NOTE 8—INCOME TAXES

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

	Years Ended December 31,
	2015		2014
Current:
Federal	$	1,293,000	$	123,000
State and local		137,000		109,000
Foreign		14,000		7,000
Total current		1,444,000		239,000
Deferred:
Federal		328,000		1,830,000
State and local		67,000		208,000
Reversal of State and Local Valuation Allowance		—		(574,000)
Foreign		(13,000)		(6,000)
Total deferred		382,000		1,458,000
Totals	$	1,826,000	$	1,697,000

The Company has state net operating loss carryforwards of $7,500,000, which expire through 2033.

Deferred tax assets (liabilities) consist of:

	December 31,
	2015		2014
Deferred tax assets—current:
Bad debt reserves	$	57,000	$	52,000
Inventory reserves		1,084,000		1,066,000
Warranty and other reserves		183,000		220,000
		1,324,000		1,338,000
Deferred tax (liabilities)—current:
Prepaid expenses		(193,000)		(189,000)
Net deferred tax assets—current	$	1,131,000	$	1,149,000
Deferred tax assets—non-current
Federal net operating loss	$	—	$	206,000
State net operating loss		143,000		208,000
Tax credits		—		243,000
Stock-based compensation		531,000		521,000
Other		107,000		95,000
		781,000		1,273,000
Deferred tax liabilities—non-current:
Depreciation		(1,005,000)		(1,036,000)
Intangibles		(2,675,000)		(2,864,000)
Goodwill		(178,000)		(93,000)
		(3,858,000)		(3,993,000)
Net deferred tax liabilities—non-current	$	(3,077,000)	$	(2,720,000)

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

	Years ended December 31,
	2015		2014
United State operations	$	5,220,000	$	3,777,000
International operations		150,000		—
Income before tax	$	5,370,000	$	3,777,000

U.S. federal income taxes have not been provided on approximately $150,000 of undistributed earnings at the Company’s foreign subsidiary at December 31, 2015, because it is the Company’s intent to keep the earnings permanently reinvested.

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,
	2015			2014
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		2.5			4.1
Change in valuation allowance		—			(10.0)
Permanent differences - net		(1.2)			5.1
Foreign rate differential		(0.9)			—
Reversal of liabilities (1)		—			11.3
Other		(0.4)			0.4
Income tax expense		34.0	%		44.9	%

(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 previously deconsolidated subsidiary, for which claims for payment were not submitted, the Company was required to recognize a gain for income tax purposes for the year ended December 31, 2014.

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 January 1, 2014	$	—
Additions for tax positions related to current year acquisition		866,000
Interest accrual		14,000
Balance at January 1, 2015		880,000
Lapse of statute of limitations		(469,000)
Interest accrual		21,000

Balance December 31, 2015	$	432,000

In connection with one of the acquisitions that occurred in 2014, the Company, in accordance with the ASC 740-10, recorded in Accrued liabilities an uncertain tax position of $432,000 on its Consolidated Balance Sheet as of December 31, 2015. 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, 2012 through December 31, 2014. During the prior year, the Company received notification from the Internal Revenue Service of an examination for the year ended December 31, 2013. As of December 31, 2015, 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.