NOTE 8—INCOME TAXES

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

	Years Ended December 31,
	2014		2013
Current:
Federal	$	123,000	$	(317,000)
State and local		109,000		108,000
Foreign		7,000		—
Total current		239,000		(209,000)
Deferred:
Federal		1,830,000		1,471,000
State and local		208,000		117,000
Reversal of State and Local Valuation Allowance		(574,000)		—
Foreign		(6,000)		—
Total deferred		1,458,000		1,588,000
Totals	$	1,697,000	$	1,379,000

The Company has Federal net operating loss carryforwards at December 31, 2014 of approximately $606,000, which expire in 2033.

In addition, the Company has state net operating loss carryforwards of $9,700,000, which expire in 2030 through 2033.

Deferred tax assets (liabilities) consist of:

	December 31,
	2014		2013
Deferred tax assets—current:
Bad debt reserves	$	52,000	$	86,000
Inventory reserves		1,066,000		989,000
Warranty and other reserves		220,000		314,000
		1,338,000		1,389,000
Valuation allowance		—		(11,000)
		1,338,000		1,378,000
Deferred tax (liabilities)—current:
Prepaid expenses		(189,000)		(210,000)
Net deferred tax assets—current	$	1,149,000	$	1,168,000
Deferred tax assets—non-current
Federal net operating loss	$	206,000	$	2,195,000
State net operating loss		208,000		614,000
Tax credits		243,000		128,000
Stock based compensation		521,000		455,000
Other		95,000		1,000
		1,273,000		3,393,000
Valuation allowance		—		(617,000)
		1,273,000		2,776,000
Deferred tax (liabilities)—non-current:
Depreciation		(1,036,000)		(1,032,000)
Intangibles		(2,864,000)		(144,000)
Goodwill		(93,000)		(6,000)
		(3,993,000)		(1,182,000)
Net deferred tax (liabilities) assets —non-current	$	(2,720,000)	$	1,594,000

As discussed in Note 1, on November 12, 2013, the Company sold the assets of the Kitchen and Bath product line. As the result of the sale, the Company wrote–off the remaining tax basis of intangibles and goodwill. The deferred tax effect was to reduce tax basis of intangibles and goodwill and increase the net operating loss carryforward.

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

	Years ended December 31,
	2014		2013
Federal income tax computed at statutory rates	34.0	%	34.0	%
(Decrease) increase in taxes resulting from:
State and local taxes, net of Federal tax benefit	4.1		3.2
Change in valuation allowance	(10.0)		(0.6)
Expenses not deductible for tax purposes - net	5.1		0.5
Lapse of statute of limitation on uncertain tax position	—		(6.8)
Reversal of liabilities (1)	11.3		—
Other	0.4		(0.3)
Income tax expense	44.9	%	30.0	%

(1)

As the result of the expiration of various state statute of limitations pertaining to approximately $1.2 million of unpaid vendor invoices belonging to a formerly deconsolidated subsidiary, for which claims for payment were not submitted, the Company was required to recognize a gain for income tax purposes.

The Company follows the authoritative guidance issued by the FASB that pertains to the accounting for uncertain tax matters. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

Balance at January 1, 2013	$	315,000
Interest accrual		14,000
Lapse of statute of limitation on uncertain tax position		(329,000)
Balance at January 1, 2014		—
Additions for tax positions related to current year acquisition		866,000
Interest accrual		14,000
Balance at December 31, 2014	$	880,000

In connection with one of the acquisitions that occurred in 2014, the Company, in accordance the Accounting Standards Codification 740-10, recorded in Accrued liabilities an uncertain tax position of $866,000 on its Consolidated Balance Sheet as of December 31, 2014. The parties to such transaction entered into a tax exposure-related escrow agreement, which, together with the indemnity obligations of the seller, the Company believes adequately covers the entire potential exposure related to the uncertain tax position. As a result, such liability was offset by an indemnification asset recorded in Prepaid expenses and other current assets in the Consolidated Balance Sheet.

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, 2011 through December 31, 2013. During the prior year, the Company received notification from the Internal Revenue Service of an examination for the year ended December 31, 2010. As of December 31, 2014, no significant preliminary audit findings were received by the Company and no reserves have been recorded.

Interest and penalties, if any, related to income tax liabilities are included in income tax expense.