Note

– Income Taxes

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

	December 31 , 201 9			December 31, 201 8
Current:
Federal (Net of a 2018 net operating loss benefit of $288)	$	—		$	—
State (Net of a 2018 and 2019 net operating loss benefit of $35 and $97, respectively)		7			3
Foreign		5			1
Provision for income taxes	$	12		$	4
Deferred:
Federal		—			—
State		(30	)		—
Deferred income tax	$	(30	)	$	—
Net income tax expense	$	(18	)	$	4

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

	Twelve Months Ended December 31,
	201 9			201 8
Statutory federal income tax benefit		21.0	%		21.0	%
State income taxes, net of federal income tax benefit		(7.9	)		6.6
Foreign income taxes, net of federal income tax benefit		(13.2	)		—
Deferred tax adjustment – NOL		42.6			—
Valuation allowance		8.2			(26.6	)
Other		0.2			(0.6	)
Effective income tax rate		50.9	%		0.4	%

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

	December 31 , 201 9			December 31, 201 8
Deferred tax assets:
Net operating loss carry forwards	$	7,734		$	7,675
Engineering credit carry forwards		1,920			1,919
Inventory reserves		503			558
Capital loss and other credit carry forwards		6			—
Allowance for bad debts and returns		13			16
Stock compensation		330			287
Capitalized inventory costs, stock compensation and other accuals		389			233
Total gross deferred tax assets		10,895			10,688
Less valuation allowance on deferred tax assets		(10,686	)		(10,688	)
Net deferred tax assets		209			—

Deferred tax liabilities:
Depreciation and other		—			—
Right to use property		(179	)		—
Total deferred tax liabilities		(179	)		—
Net deferred taxes	$	30		$	—

December 22, 2017,

H.R.

(the “Tax Act”), originally known as the Tax Cuts and Jobs Act, was enacted in the United States. In addition to reducing the corporate tax rate to

21%

effective

January 1, 2018,

the Tax Act contains many other tax provisions that affect recorded deferred tax assets and liabilities. The majority of these new provisions are also effective as of

January 1, 2018,

though there are a few that are effective during the

2017

calendar year. Although for

2017

the Company had federal alternative minimum tax (“AMT”) of approximately

$12,000,

the Tax Act eliminated the AMT effective

January 1, 2018,

and provides that any AMT credit carryforwards will be refunded. Accordingly, the

2017

AMT tax liability is being treated as a receivable, and was

not

treated as a current tax expense in

2017.

In addition, the Tax Act provided new rules related to global intangible low-taxed income (“GILTI”). The Tax Act provides that a U.S. shareholder of any controlled foreign corporation (“CFC”) must include in taxable income its pro rata shares of GILTI income. The Company accounts for taxes related to GILTI as such income is incurred, however, currently, the Company’s share of GILTI income is immaterial.

As previously indicated, 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 year ended

December 31, 2019

and

2018,

the Company placed a valuation allowance on net deferred tax assets. With the exception of a small amount of deferred California taxes, the Company continues to fully offset its deferred tax assets with a valuation allowance, despite generating income in

2018

and

2017

given the Company’s significant book losses prior to

2017

and the current year book and tax loss. With regard to California deferred tax assets, since Qualstar files on a separate company basis, and Qualstar generated book income for

2017

and

2018,

and a small loss for

2019,

the Company expects to generate income in the subsequent year, therefore the Company reduced a small amount of the valuation allowance related to Qualstar’s separate company net operating loss carryovers.

The Company had net operating loss carry-forwards for federal income tax purposes of approximately

$30.7

million as of

December 31, 2019

and

$30.4

million as of

December 31, 2018.

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

$19.0

million as of

December 31, 2019

and

$19.7

million as of

December 31, 2018.

The Company had engineering and other credit carryforwards for tax purposes of

$2.7

million as of

December 31, 2019

and

$2.7

million as of

December 31, 2018.

not

utilized, the federal net operating loss will expire beginning in

2026,

and other tax credit carry-forwards will expire beginning in

2024.

not

utilized, the state net operating loss carry-forward as of

December 31, 2019

will begin to expire beginning in

2020.

The state engineering credit has

limit on the carry-forward period.

For U.S. purposes, the Company has completed its evaluation, as of

December 31, 2017,

of the net operating loss (“NOL”) and credit carryforward utilization limitations under Internal Revenue Code, as amended (the “Code”) Section

382

and

383,

change of ownership rules. Code sections

382

and

383

impose certain limitations on the use of NOL or credit carryforwards in certain situations, including when a company has a change in ownership as defined in such sections. As of

December 31, 2017,

the Company has determined that it has

not

had a change in ownership within the meaning of IRC Sections

382

and

383.

Management, at the date of this filing, is of the opinion that its NOL and credit carryforwards that can be utilized each year.

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

	December 31 , 201 9		December 31, 201 8

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

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

$527,000

of uncertain tax positions. The Company expects that any future changes in the unrecognized tax benefit will have

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, 2019.

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

December 31, 2016

and subsequent and California tax returns for fiscal years

December 31, 2015

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 Internal Revenue Service performed an audit of the tax period

December 31, 2017,

the result was

change. The Company does

not

have any open examinations as of

December 31, 2019.

As of

December 31, 2019,

the operations of Qualstar Limited were

not

material for tax purposes and had

significant impact on the year-end tax provision.