the remote possibility of realization.

Significant components of the Company's deferred tax assets and liabilities at June 30, 2017 and 2016 are as follows:

	June 30,
	2017			2016
Deferred tax assets:
Allowance for doubtful accounts	$	6,255,976		$	6,495,094
Non-deductible accruals		273,435			962,867
Net operating carryforwards		39,330,708			44,011,554
Tax credits		5,744,086			6,770,099
Inventory		130,430			105,250
Property and equipment and depreciation		298,426			—
		52,033,061			58,344,864
Valuation allowance		(34,171,284	)		(45,302,504	)
Total deferred tax assets		17,861,777			13,042,360
Intangibles		(331,527	)		—
Capitalized software development costs		—			(481,779	)
Total deferred tax liabilities		(331,527	)		(481,779	)
Net deferred tax asset	$	17,530,250		$	12,560,581

The valuation allowance for deferred tax assets decreased by approximately $11,131,000 during the year ended June 30, 2017 and decreased by approximately $10,123,000 during the year ended June 30, 2016.