Note

– Income Taxes

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

	December 31 , 2016		December 31, 2015
Current:
Federal	$	—	$	—
State		—		20
		—		20
Deferred:
Federal		—		—
State		—		—
	$	—	$	—
			$	20

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

	Twelve Months Ended December 31,						Six Months Ended December 31,			Twelve Months Ended June 30,
	201 6			201 5			2015			2015
	Audited			(Unaudited)			Audited			Audited
Statutory federal income tax benefit		(34.0	)%		(34.0	)%		(34.0	)%		(34.0	)%
State income taxes, net of federal income tax benefit		8.7			(10.9	)		(10.9	)		(4.3	)
Foreign income taxes, net of federal income tax benefit		(1.3	)		0.7			0.7			1.8
Engineering credits		(5.2	)		(2.5	)		(2.5	)		(8.2	)
Valuation allowance		26.2			48.3			48.3			43.3
Other		5.6			(0.5	)		(0.5	)		1.4
Effective federal income tax rate		0.0	%		1.1	%		1.1	%		0.0	%

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

	December 31 , 2016			December 31, 2015

Deferred tax assets:
Net operating loss carry forwards	$	12,295		$	11,461
Engineering credit carry forwards		1,830			1,771
Inventory reserves		1,015			1,412
Capital loss and other credit carry forwards		21			67
Allowance for bad debts and returns		45			44
Capitalized inventory costs, stock compensation and other accruals		596			784
Total gross deferred tax assets		15,802			15,539
Less valuation allowance on deferred tax assets		(15,765	)		(15,448	)
Net deferred tax assets		37			91
Deferred tax liabilities:
Depreciation and other		(37	)		(91	)
Total deferred tax liabilities		(37	)		(91	)
Net deferred taxes	$	—		$	—

The Company records a valuation allowance against its net deferred income tax assets 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 year ended

December

31,

2016,

the short year ended

December

31,

2015,

and the year ended

June

30,

2015,

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

$32.6

million as of

December

31,

2016,

$30.1

million as of

December

31,

2015,

and

$29.4

million as of

June

30,

2015.

The Company has net operating loss carry-forwards for state income tax purposes of approximately

$21.9

million as of

December

31,

2016,

$20

million as of

December

31,

2015,

and

$20.4

million as of

June

30,

2015.

The Company has net operating loss carry-forwards for foreign income tax purposes of approximately

$0.2

million as of

December

31,

2016

and

December

31,

2015.

The Company had engineering and other credits for tax purposes of

$2.7

million as of

December

31,

2016,

$2.6

million as of

December

31,

2015,

and

$2.6

million as of

June

30,

2015.

If not utilized, the federal net operating loss will expire beginning in

2025

, and other tax credit carry-forwards will expire beginning in

2024.

If not utilized, the state net operating loss carry-forward as of

December

31,

2016

, will expire beginning in

2017.

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):

	December 31 , 2016		December 31, 2015

Beginning Balance	$	27	$	17
Increases related to tax positions taken in prior year		2		10
Decreases due to lapse of statute of limitations		—		—
Related interest and penalties, net of federal tax benefit		—		—
Balance at December 31	$	29	$	27

The deferred tax asset amounts related to NOL and credit carryforwards have been reduced by approximately

$540,000

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

December

31,

2016.

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,

2013

and subsequent and California tax returns for fiscal years

June

30,

2012

and subsequent, are still subject to examination. Various state and foreign jurisdictions’ tax years remain open to examination as well, though the Company believes any additional assessment will be immaterial to its consolidated financial statements. The company does not have any open examinations as of

December

31,

2016.