Note 7.

Income Taxes

The following summarizes the Company’s provision for income taxes on income from operations:

	Year Ended August 31,
	2016		2015
Current:
Federal	$	2,226,000	$	1,568,000
State		362,000		325,000
Foreign		28,000		(5,000)
		2,616,000		1,888,000
Deferred:
Federal		(273,000)		560,000
State		90,000		(194,000)
Foreign		-		-
		(183,000)		366,000
Total	$	2,433,000	$	2,254,000

Income taxes for the years ended August 31, 2016 and 2015 differ from the amounts computed by applying the federal statutory corporate rates of 34% to the pre-tax income from operations.

The differences are reconciled as follows:

	Year Ended August 31,
	2016		2015
Current:
Expected income tax benefit at statutory rate	$	2,234,000	$	2,008,000
Increase (decrease) in taxes due to:
State tax, net of federal benefit		303,000		284,000
Permanent differences		29,000		32,000
Change in deferred tax asset valuation allowance		(121,000)		62,000
Other, net		(12,000)		(132,000)
Income tax expense	$	2,433,000	$	2,254,000

The components of deferred taxes at August 31, 2016 and 2015 are summarized below:

	August 31,
	2016		2015
Deferred tax assets:
Net operating loss	$	518,000	$	522,000
Capital losses		-		116,000
Allowance for doubtful accounts		8,000		14,000
Accrued expenses		381,000		146,000
Accrued workers’ compensation		25,000		32,000
Inventory reserve		852,000		775,000
Unrealized losses on investment		(167,000)		(254,000)
Excess of tax over book depreciation		(147,000)		(78,000)
Other		198,000		305,000
Total deferred tax assets		1,668,000		1,578,000
Valuation allowance		(518,000)		(639,000)
Total deferred tax assets	$	1,150,000	$	939,000

The Company records net deferred tax assets to the extent management believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance.

Based on the Company’s profitability and future forecast, management believes it is more-likely-than not that a portion of its net deferred tax assets will not be utilized in the future. Therefore, as of August 31, 2016 and 2015, a partial valuation allowance has been recorded based on management’s estimate of the amount of its net deferred tax assets that will be able to be utilized in future periods.

The guidance in the “Transactions Between Entities Under Common Control Subsections” of ASC 805-50, does not specifically address the accounting for the deferred tax consequences that may result from a transfer of net assets or the exchange of equity interest between enterprises under common control. Although such a transaction is not a pooling of interests, it appears as if the guidance of the FASB Statement No. 109 (ASC 740), paragraphs 270-272, which addresses the income tax accounting effects of a pooling-of-interests transaction should be applied by analogy.

On January 1, 2007, we adopted ASC 740 “Income Taxes” formerly FASB Interpretation No. 48 an interpretation of FASB Statement No. 109 (“ASC 740”). ASC 740 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in the tax return. The Company did not recognize any additional liability for unrecognized tax benefit as a result of the implementation. The Company has no liability for unrecognized tax benefit related to tax positions for either the August 31, 2015 year end or the August 31, 2016 year end.

The Company’s policy is to recognize interest and penalty related to unrecognized tax benefits as income tax expense. As of August 31, 2016, the Company has not recognized liabilities for penalty and interest as the Company does not have any liability for unrecognized tax benefits.