We account for income taxes under ASC 740, which requires the use of the liability method. ASC 740 provides that deferred income tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Deferred income tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred income tax assets and liabilities are expected to be settled or realized.
Income tax provision (benefit) for income taxes is summarized below:
| Years Ended | March 31, 2017 | March 31, 2016 | ||||||
| Current: | ||||||||
| Federal | $ | –– | $ | –– | ||||
| State | –– | –– | ||||||
| Total current | –– | –– | ||||||
| Deferred: | ||||||||
| Federal | –– | (291,000 | ) | |||||
| State | –– | (30,000 | ) | |||||
| Total deferred | –– | (321,000 | ) | |||||
| Valuation allowance | –– | 321,000 | ||||||
| Total | $ | –– | $ | –– | ||||
The following is a reconciliation between the effective rate and the federal statutory rate used in determining deferred tax assets:
| Years Ended | March 31, 2017 | March 31, 2016 | ||||||
| Expected income tax rate | $ | (248,000 | ) | $ | (299,000 | ) | ||
| State income taxes, net of federal tax benefit | (26,000 | ) | (31,000 | ) | ||||
| Change in valuation allowance | 248,000 | 315,000 | ||||||
| Other permanent differences | 26,000 | 15,000 | ||||||
| Income tax expense | $ | –– | $ | –– | ||||
The components of the net accumulated deferred income tax asset (liability) are as follows:
| Years Ended | March 31, 2017 | March 31, 2016 | ||||||
| Other deferred assets | $ | 99,000 | $ | 225,000 | ||||
| Valuation allowance | (99,000 | ) | (225,000 | ) | ||||
| Current deferred tax assets | –– | –– | ||||||
| Credits and net operating loss carryforwards | 4,775,000 | 4,190,000 | ||||||
| Valuation allowance | (4,775,000 | ) | (4,190,000 | ) | ||||
| Long-term deferred tax assets | –– | –– | ||||||
| Total deferred tax assets | –– | –– | ||||||
| Valuation allowance | –– | –– | ||||||
| Long-term deferred tax liabilities | –– | –– | ||||||
| Total deferred tax liabilities | –– | –– | ||||||
| Net deferred tax assets (liabilities) | $ | –– | $ | –– | ||||
The primary components of our deferred tax assets are describe below:
| Years Ended | March 31, 2017 | March 31, 2016 | ||||||
| Differences in reporting long-term assets | $ | 99,000 | $ | 225,000 | ||||
| Credits and net operating loss carryforwards | 4,775,000 | 4,190,000 | ||||||
| Less valuation allowance | (4,874,000 | ) | (4,415,000 | ) | ||||
| Total deferred tax assets | $ | –– | $ | –– | ||||
We believe that based on all available evidence, it is more likely than not that the deferred tax assets will not be fully realized. Accordingly, a valuation allowance has been recorded against the deferred tax asset.
As of March 31, 2017, we had approximately $12.1 million of net operating loss carryovers for tax purposes. Additionally, we have approximately $239,000 of research and development tax credits available to offset future federal income taxes. The net operating loss and credit carryovers begin to expire in the fiscal year ended March 31, 2019. In fiscal years ended after March 31, 2019, net operating losses expire at various dates through March 31, 2037. Our net operating loss carryovers at March 31, 2017 include $455,000 in income tax deductions related to stock options which will be tax effected and the benefit will be reflected as a credit to additional paid-in capital when realized. As such, these deductions are not reflected in our deferred tax assets. The Internal Revenue Code contains provisions, which may limit the net operating loss carryforwards available to be used in any given year if certain events occur, including significant changes in ownership interests.