NOTE 5—INCOME TAXES

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


	2019		2018
Current tax expense (benefit)
Federal	$	(34,000)	$	—
State		13,000		2,000
		(21,000)		2,000
Deferred tax expense
Federal		34,000		612,000
State		—		67,000
		34,000		679,000
Total income tax provision	$	13,000	$	681,000

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:


	2019		2018
Computed tax expense at statutory rates	$	137,000	$	(405,000)
Permanent differences		6,000		11,000
State tax and credits		56,000		(49,000)
Adjustments required by change in method of accounting as a result of adopting ASC 606		31,000		—
Return to provision		—		6,000
Impact of federal rate change		—		467,000
Increase (decrease) in valuation allowance		(217,000)		651,000
	$	13,000	$	681,000

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
2037	$	48,000
2038		909,000
	$	957,000

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


	2019		2018
Net operating loss carryforwards	$	226,000	$	574,000
Inventory valuation reserve		89,000		98,000
Loss on equity and impairment in investee		301,000		301,000
Tax credit carryforward		34,000		68,000
Adjustments required by change in method of accounting as a result of adopting ASC 606		(31,000)		—
Cost of sales adjustment from ASC 606		163,000		—
Depreciation expense		(111,000)		(118,000)
Uniform capitalization		19,000		12,000
Bad debt reserve		3,000		3,000
Warranty reserve		9,000		80,000
Accrued vacation		7,000		12,000
Accrued bonuses		42,000		19,000
Accrued commissions		16,000		16,000
Claims reserve		7,000		7,000
Stock compensation		76,000		47,000
Deferred rent		55,000		36,000
Other		—		1,000
		905,000		1,156,000
Less: valuation allowance		(871,000)		(1,088,000)
	$	34,000	$	68,000

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 make 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 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 had federal minimum tax credit carryforwards of $68,000. In 2019, 50% of the federal minimum tax credit carryforwards were refunded.

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 net change in the valuation allowance for the year ended April 30, 2019 was a decrease of $217,000. Valuation allowances are reviewed on a quarterly basis and adjustments made as appropriate. The decrease in the valuation allowance in 2019 resulted from utilization of NOLs and credits.

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, 2019 and 2018, the Company maintained a valuation allowance of $871,000 and $1,088,000, respectively, for its deferred tax assets.

As of April 30, 2019, the federal tax returns for the fiscal years ended 2016 through 2018 remain subject to examination and assessment. Fiscal years ending before 2016 remain open solely for purposes of examination of our loss and credit carryforwards. As of April 30, 2019, 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, 2019 and 2018, 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.