12. INCOME TAXES
The Company was incorporated in the State of Delaware under the name of Cardigant Medical Inc. on April 17, 2009. After the Company had acquired the business of Hong Kong Takung through the acquisition of all the share capital of Hong Kong Takung under a Share Exchange Agreement dated September 23, 2014 on October 20, 2014, it became a holding company and do not conduct any substantial operations or business of its own in the State of Delaware and in the U.S.
The Company also does not provide for U.S. taxes or foreign withholding taxes on undistributed earnings from its non-U.S. subsidiaries, either owned directly or indirectly, because it was elected to indefinitely reinvest such earnings outside the U.S to support non-U.S. liquidity needs to fund operations and growth of its foreign subsidiaries and acquisitions.
United States of America
As of December 31, 2016 and 2015, the Company in the United States had $2,212,890 and $900,301 in net operating loss carry forwards available to offset future taxable income, respectively. Federal net operating losses can generally be carried forward twenty years. The federal corporate net operating loss carryover is expired in 20 taxable years following the taxable year of the loss. If not utilized, the federal net operating loss for the fiscal years 2014, 2015 and 2016 in an amount of $109,162, $791,139 and $1,312,589, respectively, will begin to expire in the years 2035, 2036 and 2037, respectively.
The Company believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future. Therefore, the Company has provided full valuation allowance for the deferred tax assets arising from the losses at US during the year ended December 31, 2016 and 2015, amounting to $962,012 and $306,102, respectively. Accordingly, the Company has no net deferred tax assets under the US entity.
Hong Kong
The provision for current income taxes of the subsidiary operating in Hong Kong has been calculated by applying the current rate of taxation of 16.5% for the year ended December 31, 2016 and 2015, if applicable.
PRC
In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries that are not entitled to any tax holiday were subject to income tax at a rate of 25% for the year ended December 31, 2016 and 2015. As of December 31, 2016 and 2015, the Company in PRC had $504,782 and nil in net operating loss carryforwards available to offset future taxable income, respectively. According to PRC tax regulations, the PRC net operating loss can generally carried forward for no longer than five years starting from the year subsequent to the year in which the loss was incurred. Carryback of losses is not permitted. If not utilized, the PRC net operating loss for the fiscal year 2016, $504,782, will expire in 2022.
The income tax expense was $1,769,449 and $1,282,331 for the year ended December 31, 2016 and 2015, respectively.
The income tax provision consists of the following components:
| | | December 31, | | December 31, | |
| | | 2016 | | 2015 | |
| Current | | $ | 2,006,768 | | $ | 1,303,865 | |
| Deferred | | | (237,319) | | | (21,534) | |
| Total Provision for Income Taxes | | | 1,769,449 | | | 1,282,331 | |
A reconciliation between the Company’s actual provision for income taxes and the provision at the statutory rate is as follow:
| | | December 31, | | December 31, | |
| | | 2016 | | 2015 | |
| Income before income tax expense | | $ | 8,140,143 | | $ | 6,718,440 | |
| | | | | | | | |
| Provision for taxes at respective statutory tax rate | | | 983,604 | | | 984,497 | |
| Tax effect of non-deductible expenses | | | 132,509 | | | 50,383 | |
| Return true-up | | | (2,574) | | | - | |
| Changes in valuation allowance | | | 655,910 | | | 247,451 | |
| | | | | | | | |
| Total Provision for Income Taxes | | | 1,769,449 | | | 1,282,331 | |
The Company's effective tax rate was 21.7%and 19.1% for the year ended December 31, 2016 and 2015, respectively.
The approximate tax effects of temporary differences, which give rise to the deferred tax assets and liabilities, are as follows:
| | | As of | | As of | |
| | | December 31, | | December 31, | |
| | | 2016 | | 2015 | |
| Deferred tax assets | | | | | | | |
| Tax loss carried forward | | $ | 873,071 | | $ | 306,102 | |
| Unvested restricted stock carried forward | | | 209,629 | | | - | |
| Deferred advertising expenses | | | 122,496 | | | - | |
| Others | | | 588 | | | - | |
| | | | 1,205,784 | | | 306,102 | |
| Valuation allowance | | | (962,012) | | | (306,102) | |
| Deferred tax asset, net | | | 243,772 | | | - | |
| | | | | | | | |
| Deferred tax liabilities | | | | | | | |
| Property, plant and equipment, principally due to differences in depreciation | | | (62,618) | | | (45,037) | |
| Deferred tax liability | | $ | (62,618) | | $ | (45,037) | |