14.

INCOME TAXES

December 22, 2017,

the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or Tax Reform Act. The Tax Reform Act made broad and complex changes to the U.S. tax code, which had a number of impacts on the Company’s fiscal year ended

August 31 2018,

including, but

not

limited to, reducing the U.S. federal corporate tax rate from

35%

21%

effective

January 1, 2018,

generally eliminating U.S. federal income taxes on dividends received from foreign subsidiaries and joint ventures after

December 31, 2017,

and imposing a

one

-time deemed repatriation tax on certain unremitted earnings of foreign subsidiaries and joint ventures. The Company was subject to a blended U.S. federal tax rate of

25.7%

for the fiscal year ended

August 31, 2018

as a result of the reduction of the U.S. federal corporate tax rate from

35%

21%

effective

January 1, 2018.

For the fiscal year ended

August 31, 2019,

the Company was subject to a U.S. federal tax rate of

21.0%.

The provision for income taxes for the fiscal years ended

August

31,

2019

and

2018

was approximately as follows:

	Fiscal Year Ended August 31,
	2019			2018
Current:
Federal	$	—		$	—
State		48,000			1,000
Foreign		902,000			671,000
		950,000			672,000
Deferred:
Federal		(315,000	)		477,000
State		(21,000	)		24,000
Foreign		228,000			(297,000	)
		(108,000	)		204,000
	$	842,000		$	876,000

Reconciliations of the expected federal income tax at the statutory rate (

21.0%

in fiscal

2019

and

25.7%

in fiscal

2018

) with the provisions for income taxes for the fiscal years ended

August 31, 2019

and

2018

were approximately as follows:

	Fiscal Year Ended August 31,
	2019			2018
Tax computed at statutory rates	$	1,398,000		$	2,081,000
State income tax, net of federal benefit		27,000			25,000
Tax effect on equity in income of international joint ventures		(1,490,000	)		(1,903,000	)
Tax effect of foreign operations		672,000			101,000
Deemed repatriation		204,000			4,011,000
Foreign tax credit		-			(3,783,000	)
Research and development credit		(133,000	)		(10,000	)
Valuation allowance		133,000			(173,000	)
Stock based compensation		208,000			57,000
Non-controlling interest		(74,000	)		(103,000	)
Deferred rate change		-			633,000
Other		(103,000	)		(60,000	)
	$	842,000		$	876,000

The Company has

not

provided U.S. income taxes or foreign withholding taxes with respect to its portion of the cumulative undistributed earnings of certain foreign subsidiaries and joint ventures that are essentially permanent in duration. The Tax Reform Act generally eliminated U.S. federal income taxes on dividends received from the Company’s foreign subsidiaries and joint ventures after

December 31, 2017.

However, the Company will still be subject to foreign withholding taxes upon repatriation of any undistributed earnings that are

not

essentially permanent in duration. The Company recorded tax expense of approximately

$4,000

and

$79,000

during fiscal

2019

and fiscal

2018,

respectively, representing foreign withholding taxes to be paid with respect to the portion of the cumulative undistributed earnings of foreign subsidiaries and joint ventures that the Company determined were

not

essentially permanent in duration.

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. The tax effect of the temporary differences and tax carryforwards comprising the net deferred taxes shown on the consolidated balance sheets as of

August

31,

2019

and

2018

was approximately as follows:

	August 31,
	2019			2018
Accrued compensation	$	153,400		$	430,600
Inventory costs		60,900			58,900
Other accrued expenses		39,700			63,700
Goodwill and other intangible assets		688,400			695,800
Stock-based compensation		299,300			197,500
Foreign tax credit carryforward		5,790,500			5,789,600
Other credit and loss carryforwards		3,631,700			3,241,200
Total deferred tax assets		10,683,900			10,477,300
Valuation allowance		(8,764,300	)		(8,654,500	)
Total deferred tax assets after valuation allowance		1,899,600			1,822,800
Property and equipment		(111,900	)		(124,600	)
Other		(153,400	)		(146,200	)
Total deferred tax liabilities		(265,300	)		(270,800	)
Net deferred tax assets	$	1,634,300		$	1,552,000

As of

August 31, 2019,

the Company had foreign tax credit carryforwards of approximately

$5,790,500,

which will begin to expire if

not

utilized prior to

August 31, 2021.

In addition, the Company had federal and state tax credit carryforwards of

$2,973,800

as of

August 31, 2019

which began to expire in fiscal

2020.

These federal and state tax credit carryforwards consist primarily of federal and Minnesota research and development credit carryforwards. The Company also has a deferred tax asset of

$532,000

for federal and state net operating loss carryforwards as of

August 31, 2019.

The federal net operating loss carryforward has an indefinite carryforward period. The Company has a deferred tax asset of

$152,000

for foreign net operating loss carryforwards, which will begin to expire in fiscal

2021.

As of

August 31, 2019,

the Company has recorded a valuation allowance of

$5,790,500

with respect to the foreign tax credit carryforwards. In addition, the Company has recorded a valuation allowance of

$2,973,800

with respect to federal and state tax credit carryforwards.

As of

August 31, 2018,

the Company had recorded a valuation allowance of

$5,789,600

with respect to the foreign tax credit carryforwards. In addition, the Company had recorded a valuation allowance of

$2,864,900

with respect to federal and state tax credit carryforwards.

The Company records a tax valuation allowance to reduce deferred tax assets to the amount expected to be realized when it is more likely than

not

that some portion or all its deferred tax assets will

not

be realized. The Company determined based on all available evidence, including historical data and projections of future results, that it is more likely than

not

that all its deferred tax assets, except for its foreign tax credit carryforward and federal and Minnesota research and development credit carryforwards will be fully realized. The Company determined that its deferred tax asset related to foreign tax credit carryforwards will

not

be realized due to insufficient foreign source taxable income within the carryforward period and the fact that for ordering purposes the foreign tax credit carryforwards are

not

allowed to be utilized until after any current year foreign tax credits are utilized. In addition, based on historical data and future projections, the Company determined that it is more likely than

not

that its deferred tax asset related to federal and Minnesota research and development credit carryforwards will

not

be realized due to insufficient federal and Minnesota taxable income within the carryforward period after considering the foreign tax credit usage.

The following is a tabular reconciliation of the total amounts of approximated unrecognized tax benefits:

	Fiscal Year Ended August 31,
	2019		2018
Gross unrecognized tax benefits – beginning balance	$	242,000	$	250,000
Gross decreases – prior period tax positions		1,000		(12,000	)
Gross increases – current period tax positions		5,000		4,000
Gross unrecognized tax benefits – ending balance	$	248,000	$	242,000

The entire amount of unrecognized tax benefits would affect the effective tax rate if recognized. It is

not

expected that the amount of unrecognized tax benefits will change significantly in the next

months.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the Company’s income tax provision. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. There was

liability for the payment of interest and penalties as of both

August 31, 2019

and

August 31, 2018.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. With few exceptions, as of

August 31, 2019,

the Company is

longer subject to federal, state, local, or foreign examinations by tax authorities for years prior to

August 31, 2016.