The reconciliation of income tax attributable to operations computed at the U.S. Federal statutory income tax rate of 35% to income tax (benefit) expense is as follows:

 

The ultimate realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss carryovers are deductible. Management considers the scheduled reversal of deferred tax liabilities, taxes paid in carryover years, projected future taxable income, available tax planning strategies, and other factors in making this assessment. Based on available evidence, management does not believe it is more likely than not that all of the deferred tax assets will be realized. Accordingly, the Company has established a valuation allowance equal to the net realizable deferred tax assets. The valuation allowance increased by $3,113,196 in 2016 and decreased by $10,969,836 in 2015. 

 

During 2015, the Company acquired intangible assets of $43,193,500 in a purchase business combination related to existing customer base and contracts for which there is no tax basis. Accordingly, the recognition of the intangible asset created a deferred tax liability at the close of the purchase business combination resulting in a reduction of the valuation allowance equal to the tax affected intangible asset. In accordance with ASC 805-740-30-3, the resulting valuation allowance reversal is considered a current year deferred income tax benefit of $17,537,408 as reported on the consolidated statement of income.

 

At December 31, 2016 and 2015, the Company had total domestic Federal and state net operating loss carryovers of approximately $71,997,000 and $55,905,000, respectively. Federal and State net operating loss carryovers both expire at various dates between 2025 and 2036.

 

Under the Tax Reform Act of 1986, as amended, the amounts of and benefits from net operating loss carryovers and research and development credits may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. The Company does not believe that such an ownership change has occurred in 2016 or 2015.

 

The 2013 through 2015 tax years remain open to examination by the Internal Revenue Service and various other state tax agencies. These taxing authorities have the authority to examine those tax years until the applicable statute of limitations expire.

 

The Company did not recognize any interest or penalties related to income taxes for the years ended December 31, 2016 and 2015.

 

At December 31, 2015 the Company early adopted Accounting Standards Update (ASU) No. 2015-17, “Balance Sheet Classification of Deferred Taxes” (Topic 740), which provides for a simplified reporting and balance sheet classification of current and non-current deferred tax assets and liabilities. The adopted ASU requires all deferred tax assets and liabilities, and the related valuation allowance, be presented as non-current on the balance sheet. Accordingly, the 2016 and 2015 deferred tax assets and liabilities have been reclassified to conform to the ASU’s required presentation.