| Income Taxes |
7. Income Taxes
The amounts of income tax expense (benefit) reflected in operations
is as follows:
| | |
2018 | |
2017 |
| Current: | |
| | | |
| | |
| Federal | |
$ | (118,269 | ) | |
$ | 1,263,124 | |
| State | |
| 44,315 | | |
| 32,737 | |
| Foreign | |
| 618,930 | | |
| 693,297 | |
| Total: | |
$ | 544,976 | | |
$ | 1,989,158 | |
| | |
| | | |
| | |
| Deferred: | |
| | | |
| | |
| Federal | |
$ | 311,608 | | |
$ | 431,454 | |
| State | |
| 76,290 | | |
| 20,206 | |
| Total: | |
| 387,898 | | |
| 451,660 | |
| Total Income Tax Expense: | |
$ | 932,874 | | |
$ | 2,440,818 | |
The current state tax provision was comprised
of taxes on income, the minimum capital tax and other franchise taxes related to the jurisdictions in which the Company's facilities
are located.
A summary of United States and foreign
income before income taxes follows:
| | |
2018 | |
2017 |
| United States | |
$ | 1,928,627 | | |
$ | 2,477,871 | |
| Foreign | |
| 3,602,597 | | |
| 4,015,426 | |
| Total: | |
$ | 5,531,224 | | |
$ | 6,493,297 | |
As discussed in Note 11 below, for segment
reporting, direct import sales are included in the United States segment. However, the revenues are earned by our Hong Kong subsidiary
and related income taxes are paid in Hong Kong whose rate approximates 16.5%. As such, income of the Asian subsidiary is included
in the foreign income before taxes.
The following schedule reconciles the
amounts of income taxes computed at the United States statutory rates to the actual amounts reported in operations:
| | |
2018 | |
2017 |
| Federal income taxes at 21% | |
| | | |
| | |
| statutory rate | |
$ | 1,083,174 | | |
$ | 2,322,741 | |
| State and local taxes, net of federal | |
| | | |
| | |
| income tax effect | |
| 95,278 | | |
| 39,783 | |
| Permanent items | |
| (75,022 | ) | |
| (370,978 | ) |
| Transition tax on deemed repatriation | |
| | | |
| | |
| of foreign earnings | |
| — | | |
| 1,169,263 | |
| Effect of federal rate change | |
| | | |
| | |
| on deferred taxes | |
| (111,324 | ) | |
| 74,462 | |
| Foreign tax rate difference | |
| (59,232 | ) | |
| (699,047 | ) |
| Change in deferred income tax | |
| | | |
| | |
| valuation allowance | |
| — | | |
| (95,406 | ) |
| Provision for income taxes: | |
$ | 932,874 | | |
$ | 2,440,818 | |
The following summarizes deferred income
tax assets and liabilities:
| | |
2018 | |
2017 |
| Deferred income tax liabilities: | |
| | | |
| | |
| Plant, property and equipment | |
$ | 847,162 | | |
$ | 563,289 | |
| | |
| 847,162 | | |
| 563,289 | |
| | |
| | | |
| | |
| Deferred income tax assets: | |
| | | |
| | |
| Asset valuations | |
| 575,920 | | |
| 506,993 | |
| Pension | |
| 105,647 | | |
| 96,098 | |
| Other | |
| 278,948 | | |
| 469,844 | |
| | |
| 960,515 | | |
| 1,072,935 | |
| Net deferred income tax asset: | |
$ | 113,353 | | |
$ | 509,646 | |
The Tax Cuts and Jobs Act (the “Tax Act”)
was signed into law in December 2017 and includes a broad range of tax reforms, certain of which were required by GAAP to be recognized
upon enactment. The U.S. Securities and Exchange Commission has issued Staff Accounting Bulletin 118 (SAB 118), which provides
guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one
year from the 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 Act is incomplete but it is able to determine a reasonable estimate,
it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included
in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect
immediately before the enactment of the Act. As permitted by SAB 118, the Company has subsequently finalized its accounting analysis
based on the guidance, interpretations and data available as of December 31, 2018. There were no material adjustments to the Company’s
financial statements as a result.
The Act introduced provisions that
fundamentally change the U.S. approach to taxation of foreign earnings. Under the Act, qualified dividends of foreign
subsidiaries are no longer subject to U.S. tax. Under the previously-existing tax rules, dividends from foreign operations
were subjected to U.S. tax, and if not considered permanently reinvested, the Company had recognized expense and recorded a
liability for the tax expected to be incurred upon receipt of the dividend of these foreign earnings. Although the Act
excludes dividends of foreign subsidiaries from taxation, it includes provisions for a mandatory deemed dividend of
undistributed foreign earnings at tax rates of 15.5% or 8% ("transition tax") depending on the nature of the foreign
operations' assets. Companies may utilize tax attributes (including net operating losses and tax credits) to offset the
transition tax. The estimated provisional net effect of applying the provisions of the Act on our 2017 results of operations
was a non-cash charge to tax expense of $1,170,000. This provisional amount could be revised as additional guidance and
interpretations are issued and as we continue to examine the details of the Act and the related tax attributes.
On January 22, 2018, the FASB released guidance
on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act. The GILTI provisions
impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company considers any
potential GILTI as an expense in the period the tax is incurred.
Based on our historical
financial performance in the U.S., at December 31, 2017, the Company had a significant net deferred tax asset position. As
such, with the Act's reduction of the corporate tax rate from 35% to 21%, the Company re-measured its net deferred tax
assets at the lower corporate rate of 21% and recognized a $75,000 tax expense to adjust net deferred tax assets to the
reduced value.
The total effect in 2017 of applying the U.S.
tax reform provisions of the Act was tax expense of $1,245,000 increasing the effective rate for 2017 by 128%.
In 2018, the Company evaluated its tax positions
for years which remain subject to examination by major tax jurisdictions, in accordance with the requirements of ASC 740 and as
a result, concluded no adjustment was necessary. The Company files income tax returns in the U.S. federal jurisdiction, and various
state and foreign jurisdictions. The Company’s evaluation of uncertain tax positions was performed for the tax years ended
December 31, 2015 and forward, the tax years which remain subject to examination by major tax jurisdictions as of December 31,
2018.
Due to the uncertain nature of the realization
of the Company's deferred income tax assets based on past performance of its German subsidiary and carry forward expiration dates,
the Company has recorded a valuation allowance for the amount of deferred income tax assets which are not expected to be realized.
This valuation allowance, all of which is related to deferred tax assets resulting from net operating losses of the Company’s
German subsidiary, is subject to periodic review, and, if the allowance is reduced, the tax benefit will be recorded in future
operations as a reduction of the Company's tax expense.
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