NOTE 6—INCOME TAXES

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


	2020		2019
Current tax expense (benefit)
Federal	$	—	$	(34,000)
State		75,000		13,000
		75,000		(21,000)
Deferred tax expense
Federal		—		34,000
State		—		—
		—		34,000
Total income tax provision	$	75,000	$	13,000

The effective tax rate as of April 30, 2020 and 2019 is 9.5% and 2.0%, respectively.

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:


	2020		2019
Computed tax expense at statutory rates	$	166,000	$	137,000
Permanent differences		98,000		6,000
State tax and credits		59,000		56,000
Adjustments required by change in method of accounting as a result of adopting ASC 606		(24,000)		31,000
Other		(4,000)		—
Use of net operating loss carryforward		(220,000)		(217,000)
	$	75,000	$	13,000

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
2038	$	92,000

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


	2020		2019
Net operating loss carryforwards	$	19,000	$	226,000
Inventory valuation reserve		109,000		89,000
Loss on equity and impairment in investee		301,000		301,000
Tax credit carryforward		—		34,000
Adjustments required by change in method of accounting as a result of adopting ASC 606		—		(31,000)
Cost of sales adjustment from ASC 606		15,000		163,000
Depreciation expense		(171,000)		(111,000)
Uniform capitalization		—		19,000
Right-of-use asset		(538,000)		—
Lease liability		609,000		—
Bad debt reserve		11,000		3,000
Warranty reserve		5,000		9,000
Accrued vacation		35,000		7,000
Accrued bonuses		65,000		42,000
Accrued commissions		15,000		16,000
Claims reserve		7,000		7,000
Stock compensation		105,000		76,000
Deferred rent		—		55,000
Other		2,000		—
		589,000		905,000
Less: valuation allowance		(589,000)		(871,000)
	$	—	$	34,000

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. In 2020, the remaining 50% of the federal minimum tax credit carryforwards were eligible for refund and applied towards future period tax due.

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, 2020 and 2019, was a decrease of $282,000 and $217,000, respectively. Valuation allowances are reviewed on a quarterly basis and adjustments made as appropriate. The decrease in the valuation allowance in 2020 and 2019 resulted primarily 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, 2020 and 2019, the Company maintained a valuation allowance of $589,000 and $871,000, respectively, for its deferred tax assets.

As of April 30, 2020, the federal tax returns for the fiscal years ended 2017 through 2019 remain subject to examination and assessment. Fiscal years ending before 2017 remain open solely for purposes of examination of our loss and credit carryforwards. As of April 30, 2020, 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, 2020 and 2019, 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.