Annual report pursuant to Section 13 and 15(d)

14. Income Taxes

14. Income Taxes

12 Months Ended

Sep. 30, 2016

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Income tax expense for the years ended September 30, 2016 and 2015 is as follows:

	2016			2015
Current expense:
Federal	$	–		$	320,000
State		31,161			56,000
		31,161			376,000
Deferred expense:
Federal		(12,524,582	)		–
State		–			–
		–			–
Total income tax expense	$	(12,493,221	)	$	376,000

A reconciliation of the differences between the effective and statutory income tax rates for years ended September 30:

	2016					2015
	Amount			Percent		Amount			Percent

Federal statutory rates	$	1,830,150			34%	$	(4,874,337	)		34%
State income taxes		161,484			3%		(123,292	)		1%
Permanent differences		(852,646	)		-16%		2,794,987			-19%
Net operating loss adjustment		(1,083,866	)		-20%		327,477			-2%
Valuation allowance against net deferred tax assets		(12,284,278	)		-228%		2,251,165			-16%
Other		(264,065	)		-5%		–			0%
Effective rate	$	(12,493,221	)		-227%	$	376,000			-3%

At September 30, deferred income tax assets and liabilities were comprised of:

	2016		2015
Deferred income tax asset, current:
Book to tax differences in accounts receivable	$	406,733	$	374,621
Book to tax differences in prepaid expenses		–		65,467
Book to tax difference in accrued expenses		241,536		144,961
Book to tax differences in inventory		414,575		–
Total deferred income tax asset, current		1,062,844		585,049
Less: valuation allowance		–		(585,049	)
Deferred income tax asset, current, net		1,062,844		–

Deferred income tax asset, long-term:
Net operation loss carryforwards		9,915,371		10,801,243
Book to tax differences in intangible assets		633,869		632,557
Book to tax differences in organizational costs		160,586		272,239
Book to tax differences in depreciation		751,912		(6,810	)
Total deferred income tax asset, long-term		11,461,738		11,669,229
Less: valuation allowance		–		(11,669,229	)
Deferred income tax asset, net		11,461,738		–

Total deferred income tax asset	$	12,524,582	$	–

The Company has recorded as of September 30, 2016 and 2015 a valuation allowance of $0 and $12,284,278, respectively. We reduced our valuation allowance by $12,284,278 based on the profitable operations of our Marquis subsidiary that can be offset against our net operation loss carryforwards.

The Company annually conducts an analysis of its tax positions and has concluded that it has no uncertain tax positions as of September 30, 2016.

The Company has net operating loss carry-forwards of approximately $35.5 million. Such amounts are subject to IRS code section 382 limitations and expire in 2027. The 2011 to 2014 tax years are still subject to audit.