Note 5: Income Taxes

The provision for income tax for the years ended December 31 is as follows:

	2015			2014
Current provision (benefit):
Federal	$	60,300		$	33,900
State		(8,600	)		10,000
Total current provision (benefit)		51,700			43,900
Deferred provision (benefit):
Federal		741,700			724,700
State		81,200			61,800
Valuation allowance		(3,379,100	)		(786,500	)
Total deferred provision (benefit)		(2,556,200	)		0
Provision (benefit):
Federal		(2,115,700	)		33,900
State		(388,800	)		10,000
Total provision (benefit)	$	(2,504,500	)	$	43,900

Income tax expense (benefit) at the statutory tax rate is reconciled to the overall income tax expense (benefit) as follows:

	2015			2014
Federal income tax at statutory rates	$	773,700		$	726,700
State income taxes, net of federal tax effect		69,300			61,900
Change in unrecognized benefit		0			(17,600	)
Permanent differences		54,800			34,800
Other		(23,200	)		24,600
Total		874,600			830,400
Change in valuation allowance		(3,379,100	)		(786,500	)
Provision (benefit) for income taxes	$	(2,504,500	)	$	43,900

Deferred income taxes are based on estimated future tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes given the provision of enacted tax laws. The net deferred tax assets and liabilities as of December 31, 2015 and 2014 are comprised of the following:

	2015			2014
Deferred tax assets:
Net operating loss carryforwards	$	1,833,100		$	2,840,800
Tax credit and other carryforwards		413,800			344,800
Trade receivables		205,200			178,000
Inventories		70,600			28,200
Accrued vacation		38,800			35,400
Other		20,800			10,300
Total deferred taxes		2,582,300			3,437,500
Deferred tax liability:
Accumulated depreciation for tax purposes		(26,100	)		(58,400	)
Total deferred tax liabilities		(26,100	)		(58,400	)
Net deferred tax asset, before allowance		2,556,200			3,379,100
Valuation allowance		0			(3,379,100	)
Net deferred tax asset	$	2,556,200		$	0

At December 31, 2015, we had federal net operating loss carryforwards of approximately $4,377,900 for federal income tax purposes and approximately $4,348,400 for financial reporting purposes. The difference between the federal income tax net operating loss carryforwards of $29,500 relates to tax deductions for compensation expense for financial reporting purposes for which the benefit will not be recognized until the related deductions reduce income taxes payable. The Company also had federal tax credit carryforwards related to research and development efforts of approximately $286,700. The net operating loss carryforwards and the research and development credits will expire over a period ending in 2032 and 2035 respectively. At December 31, 2015, there was approximately $127,000 of alternative minimum tax credits which have no expiration period. State tax loss carryforwards at December 31, 2015 are approximately $11,640,000 expiring over a period ending in 2032.

As of December 31, 2014 the Company placed a full valuation allowance against deferred income tax assets. During the year ended December 31, 2015, the Company has determined in its judgement, based upon all available evidence (both positive and negative), that it is more likely than not that the net deferred tax assets will be realized. Hence, all deferred tax benefits will be recognized and the full valuation allowance removed as part of the effective tax rate.

We adhere to the authoritative guidance with respect to accounting for uncertainty in income taxes. This guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It requires that we recognize in our consolidated financial statements, only those tax positions that are “more-likely-than-not” of being sustained as of the adoption date, based on the technical merits of the position. Each year we perform a comprehensive review of our material tax positions.

In prior years, as a result of this review, we identified certain deferred tax assets that need to be adjusted. As of December 31, 2014 following the acceptance of an accounting method change by the IRS, the Company has removed any liabilities associated with previously identified tax positions and no longer identifies any income tax positions that are not "more-likely-than-not" to be sustained.

	2015			2014
Balance at January 1,	$	0	$		395,100
Additions based on tax positions related to current year		0			0
Reductions for tax positions of prior years or change in valuation		0			(395,100	)
Balance at December 31,	$	0	$		0

Our policy is to recognize interest and penalties related to uncertain tax benefits in income tax expense. As there are currently no uncertain tax benefits, we have no accrued interest or penalties related to uncertain tax positions as of December 31, 2015. As a result of our net operating loss carryforward position, we have no accrued interest or penalties related to uncertain tax positions for the year ended December 31, 2014.

We and our subsidiaries are subject to the following material taxing jurisdictions: United States and Colorado. The tax years that remain open to examination by the Internal Revenue Service are 2012 and years thereafter. However, due to our net operating loss carryforwards from prior periods, the Internal Revenue Service could potentially review the losses back to 2000. The tax years that remain open to examination by the State of Colorado are 2011 and years thereafter.