Note 7 – Income Taxes

The provision for (benefit from) income taxes is comprised of the following:

	Year Ended June 30,
	2015		2014		2013
	(In thousands)
Current:
Federal	$	—	$	—	$	—
State		—		—		—
	$	—	$	—	$	—
Deferred:
Federal		—		—		—
State		—		—		—
		—		—		—
	$	—	$	—	$	—

The following is a reconciliation of the statutory federal income tax rate to Qualstar’s effective income tax rate:

	Year Ended June 30,
	2015			2014			2013
Statutory federal income tax benefit		(34.0	)%		(34.0	)%		(34.0	)%
State income taxes, net of federal income tax benefit		(4.3	)		(28.8	)		(3.7	)
Foreign income taxes, net of federal income tax benefit		1.8			—			—
Engineering credits		(8.2	)		(1.5	)		(1.1	)
Valuation allowance		43.3			65.2			39.2
Other		1.7			(0.9	)		(0.4	)
		0.3	%		0.0	%		0.0	%

The tax effect of temporary differences resulted in deferred income tax assets (liabilities) as follows:

	June 30,
	2015			2014			2013
	(In thousands)
Deferred tax assets:
Net operating loss carry forwards	$	11,207		$	10,502		$	8,888
Capital loss and other credit carry forwards		62			151			57
Engineering credit carry forwards		1,804			1,611			1,412
Allowance for bad debts and returns		10			40			105
Inventory reserves		1,106			1,280			408
Capitalized inventory costs		41			7			—
Stock Compensation		247			—			—
Other accruals		152			513			849
Total gross deferred tax assets		14,629			14,104			11,719
Less valuation allowance on deferred tax assets		(14,550	)		(14,090	)		(11,717	)
Net deferred tax assets		79			14			2
Deferred tax liabilities:
Marketable securities		—			(1	)		(1	)
Depreciation and other		(79	)		(13	)		(1	)
Total deferred tax liabilities		(79	)		(14	)		(2	)
Net deferred taxes	$	—		$	—		$	—

The Company records a valuation allowance against its net deferred income tax assets in accordance with ASC 740 “Income Taxes” when in management’s judgment, it is more likely than not that the deferred income tax assets will not be realized in the foreseeable future. For the fiscal years ended June 30, 2015, 2014, and 2013, the Company placed a valuation allowance on net deferred tax assets. The Company has net operating loss carry-forwards for federal income tax purposes of approximately $29.5 million as of June 30, 2015, $27.5 million as of June 30, 2014 and $23.6 million as of June 30, 2013. The Company has net operating loss carry-forwards for state income tax purposes of approximately $20.6 million as of June 30, 2015, $20.9 million as of June 30, 2014 and $16.3 million as of June 30, 2013. The Company had engineering and other credits for tax purposes of $2.7 million as of June 30, 2015, $1.9 million as of June 30, 2014 and $2.0 million at June 30, 2013. If not utilized, the federal net operating loss and other tax credit carry-forwards will expire beginning in 2025. If not utilized, the state net operating loss carry-forward will expire beginning in 2016. The state engineering credit has no limit on the carry-forward period.

The following table summarizes the activity related to the Company’s uncertain tax positions (in thousands):

	June 30,
	2015		2014			2013
Balance at July 1	$	17	$	17		$	26
Increases related to tax positions taken in prior year		—		3			3
Decreases due to lapse of statute of limitations		—		(2	)		(11	)
Related interest and penalties, net of federal tax benefit		—		(1	)		(1	)
Balance at June 30	$	17	$	17		$	17

The deferred tax asset amounts related to NOL and credit carryforwards have been reduced by approximately $532,000 of uncertain tax positions. While the Company expects that the amount of its uncertain tax positions will change in the next twelve months, the Company does not expect this change to have a significant impact on its results of operations or financial position. In addition, future changes in the unrecognized tax benefit will have no impact on the Company’s effective tax rate due to the existence of the valuation allowance.

The Company’s policy is to include interest and penalties on uncertain tax positions in income tax expense, but they are not significant at June 30, 2015. The Company files its tax returns by the laws of the jurisdictions in which it operates. The Company’s federal tax returns for fiscal years June 30, 2012 and subsequent and California tax returns for fiscal years June 30, 2011 and subsequent, are still subject to examination. Various state jurisdictions’ tax years remain open to examination as well, though the Company believes any additional assessment will be immaterial to its consolidated financial statements.