Note 12. Income Taxes

A reconciliation of the difference between the provision for income taxes computed at statutory rates and the provision for income taxes provided in the consolidated statements of income is as follows:


	2020		2019		2018

Statutory federal rate	21.0	%	21.0	%	31.3	%
State taxes, net of federal benefit	2.0		3.5		4.0
Non-deductible expenses	(0.5)		2.1		4.4
Change in uncertain tax positions	—		(4.6)		—
Change in valuation allowance	(6.5)		1.9		—
Change in deferred tax related to key man life insurance	—		—		(7.3)
Rate change for loss carrybacks	9.9		—		—
Other	0.4		—		(1.9)
Effective rate	26.3	%	23.9	%	30.5	%

The provision for income taxes was comprised of the following:


	2020		2019		2018

Federal: Current	$	(4,308,900)	$	1,037,600	$	3,073,400
Deferred		(2,596,500)		576,200		(1,081,600)
State: Current		(418,700)		52,600		433,400
Deferred		(380,700)		79,000		(148,000)
Provision for income taxes	$	(7,704,800)	$	1,745,400	$	2,277,200

Total net deferred tax assets (liabilities) as of March 29, 2020 and March 31, 2019, and the sources of the differences between financial accounting and tax basis of the Company's assets and liabilities which give rise to the deferred tax assets, are as follows:


	2020		2019
Deferred tax assets :
Deferred compensation	$	264,300	$	267,300
Accrued vacation		469,100		312,300
Deferred rent		3,258,600		34,500
Allowance for doubtful accounts		1,130,900		488,000
Inventory reserves		2,794,200		1,406,100
Sales tax reserves		122,900		192,900
Sales return assets		1,200,400		478,600
Other liabilities		—		205,700
Net operating loss		275,400		141,600
Business interest limitation carryforward		259,300		—
Other assets		1,013,600		652,800
		10,788,700		4,179,800
Valuation allowance		(2,047,300)		(141,600)
Total deferred tax assets		8,741,400		4,038,200

Deferred tax liabilities :
Depreciation and amortization		(419,200)		(3,094,000)
Sales return liabilities		(950,600)		(365,200)
Lease right of use		(3,232,900)		—
Prepaid expenses		(1,106,200)		(523,700)
Total deferred tax liabilities		(5,708,900)		(3,982,900)
Net Deferred Tax Assets	$	3,032,500	$	55,300

The valuation allowance recorded by the Company as of March 29, 2020 resulted from the uncertainties of the future realization of federal and state deferred tax assets. The valuation allowance recorded by the Company as of March 31, 2019 resulted from the uncertainties of the future realization of state deferred tax assets mainly resulting from state net operating loss carryovers. The Company will continue to assess and evaluate strategies that will enable the deferred tax asset, or portion thereof, to be realized, and will reduce the valuation allowance appropriately as such time when it is determined that the “more likely than not” criteria is satisfied.

As of March 29, 2020, the Company had state net operating loss carryforwards of $38,066,068 which will generally begin to expire in fiscal year 2030 through fiscal year 2040. Certain state net operating loss carryovers do not expire.

As of March 29, 2020 and March 31, 2019, the Company had no unrecognized tax benefits.

The Company’s accounting policy with respect to interest and penalties related to tax uncertainties is to classify these amounts as part of the provision for income taxes. The total amount of interest and penalties related to tax uncertainties recognized in the consolidated statement of income for fiscal year 2020 and 2019 was a benefit of $0 and $250,500 (net of federal detriment), respectively. The cumulative amount included in the consolidated balance sheet as of March 29, 2020 and March 31, 2019 was $0. The total amount of interest and penalties related to tax uncertainties recognized in the consolidated statement of income for fiscal year 2018 was a benefit of $38,100 (net of federal expense) and the cumulative amount included as a liability in the consolidated balance sheet as of April 1, 2018 was $250,500 (net of federal benefit).

A reconciliation of the changes in the gross balance of unrecognized tax benefit amounts, exclusive of interest, is as follows:


	2020		2019		2018
Beginning balance of unrecognized tax benefit	$	—	$	112,700	$	204,500
Increases related to current period tax positions		—		3,500		—
Reductions as a result of a lapse in the applicable statute of limitations		—		(116,200)		(91,800)
Ending balance of unrecognized tax benefits	$	—	$	—	$	112,700

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, which we refer to herein as the 2017 Tax Act. While the changes from the Tax Act were generally effective for tax years beginning after December 31, 2017, ASC No. 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment. Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allowed registrants to record provisional amounts in earnings for the year ended April 1, 2018. The Company was required to complete its tax accounting for the 2017 Tax Act when it had obtained, prepared and analyzed the information to complete the income tax accounting but no later than December 22, 2018. Accordingly, during fiscal year 2019, the Company completed its accounting for the tax effects of the enactment of the 2017 Tax Act based on the Company’s interpretation on the new tax regulations and related guidance issued by the U.S. Department of the Treasury and the IRS. The Company did not record a material adjustment to the provided provisional amount of $0.2 million.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law making several changes to the Internal Revenue Code. The changes include, but are not limited to: increasing the limitation on the amount of deductible business interest expense, allowing companies to carryback certain net operating losses to the preceding five years, and increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income. Under the CARES Act, the Company is able to recognize the benefit of $4,800,000 by carrying back the current loss to prior periods.

The Company files income tax returns in U.S. federal, state and local jurisdictions. Certain income tax returns for fiscal years 2016 through 2019 remain open to examination by U.S. federal, state and local tax authorities. All state net operating losses generated to date are subject to adjustment for state income tax purposes. Currently, our New York income tax return for tax year 2016 is under examination. The potential outcome of the current examination could result in a change to unrecognized tax benefits within the next twelve months. However, we cannot reasonably estimate possible adjustments at this time.