11. Income Taxes

Compenents of income (loss) before income taxes:	Year ended December 31
	2015		2014

United States	$	(103,069)	$	49,757
Foreign		(1,359,598)		(73,188)
	$	(1,462,667)	$	(23,431)

Compenents of provision (benefit) for income taxes:	Year ended December 31
	2015		2014
Current:
Federal	$	(389,000)	$	(37,000)
State		21,000		(122,000)
Foreign		38,000		26,000
Total current		(330,000)		(133,000)

Deferred:
Federal		27,000		131,000
State		5,000		24,000
Foreign		60,000		(770,000)
Total deferred		92,000		(615,000)
	$	(238,000)	$	(748,000)

The provision (benefit) for income taxes is different from the amounts computed by applying the United States federal statutory income tax rate of 34%. The reasons for these differences are as follows:

	Year ended December 31
	2015		2014

Income taxes at U.S. statutory rate	$	(497,000)	$	(8,000)
State income taxes, net of federal benefit		21,000		19,000
Higher/(lower) effective taxes on losses in foreign countries		63,000		37,000
Foreign corporate income taxes		43,000		14,000
Effect of future tax rate changes to foreign deferred income taxes		55,000		-
Nondeductible meals and entertainment expense		18,000		23,000
Qualified domestic production activities income, net		45,000		-
State tax planning strategy		-		(97,000)
Release of valuation allowance, net		-		(714,000)
Other		14,000		(22,000)
	$	(238,000)	$	(748,000)

The Company has a deferred tax asset of $3,112,000 as of December 31, 2015, and $3,147,000 as of December 31, 2014, relating to foreign net operating loss carryforwards (NOLs) in various jurisdictions which expire in a range of years from one to unlimited. In 2014, the Company recorded a net income tax benefit of $758,000 due to a reduction of the valuation allowance related to deferred tax assets for net operating losses of approximately $3.6 million in the Company’s United Kingdom subsidiary. Based on management’s assessment, the Company reduced the United Kingdom’s NOL valuation allowance because the weight of evidence regarding the future realizability of the deferred tax assets had become predominantly positive and realization of the deferred tax assets was more likely than not. The positive evidence considered primarily related to three years of consistent profitability while the only negative evidence was historical losses prior to 2012 for this subsidiary. As of December 31, 2015 and 2014, the net deferred tax asset attributable to the United Kingdom subsidiary’s net operating loss carryforward was $623,000 and $715,000, respectively. The Company has recorded a valuation allowance against all other foreign net operating loss carryforward balances as it is more likely than not that this asset will not be realized before it expires beginning in 2016.

The components of the deferred tax assets and liabilities, and the related tax effects of each temporary difference at December 31, 2015 and 2014, are as follows:

	2015		2014
Deferred tax assets:
Product refund reserve	$	12,000	$	13,000
Inventory obsolescence reserve		20,000		24,000
Vacation accrual		14,000		17,000
Stock-based compensation		11,000		10,000
Organization costs		195,000		208,000
Deferred compensation		107,000		98,000
Miscellaneous accrued expenses		13,000		8,000
Foreign net operating loss carryforwards		3,112,000		3,147,000
Valuation allowance - NOL carryforwards		(2,489,000)		(2,432,000)
		995,000		1,093,000
Deferred tax liabilities:
Depreciation and amortization		240,000		213,000
Foreign currency exchange		160,000		133,000
		400,000		346,000
Net deferred tax assets (liabilities)	$	595,000	$	747,000

Reported as:
Current deferred tax assets	$	66,000	$	61,000
Non-current deferred tax assets		623,000		686,000
Non-current deferred tax liabilities		94,000		-
Net deferred tax assets	$	595,000	$	747,000

Through December 31, 2015, the cumulative amount of unremitted earnings on which the Company has not recognized United States income tax was $57,000 as the Company plans to indefinitely reinvest these earnings outside the United States.

The Company applied applicable accounting guidance relating to accounting for uncertainty in income taxes. Reserves for uncertainty in income taxes are adjusted quarterly in light of changing facts and circumstances, such as the progress of tax audits, case law, and emerging legislation. The primary difference between gross unrecognized tax benefits and net unrecognized tax benefits is the U.S. federal tax benefit from state tax deductions. It is the Company’s practice to recognize interest and / or penalties related to income tax matters in income tax expense.

At December 31, 2015 and 2014, the Company had $63,000 and $48,000, respectively, of cumulative unrecognized tax benefits, of which only the net amount of $46,000 would impact the effective income tax rate if recognized.

The aggregate changes in the balance of gross unrecognized tax benefits were as follows:

	2015		2014

Beginning of year	$	48,000	$	91,000
Settlements and effective settlements with tax authorities		-		-
Lapse of statute of limitations		(6,000)		(6,000)
Decrease to tax positions taken during prior periods		(7,000)		(46,000)
Increase to tax positions taken during current period		11,000		9,000
End of year	$	46,000	$	48,000

At December 31, 2015 and 2014, the Company had $22,000 in each year accrued for interest and penalties within the balance of unrecognized tax benefits. The Company’s unrecognized tax benefits balance is included within other noncurrent liabilities on the consolidated balance sheets.

The Company, including its domestic and foreign subsidiaries, is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for years through 2011 and concluded years through 2011 with its primary state jurisdiction.

One of the Company’s foreign subsidiaries is presently under local country audit for alleged deficiencies (totaling approximately $800,000 plus interest at 20% per annum) in value-added tax (VAT) and withholding tax for the years 2004 through 2006. The Company, in consultation with its legal counsel, believes that there are strong legal grounds that it should not be liable to pay the majority of the alleged tax deficiencies. As of December 31, 2010, management estimated and reserved approximately $185,000 for resolution of this matter and recorded this amount within Selling, General, and Administrative expense in the 2010 Consolidated Statement of Income. In 2011, the Company made good faith deposits to the local tax authority under the tax agency’s administrative judicial resolution process. As of December 31, 2015, management’s estimated reserve (net of deposits) for this matter is approximately $142,000.