NOTE 4—INCOME TAXES

The components of the provision (benefit) for income taxes are as follows:


	2018		2017
Current tax expense
Federal	$	—	$	2,000
State		2,000		1,000
		2,000		3,000
Deferred tax expense (benefit)
Federal		612,000		(137,000)
State		67,000		(18,000)
		679,000		(155,000)
Total income tax provision (benefit)	$	681,000	$	(152,000)

The provision for income taxes reflected in the consolidated statements of operations differs from the amounts computed at the federal statutory tax rates.

The principal differences between our statutory income tax expense and the effective provision for income taxes are summarized as follows:


	2018		2017
Computed tax expense at statutory rates	$	(405,000)	$	(144,000)
Permanent differences		11,000		6,000
State tax and credits		(49,000)		(18,000)
Provision to return adjustment		6,000		4,000
Impact of federal rate change		467,000		—
Increase in valuation allowance		651,000		—
	$	681,000	$	(152,000)

We have available as benefits to reduce future income taxes, subject to applicable limitations, estimated federal net operating loss carryforward amounts as described below.


	Net Operating Loss
Year of Expiration	Carryforwards
2027	$	94,000
2030		28,000
2032		298,000
2037		960,000
2038		909,000
	$	2,289,000

The following table summarizes the components of the net deferred income tax asset:


	2018		2017
Net operating loss carryforwards	$	574,000	$	420,000
Inventory valuation reserve		98,000		101,000
Loss on equity and impairment in investee		301,000		437,000
Tax credit carryforward		68,000		68,000
Other		115,000		158,000
		1,156,000		1,184,000
Less: valuation allowance		(1,088,000)		(437,000)
	$	68,000	$	747,000

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 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent effective for tax years beginning after January 1, 2018; (2) extending bonus depreciation that will allow for full expensing of qualified property; and, (3) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized. The corporate tax rate change is administratively effective at the beginning of our fiscal year, using a blended statutory rate of 30.4% for the annual period.

The SEC issued Staff Accounting Bulletin No. 118 (‘SAB 118’) to address the application of accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

The Company has considered SAB 118 and believes the accounting for the income tax effects of the Act is substantially complete and appropriately reflected in the financial statements for the period ended April 30, 2018. The Company’s financial statements for the year ended April 30, 2018, reflect certain effects of the Act, which includes a reduction in the corporate tax rate from 34% to 21%, as well as other changes. As a result of the changes to tax laws and tax rates under the Act, the Company incurred incremental income tax expense of $467,000 during the year ended April 30, 2018, which consisted primarily of the remeasurement of deferred tax assets and liabilities from a 34% to a 21% tax rate.

As of April 30, 2018, the Company has federal minimum tax credit carryforwards of $68,000. As a result of The Act, the federal minimum tax credits will be fully refunded to the Company by 2021 if not fully utilized.

We record deferred income tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence. Positive evidence includes, but is not limited to the following: cumulative earnings in recent years, earnings expected in future years, excess appreciated asset value over the tax basis and positive industry trends. Negative evidence includes, but is not limited to the following: cumulative losses in recent years, earnings expected in future years, a history of operating losses or tax credit carryforwards expiring, and adverse industry trends. Cumulative losses in recent years are significant negative evidence when determining the need for a valuation allowance. During the fourth quarter of the fiscal year ending April 30, 2018 the Company determined that is was no longer in a positive cumulative earnings position for the three-year period ended April 30, 2018.

The Company is anticipating increased demand over the next few fiscal years related to continuing business in the aerospace and defense markets, but has not yet executed contracts. Therefore, this expected growth is not sufficient positive evidence to outweigh the negative evidence. Given the significance of the negative evidence, the Company concluded that it is no longer more likely than not that it will realize a portion of its deferred tax assets, with exception of the AMT credit. As a result, the Company increased the valuation allowance by an additional $651,000 during the fourth quarter of fiscal year 2018, resulting in a nearly full valuation allowance against the Company’s deferred tax assets as of April 30, 2018. The increase in the valuation allowance resulted in an increase in income tax expense of $651,000.

The Company's determination of the realizable deferred tax assets requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes. In the event the actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance, which could materially impact our financial position and results of operations. The Company will continue to assess the need for a valuation allowance in future periods. As of April 30, 2018 and 2017, the Company maintained a valuation allowance of $1,088,000 and $437,000, respectively, for its deferred tax assets.

As of April 30, 2018, the federal tax returns for the fiscal years ended 2015 through 2017 remain subject to examination and assessment. Fiscal years ending before 2015 remain open solely for purposes of examination of our loss and credit carryforwards. As of April 30, 2018, the Company has no federal or state examinations ongoing.

We recognize accrued interest and penalties related to unrecognized tax benefits, as well as interest received from favorable tax settlements, within income tax expense. As of April 30, 2018 and 2017, we recorded no accrued interest or penalties related to uncertain tax positions. We expect no significant change in the amount of unrecognized tax benefit, accrued interest or penalties within the next twelve months.