Income Taxes

12 Months Ended

May 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code by reducing the U.S. federal corporate tax rate from 34 percent to 21 percent, requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, creating a new limitation on deductible interest expense and changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

The SEC staff subsequently issued Staff Accounting Bulletin 118 (“SAB 118”), which provides a one-year measurement for companies to complete the accounting for the effects of the Tax Act. In accordance with SAB 118, where accounting is complete, a company must reflect the income tax effects of those aspects, but to the extent that a company’s accounting is incomplete but a reasonable estimate may be made, a provisional estimate should be recorded in the financial statements. Where a company is unable to determine a provisional estimate, SAB 118 permits application of the tax laws that were in effect immediately before the enactment.

Effective Tax Rate

The effective tax rate for the three months ended May 31, 2020 was 1.2%. The effective tax rate on consolidated net income for the year ended May 31, 2020 and 2019 differs from the federal statutory tax rate primarily due to changes in the deferred tax valuation allowance and the impact of certain expenses not being deductible for income tax reporting purposes. Management believes the effective tax rate for Fiscal 2020 will be approximately 1.2% due to the items noted above.

The provision for income taxes is as follows:

	Year ended May 31,
	2020			2019
Current provision for continued operations		(14,368	)		8,783
Current provision for discontinued operations		60,677			17,655
Deferred provision		999,420			329,035
Change in valuation allowance		(999,420	)		(329,035	)
Total provision for income taxes	$	46,039		$	26,438

Deferred tax assets are comprised of the following components:

	2020			2019
Basis difference for assets	$	162,853		$	182,654
Inventory related items		75,500			169,585
Other reserves and liabilities		112,829			74,694
Net operating loss carryforward		624,650			1,507,141
General business and other credit carry forward		455,841			489,327
Other deferred items, net		-			7,692
Gross deferred tax assets		1,431,673			2,431,093
Deferred tax asset valuation allowance		(1,431,673	)		(2,431,093	)
Net deferred tax assets	$	-		$	-

Deferred tax assets are evaluated and a valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company has recorded a substantial deferred tax asset related to temporary differences between book and tax basis of assets and liabilities and net operating loss carryforwards. During the year ended May 31, 2020, the Company decreased its valuation allowance by $999,420 which was due to the use of net operating losses carryforwards used against the gain on the sale. The year ended May 31, 2019, the Company increased its valuation allowance $329,035 as a result of the increase in the Company’s deferred tax assets most of which was due to the increase in net operating losses carryforwards generated by the Fiscal 2019 results. The Company has provided a full valuation allowance against all of its deferred tax assets as the recent losses from continuing operations have been given more weight than projected future income when determining the need for a valuation allowance.

The Company has federal net operating loss carryforwards of approximately $2,230,773 which begin to expire in 2037 along with the federal general business and other credit carryforwards. The Company has state net operating loss carryforwards of approximately $2,690,375 million which begin to expire in 2031.

The provision for income taxes differs from the amount of income taxes determined by applying the U.S. statutory federal tax rate to pre-tax loss due to the following:

	2020			2019
Statutory Federal Rate		21.0	%		21.0	%
State Taxes, net of federal benefit		5.3	%		5.3	%
Change in deferred tax valuation allowance		-27.1	%		-25.7	%
Impact of Tax Act		0	%		0.0	%
Stock-based compensation		0	%		-1.8	%
R&E tax credits		0.2	%		1.8	%
Effect of foreign income tax rates		-0.1	%		-3.4	%
Deferred tax true-up		0.0	%		4.1	%
State minimum taxes		1.7	%		-1.0	%
Permanent and other differences		0.2	%		-2.5	%
Effective Tax Rate		1.2	%		-2.2	%

Interest and penalties associated with uncertain tax positions are recognized as components of the Provision for income taxes. The liability for payment of interest and penalties was $0 as of May 31, 2020 and 2019. Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax years for the years ended May 31, 2017 and after are subject to examination. In the United Kingdom, tax year for the year ended May 31, 2019 is subject to examination.