Note 9. Income Taxes
The components of the income tax provision (benefit) for the years ended December 31, 2017 and 2016 are as follows:
| 2017 | 2016 | |||||||
| Current tax expense: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| $ | - | $ | - | |||||
| Deferred tax benefit (expense): | ||||||||
| Federal | $ | 37,000 | $ | (3,469,000 | ) | |||
| State | 19,000 | (1,121,000 | ) | |||||
| Valuation reserve | (56,000 | ) | 4,590,000 | |||||
| $ | - | $ | - | |||||
Net deferred tax assets consist of the following components as of December 31, 2017 and 2016:
| 2017 | 2016 | |||||||
| Deferred tax asset: | ||||||||
| Net operating loss carryforward | $ | 3,993,000 | $ | 5,491,000 | ||||
| Accounts receivable reserves | 3,000 | 5,000 | ||||||
| Property and equipment | (117,000 | ) | (126,000 | ) | ||||
| Accrued expenses | 61,000 | 86,000 | ||||||
| Impairment charge | 211,000 | 296,000 | ||||||
| Start-up costs | 14,000 | 24,000 | ||||||
| Stock based compensation | 55,000 | 62,000 | ||||||
| Inventory reserves | 4,000 | 4,000 | ||||||
| Other | 20,000 | 49,000 | ||||||
| 4,244,000 | 5,891,000 | |||||||
| Less valuation allowance | (4,244,000 | ) | (5,891,000 | ) | ||||
| Net deferred taxes | $ | - | $ | - | ||||
Due to the change in the corporate tax rate under the Tax Cuts and Jobs Act (“Tax Cuts”) signed into law in December 2017, a cumulative adjustment of $1,703,000 was made to the deferred tax asset and valuation allowance to account for the corporate tax rate reduction to 21% from 34%.
A reconciliation of income tax expense at statutory rates to the income tax expense reported in the Statements of Operations is as follows for the years ended December 31, 2017 and 2016.
| Year ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Federal tax benefit at statutory rate | $ | (48,000 | ) | $ | (133,000 | ) | ||
| State tax benefit net of federal taxes | (18,000 | ) | (26,000 | ) | ||||
| Cancellation of debt | - | 4,735,000 | ||||||
| Other | 10,000 | 14,000 | ||||||
| Increase (decrease) in valuation allowance | 56,000 | (4,590,000 | ) | |||||
| Income tax expense | $ | - | $ | - | ||||
As of December 31, 2017, the Company has available, for federal and state income tax purposes, net operating loss (“NOL”) carryforwards of approximately $13,854,000, which expire at various times through 2037. As a result of the cancellation of debt and accrued interest on debt and the correction of interest expense previously deferred for tax purposes that occurred in 2015, the Company recognized an attribute reduction of the NOL carryforward effective January 1, 2016 of approximately $11,978,000, reducing the NOL carryforward available as of that date from $25,104,000 to $13,126,000. The utilization of the NOL carryforwards is dependent upon the ability of the Company to generate sufficient taxable income during the carryforward periods. The NOL carryforwards are also subject to certain limitations on their utilization should changes in Company ownership occur. The Company has not recognized any NOL carryforward benefits or other net deferred tax assets in the current financial statements.