Giga-tronics Incorporated Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Note 14 - Income Taxes

Note 14 - Income Taxes

12 Months Ended

Mar. 26, 2016

14	Income Taxes

Following are the components of the provision for income taxes:

Fiscal years ended (in thousands)	March 26, 2016			March 28, 2015

Current
Federal	$	—		$	—
State		2			47
		2			47
Deferred
Federal		(1,297	)		210
State		215			391
		(1,082	)		601

Change in liability for uncertain tax positions		13			23
Change in valuation allowance		(1,069	)		(624	)
Provision for income taxes	$	2		$	47

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows:

Fiscal years ended (In thousands)	March 26 , 201 6			March 2 8 , 201 5
Net operating loss carryforwards	$	15,065		$	13,657
Income tax credits		296			306
Inventory reserves and additional costs capitalized		1,935			1,974
Accrued vacation		131			133
Deferred rent		44			95
Non-qualified stock options and restricted stock		(10	)		247
Other		68			48
Total deferred tax assets		17,529			16,460

Valuation allowance		(17,529	)		(16,460	)
Net deferred tax assets	$	—		$	—

The following summarizes the difference between the income tax expense and the amount computed by applying the statutory federal income tax rate of 34% to income before income tax. The items comprising these differences consisted of the following for the fiscal years ended March 26, 2016 and March 28, 2015:

Fiscal years ended (In thousands except percentages)	March 26, 2016					March 28, 2015
Statutory federal income tax (benefit)	$	(1,395	)	34.0	%	$	(553	)	34.0	%
Valuation allowance		1,069		(26.1	)		(624	)	38.4
State income tax, net of federal benefit		(239	)	5.8			(95	)	5.8
Net operating loss expiration		451		(11.0	)		861		(53.0	)
Non tax-deductible expenses		107		(2.6	)		593		(36.5	)
Tax credits		(35	)	0.9			(187	)	11.5
Liability for uncertain tax positions		13		(0.3	)		23		(1.4	)
Other		31		(0.8	)		29		(1.8	)
Effective income tax	$	2		(0.1	)	$	47		(3.0%	)

The increase in valuation allowance from March 28, 2015 to March 26, 2016 was $1.1 million.

As of March 26, 2016, the Company had pre-tax federal net operating loss carryforwards of $40.5 million and state net operating loss carryforwards of $21.9 million available to reduce future taxable income. The federal and state net operating loss carryforwards begin to expire from fiscal 2023 through 2036 and from 2016 through 2036, respectively. Utilization of net operating loss carryforwards may be subject to annual limitations due to certain ownership change limitations as required by Internal Revenue Code Section 382. The federal income tax credits begin to expire from 2023 through 2036 and state income tax credit carryforwards are carried forward indefinitely.

The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets, which may not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers both positive and negative evidence and tax planning strategies in making this assessment.

As of March 26, 2016, the Company recorded unrecognized tax benefits of $106,000 related to uncertain tax positions. The unrecognized tax benefit is netted against the noncurrent deferred tax asset on the Consolidated Balance Sheet. The Company has not recorded a liability for any penalties or interest related to the unrecognized tax benefits.

The Company files U.S federal and California state income tax returns. The Company is generally no longer subject to tax examinations for years prior to the fiscal year 2012 for federal purposes and fiscal year 2011 for California purposes, except in certain limited circumstances. The Company does have a California Franchise Tax Board audit that is currently in process. The Company is working with the California Franchise Tax Board to resolve all audit issues and does not believe any material taxes or penalties are due. However, as a result of the ongoing examination, the Company eliminated certain income tax credit carryovers. The write-off of these income tax credit carryovers did not have a significant impact on total income tax expense as the majority had an uncertain tax position reserve with the balance having a full valuation allowance against the deferred tax asset.

A reconciliation of the beginning and ending amount of the liability for uncertain tax positions, excluding potential interest and penalties, is as follows:

(In thousands)	Fiscal Year 201 6		Fiscal Year 201 5
Balance as of beginning of year	$	93	$	70
Additions based on current year tax positions		13		23
(Reductions) additions for prior year tax positions		—		—
Balance as of end of year	$	106	$	93

The total amount of interest and penalties related to unrecognized tax benefits at March 26, 2016 is not material. The amount of tax benefits that would impact the effective rate, if recognized, is not expected to be material. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within next twelve (12) months.