NOTE 9 Income Taxes

The Company computes income tax expense using the liability method. Under this method, deferred income taxes are provided, to the extent considered realizable by management, for basis differences of assets and liabilities for financial reporting and income tax purposes.

The Company follows guidance issued by the Financial Accounting Standards Board (“FASB”) with respect to accounting for uncertainty in income taxes. A tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more-likely-than-not” test, no tax benefit is recorded.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the state of Florida. The Company’s income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next 12 months.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not reflect any amounts for interest and penalties in its 2015 or 2014 statements of operations, nor are any amounts accrued for interest and penalties at October 31, 2015 or November 1, 2014.

The provision for income taxes for the years ended consists of the following:


	October 31, 2015			November 1, 2014
Current tax expense:
Federal	$	5,629		$	4,036
State		—			—

		5,629			4,036
Deferred tax expense		1,105,489			489,921
Valuation allowance		(975,312	)		(489,921	)

Income tax expense	$	135,806		$	4,036

The following table shows the reconciliation between the statutory federal income tax rate and the actual provision for income taxes for the years ended:


	October 31, 2015			November 1, 2014
Provision—federal statutory tax rate	$	1,037,408		$	429,057
Increase (decrease) resulting from:
State taxes, net of federal tax benefit		110,759			45,808
Permanent differences:
Stock option expirations		6,045			20,773
Other		(43,094	)		(1,681	)
Changes in DTA valuation allowance		(975,312	)		(489,921	)

Income tax expense	$	135,806		$	4,036

The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts and the related deferred tax assets and deferred tax liabilities are as follows:


	October 31, 2015			November 1, 2014
Deferred tax assets:
Allowance for doubtful accounts	$	87,261		$	87,261
Inventories		651,980			782,308
Carrying value of other investments		1,186,668			1,939,918
Accrued expenses		75,141			58,311
Stock-based compensation		8,971			10,507
Net operating loss		—			231,289
Valuation allowance		—			(975,312	)

Total deferred tax assets		2,010,021			2,134,282
Deferred tax liabilities:
Depreciation		(37,982	)		(33,288	)
State income tax refunds		(29,598	)		(29,598	)
Amortization		(58,810	)		(58,810	)
Prepaid expenses		(17,808	)		(16,586	)

Net deferred tax assets	$	1,865,823		$	1,996,000

At November 1, 2014, the Company has unused net operating loss carry forwards totaling approximately $600,000. These net operating losses were applied to 2015 taxable income.

These amounts are included in the accompanying consolidated balance sheets under the following captions:


	October 31, 2015			November 1, 2014
Current assets:
Deferred tax assets	$	814,381		$	927,879
Deferred tax liabilities		(159,188	)		(170,710	)
Valuation allowance		—			(248,535	)

Net current deferred taxes		655,193			508,634

Non-current assets:
Deferred tax assets		1,307,422			2,306,241
Deferred tax liabilities		(96,792	)		(92,098	)
Valuation allowance		—			(726,777	)

Net non-current deferred taxes		1,210,630			1,487,366

Net deferred tax asset	$	1,865,823		$	1,996,000

In assessing the ability to realize a portion of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In fiscal year 2015, the Company determined that a valuation reserve for the Company’s deferred tax assets was not considered necessary as the deferred tax assets were fully realizable. The decision was made based on the strong profitability for two consecutive years, the reduction in deferred tax assets in 2015, and the complete utilization of all net operating loss carryforwards. In fiscal 2014, the Company had determined that, due to negative evidence as a result of losses in numerous consecutive years through 2011, a valuation reserve was required to reduce the Company’s net deferred taxes to a level supportable by certain tax planning strategies that could be enacted to realize deferred tax assets, if necessary.

The primary tax planning strategy is the potential sale of real estate, primarily land not currently used in the operations of the Company, to generate taxable gains. The Company has assessed that these strategies could result in the realization of approximately $2.0 million of deferred tax assets. The amount of deferred tax assets above this amount are reserved with a valuation allowance. There no valuation allowance at October 15, 2015. The valuation allowance was approximately $975,000 at November 1, 2014.

The Company’s tax planning strategies include estimates as to the amount of gains on sales of properties that could be realized. The Company believes these amounts are reasonable and supportable but, if circumstances change, these amounts could be affected which would impact the amount of net deferred taxes which would be supportable. The Company will continue to monitor these matters at each future reporting period.