INCOME TAXES

12 Months Ended

Dec. 31, 2021

INCOME TAXES

INCOME TAXES

NOTE 10—INCOME TAXES

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

	Years Ended December 31,
	2021		2020
Current:
Federal	$	63,000	$	(1,821,000)
State and local		55,000		(73,000)
Foreign		—		3,000
Total current		118,000		(1,891,000)
Deferred:
Federal		(69,000)		(238,000)
State and local		(48,000)		263,000
Foreign		(3,000)		(35,000)
Total deferred		(120,000)		(10,000)
Totals	$	(2,000)	$	(1,901,000)

At December 31, 2021, the Company had state net operating loss carryforwards of approximately $2,100,000, of which we have a full valuation allowance against. The state net operating losses generally expire through 2041.

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in tax years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The NOL carryback provision of the CARES Act resulted in a $1,921,000 benefit to the Company. In addition to the NOL changes, the CARES Act enacted the employee retention credit and modifies the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. This modification increased the allowable interest expense deduction of the Company and resulted in less taxable income for the year ended 2020, resulting in less utilization of net operating losses.

NOTE 10—INCOME TAXES – Continued

Deferred tax assets consist of:

	December 31,
	2021		2020
Deferred tax assets:
Bad debt reserves	$	24,000	$	25,000
Inventory reserves		789,000		762,000
Warranty and other reserves		45,000		74,000
Stock-based compensation		200,000		205,000
Goodwill		755,000		852,000
Acquisition costs		201,000		212,000
Net operating losses - state		166,000		168,000
Other		98,000		51,000
Less valuation allowance		(287,000)		(316,000)
		1,991,000		2,033,000
Deferred tax liabilities:
Prepaid expenses		(238,000)		(260,000)
Depreciation		(914,000)		(1,113,000)
Intangibles		(490,000)		(434,000)
Net deferred tax assets	$	349,000	$	226,000

The Company maintains a valuation allowance against certain state net operating losses and state depreciation adjustments. The Company believes it is more likely than not that the remaining tax benefits associated with the state net operating losses and depreciation adjustments will not be realized in the foreseeable future based upon its ability to generate sufficient state taxable income.

The components of income (loss) before income taxes consisted of the following:

	Years ended December 31,
	2021		2020
United States operations	$	2,320,000	$	(6,663,000)
International operations		(32,000)		(192,000)
Income (loss) before income taxes	$	2,288,000	$	(6,855,000)

A reconciliation of the Federal statutory rate to the net effective (benefit) tax rate is as follows:

	Years ended December 31,
	2021		2020
Federal income (benefit) tax expense computed at statutory rates	21.0	%	(21.0)	%
(Decrease) increase in taxes resulting from:
State and local taxes, net of Federal tax benefit	3.7		(2.4)
Permanent differences - net	3.3		0.4
Valuation allowance	(1.3)		4.6
Foreign rate differential	0.1		0.1
CARES Act	(26.9)		(9.3)
Other	—		(0.1)
Benefit tax rate	(0.1)	%	(27.7)	%

NOTE 10—INCOME TAXES – Continued

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, 2018, through December 31, 2021.

Interest and penalties, if any, related to income tax liabilities are included in income tax expense. As of December 31, 2021, the Company does not have a liability for uncertain tax positions.