Income Taxes | Note 6. Income Taxes The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of assets and liabilities, and for net operating loss and tax credit carryforwards. The Company completes a detailed analysis of its deferred income tax valuation allowance on an annual basis or more frequently if information comes to our attention that would indicate that a revision to its estimates is necessary. In evaluating the Company’s ability to realize its deferred tax assets, management considers all available positive and negative evidence on a country by country basis, including past operating results and forecast of future taxable income. In determining future taxable income, management makes assumptions to forecast U.S. federal and state, U.K. and Malaysia operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies. These assumptions require significant judgment regarding the forecasts of the future taxable income in each tax jurisdiction, and are consistent with the forecasts used to manage the Company’s business. It should be noted that the Company realized significant losses through 2005 on a consolidated basis. Since fiscal year 2006, the Company has consistently generated taxable income on a consolidated basis, providing a reasonable future period in which the Company can reasonably expect to generate taxable income. In management’s analysis to determine the amount of the deferred tax asset to recognize, management projected future taxable income for each tax jurisdiction. Although management uses the best information available, it is reasonably possible that the estimates used by the Company will be materially different from the actual results. These differences could have a material effect on the Company's future results of operations and financial condition. Income before income taxes was taxed by the following jurisdictions for the years ended September 30, 2016, 2015, and 2014 : 2016 2015 2014 Domestic $ 1,068,580 $ 4,524,499 $ 2,837,835 Foreign 1,745,336 2,162,541 1,119,356 Total $ 2,813,916 $ 6,687,040 $ 3,957,191 A reconciliation of income tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes for the years ended September 30, 2016, 2015, and 2014 is as follows: 2016 2015 2014 Income tax expense at statutory rates $ 957,000 $ 2,274,000 $ 1,345,000 State income tax, net of federal benefits 149,000 362,000 248,000 Non-deductible expenses - other 50,000 51,000 (5,000) Non-deductible business acquisition expenses 556,000 — — Effect of lower foreign income tax rates (305,648) (351,244) (175,632) Effect of change in U.K. tax rate 1,251,000 — — Effect of reinvestment allowance - Malaysia — — (9,000) Effect of export allowance - Malaysia — (85,000) — Effect of change in Illinois tax rate — 202,000 — Effect of conversion of charitable contribution to NOL — (36,174) — Other 87,839 (59,578) 56,762 Change in valuation allowance (18,000) (16,000) 64,000 Effect of UK tax rate change on valuation allowance (258,000) — — Income tax expense $ 2,469,191 $ 2,341,004 $ 1,524,130 As of September 30, 2016 , the Company had federal and state net operating loss carryforwards of approximately $ 8,105,000 and $ 7,825,000 , respectively, for income tax purposes expiring in years 202 1 to 2027 . The Company's U.K. subsidiary has U.K. net operating loss carryforwards of approximately $ 60,863,000 as of September 30, 2016 , which can be carried forward indefinitely to be used to offset future U.K. taxable income. The federal and state income tax expense (benefit) for the years ended September 30, 2016, 2015, and 2014 is summarized below: 2016 2015 2014 Deferred – U.S. $ 881,000 $ 1,856,000 $ 561,000 Deferred – U.K. 1,162,000 162,000 496,000 Deferred – Malaysia 11,817 (92,261) (44,666) Subtotal 2,054,817 1,925,739 1,012,334 Current – U.S. 104,000 83,606 219,000 Current – Malaysia 310,374 331,659 292,796 Current - U.K. — — — Subtotal 414,374 415,265 511,796 Income tax expense $ 2,469,191 $ 2,341,004 $ 1,524,130 Significant components of the Company's deferred tax assets and liabilities are as follows at September 30, 2016 and 2015 : Deferred Tax Assets 2016 2015 Federal net operating loss carryforwards $ 2,756,000 $ 4,428,000 State net operating loss carryforwards 400,000 644,000 AMT credit carryforward 489,000 390,000 Foreign net operating loss carryforwards – U.K. 10,955,000 12,388,000 Foreign capital allowance – U.K. 112,000 114,000 Other, net - Malaysia 9,850 13,097 Restricted stock – U.K. 1,000 — Share-based compensation 101,000 128,000 Deemed dividend - Malaysia 942,000 — Other, net - U.S. 25,000 8,000 Gross deferred tax assets 15,790,850 18,113,097 Valuation allowance for deferred tax assets (2,299,000) (2,575,000) Net deferred tax assets 13,491,850 15,538,097 Deferred Tax Liabilities: Foreign capital allowance – Malaysia (119,919) (111,349) Net deferred tax assets $ 13,371,931 $ 15,426,748 The deferred tax amounts have been classified in the accompanying consolidated balance sheets at September 30 as follows: 2016 2015 Current assets – U.S. $ 2,020,000 $ 854,000 Current assets – U.K. 5,000 162,000 Total current assets 2,025,000 1,016,000 Long-term assets – U.S. 2,693,000 4,740,000 Long-term assets – U.K 8,764,000 9,769,000 Total long-term assets 11,457,000 14,509,000 Long-term liability – Malaysia (110,069) (98,252) $ 13,371,931 $ 15,426,748 The change in the valuation allowance for deferred tax assets for the years ended September 30 is as follows: Balance at Charged to Costs Balance at Year October 1 and Expenses Deductions/Other September 30 2014 $ 2,147,000 $ 432,000 $ 12,000 $ 2,591,000 2015 $ 2,591,000 $ (16,000) $ — $ 2,575,000 2016 $ 2,575,000 $ (276,000) $ — $ 2,299,000 The valuation allowance decreased by $ 276,000 , decreased by $ 16,000 , and increased by $ 444,000 for the years ended September 30, 2016, 2015, and 2014 , respectively. Under the Internal Revenue Code, certain ownership changes, including the prior issuance of preferred stock, the public offering of common stock and the exercise of common stock warrants and options may subject the Company to annual limitations on the utilization of its net operating loss carryforward. Under the Inland Revenue statutes, certain triggering events may subject the Company to limitations on the utilization of its net operating loss carryforward in the U.K. As of September 30, 2016 , management does not believe any limitations have occurred. The Company has not recorded any other deferred income taxes applicable to undistributed earnings of foreign subsidiaries because it is the present intention of management to reinvest the undistributed earning s indefinitely. Generally such earnings become subject to U.S. tax upon remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax or such undistributed earnings. ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 developed a two-step process to evaluate a tax position and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has not recorded a reserve for any tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The Company files tax returns in all appropriate jurisdictions, including foreign, U.S. Federal and Illinois and Virginia State tax returns. The following summarizes open tax years in the relevant jurisdictions: · For the U.S., a tax return may be audited any time within 3 years from filing date. The U.S. open tax years are for fiscal years 201 3 through 201 5 , which expire in years 201 7 through 201 9 , respectively. · For Malaysia, a tax return may be audited any time within 5 years from filing date ( 7 months after the fiscal year end). The Malaysia open tax years are for 201 1 through 201 5 , which expire on December 31, 201 6 through 20 20 . · For the U.K., a tax return may be audited within 1 year from the later of: the filing date or the filing deadline ( 1 year after the end of the accounting period). T he U.K. open tax year is for 201 5, which expires in 2017 . The fiscal year 2016 tax returns for each jurisdiction have not been filed as of the date of this filing. As of September 30, 2016 and 2015 , the Company has no recorded liability for unrecognized tax benefits. The Company recognizes interest and penalties related to uncertain tax positions as income tax expense as incurred. No expense for interest and penalties was recognized for the years ended September 30, 2016, 2015, and 2014 . |