Note 10 – Income Taxes
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. A full valuation allowance is established against all net deferred tax assets as of December 31, 2016 (Predecessor), based on estimates of recoverability. The Company determined that such a valuation allowance was necessary given the current and expected near term losses and the uncertainty with respect to its ability to generate sufficient profits from its new business model. For the year ended December 31, 2015 (Predecessor) income tax expense was $197,386. Because of book-tax differences related to the company’s long-lived assets were creditable against current year losses, there was a small adjustment of the valuation allowance, there was an income tax benefit for the year ended December 31, 2016 (Successor), of $52,694.
The following is a reconciliation of the difference between the effective and statutory income tax rates for years ended December 31:
| December 31, 2016 (Successor) | December 31, 2015 (Predecessor) | |||||||
| Amount | Percent | Amount | Percent | |||||
| Federal statutory rates | $ | (1,084,498) | 34.0% | $ | 103,592 | 34.0% | ||
| State income taxes | (281,970) | 8.8% | 26,934 | 8.8% | ||||
| Permanent differences | 839,208 | -26.3% | 76,097 | 25.0% | ||||
| Temporary differences (Deferred tax liability) | (25,343) | 0.8% | (9,236) | -3.0% | ||||
| Valuation allowance against net deferred tax assets | 499,909 | -17.3% |
| 0.0% | ||||
| Effective rate | $ | (52,694) | 0.0% | $ | 197,386 | 64.8% | ||
At December 31, 2016 (Successor), and December 31, 2015 (Predecessor), the significant components of the deferred tax assets are summarized below:
| December 31, 2016 (Successor) | December 31, 2015 (Predecessor) | |||||
| Deferred income tax assets: | ||||||
| Net operation loss carryforwards | 742,242 | 0 | ||||
| Book to tax differences for allowance for uncollectible accounts | 0 | 0 | ||||
| Total deferred income tax assets | 742,242 | 0 | ||||
| Less: valuation allowance | (742,242) | 0 | ||||
| Total deferred income tax asset | $ | 0 | $ | 0 | ||
The valuation allowance increased by $742,242 in 2016 as a result of the Company’s generating net operating losses.
At December 31, 2016 (Successor) and December 31, 2015 (Predecessor), the significant components of the deferred tax liabilities are summarized below:
| December 31, 2016 (Successor) | December 31, 2015 (Predecessor) | ||||
| Deferred income tax liabilities: | |||||
| Book to tax differences for tangible and intangible assets | 287,153 | 21,560 | |||
| Total deferred income tax liabilities | $ | 287,153 | $ | 21,560 | |
The deferred tax liability is mostly made up of the difference between book and tax values for tangible and intangible fixed assets.
The Company has recorded as of December 31, 2016 a valuation allowance of $742,242 as management believes that it is more likely than not that the deferred tax assets will not be realized in future years. Management has based its assessment on the Company’s lack of profitable operating history.
The Company annually conducts an analysis of its tax positions and has concluded that it had no uncertain tax positions as of December 31, 2016.
The Company has net operating loss carry-forwards of approximately $1,996,644. Such amounts are subject to IRS code section 382 limitations and begin to expire in 2029. The 2014, 2015 and 2016 tax years are still subject to audit.