NOTE 10—INCOME TAXES

Income tax expense (benefit) in the consolidated statements of income and comprehensive income consists of:


	Years Ended December 31,
	2019		2018
Current:
Federal	$	1,078,000	$	(39,000)
State and local		312,000		24,000
Foreign		3,000		19,000
Total current		1,393,000		4,000
Deferred:
Federal		513,000		268,000
State and local		(105,000)		(15,000)
Foreign		(4,000)		(4,000)
Total deferred		404,000		249,000
Totals	$	1,797,000	$	253,000

At December 31, 2019, the Company had state net operating loss carryforwards of approximately $4,112,000, which expire through 2039.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes included, but are not limited to, a corporate tax rate decrease from 35% to 21%, effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. During 2018, the Company finalized its computation of the impact of the Act which resulted in a 3.4 % reduction in its effective tax rate.

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance allows companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which they are subject to the rules (the period cost method), or (ii) account for GILTI in the Company’s measurement of deferred taxes (the deferred method). After completing the analysis of the GILTI provisions, the Company elected to account for GILTI using the period cost method.

Deferred tax assets (liabilities) consist of:


	December 31,
	2019		2018
Deferred tax assets:
Bad debt reserves	$	17,000	$	17,000
Inventory reserves		653,000		615,000
Warranty and other reserves		77,000		78,000
Stock-based compensation		212,000		184,000
Goodwill		866,000		940,000
Acquisition costs		223,000		170,000
Net operating losses - federal		—		340,000
Net operating losses - state		77,000		91,000
Other		20,000		18,000
		2,145,000		2,453,000
Deferred tax (liabilities):
Prepaid expenses		(79,000)		(373,000)
Depreciation		(1,154,000)		(732,000)
Intangibles		(696,000)		(720,000)
Net deferred tax assets	$	216,000	$	628,000

The components of income before income taxes consisted of the following:


	Years ended December 31,
	2019		2018
United States operations	$	6,715,000	$	1,004,000
International operations		(7,000)		105,000
Income before tax	$	6,708,000	$	1,109,000

A reconciliation of the Federal statutory rate to the total effective tax rate applicable to income is as follows:


	Years ended December 31,
	2019		2018
Federal income tax computed at statutory rates	21.0	%	21.0	%
(Decrease) increase in taxes resulting from:
State and local taxes, net of Federal tax benefit	2.4		0.6
Permanent differences - net	3.1		5.2
Foreign rate differential	—		(0.7)
Tax Cuts and Jobs Act of 2017	—		(3.4)
Other	0.3		0.1
Income tax expense	26.8	%	22.8	%

The Company files a consolidated Federal tax return. The Company and certain of its subsidiaries file tax returns in various U.S. state jurisdictions. Its foreign subsidiary, UAT, files in the United Kingdom. With few exceptions, the years that remain subject to examination are the years ended December 31, 2016 through December 31, 2019.

Interest and penalties, if any, related to income tax liabilities are included in income tax expense. As of December 31, 2019, the Company does not have a liability for uncertain tax positions.