The Company’s income tax provision consists of the following:
| | | Years Ended December 31, | |
| | | 2016 | | 2015 | |
| | | | | | |
| Current: | | | | | | | |
| Federal | | $ | — | | $ | — | |
| State | | | — | | | — | |
| | | | | | | | |
| Deferred: | | | | | | | |
| Federal | | | — | | | — | |
| State | | | — | | | — | |
| | | | | | | | |
| Total | | $ | — | | $ | — | |
A reconciliation of the income tax provision computed at the statutory Federal income tax rate to our effective income tax rate follows (in percent):
| | | Years Ended | |
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Federal statutory rate | | | (34.0) | % | | | (34.0) | % |
| State statutory rate | | | (7.0) | | | | (7.0) | |
| Change in Valuation Allowance | | | 43.0 | | | | 38.6 | |
| Permanent Differences | | | (2.0) | | | | 2.5 | |
| Prior year adjustments | | | — | | | | (0.8) | |
| Other | | | — | | | | 0.7 | |
| Effective income tax rate | | | 0 | % | | | 0 | % |
At December 31, 2016 and 2015, the Company had estimated Federal net operating loss carry forwards of approximately $9,194,000 and $9,192,000, respectively and State net operating loss carry forwards of approximately $4,969,000 and $4,745,000. These tax loss carry forwards expire at various dates through 2036.
Internal Revenue Code Section 382 places a limitation on the utilization of Federal net operating loss and other credit carry forwards when an ownership change, as defined by the tax law, occurs. Generally, this occurs when a greater than 50 percentage point change in ownership occurs. Accordingly, the actual utilization of the net operating loss and carryforwards for tax purposes may be limited annually to a percentage (based on the risk free interest rate) of the fair market value of the Company at the time of any such ownership change. The Company has not prepared an analysis of ownership changes but does not believe that a greater than 50% change of ownership has occurred and such limitations would not apply to the Company.
Deferred tax assets (liabilities) are comprised of the following:
| | | December 31, | |
| | | 2016 | | 2015 | |
| | | (In thousands) | |
| Account receivable reserves | | $ | 6 | | $ | 6 | |
| Inventory reserves | | | 944 | | | 844 | |
| Inventory capitalization | | | 129 | | | 134 | |
| Depreciation | | | 401 | | | 338 | |
| Loss carry forwards | | | 3,435 | | | 3,442 | |
| Gross deferred tax assets | | | 4,915 | | | 4,764 | |
| Valuation allowance | | | (4,915) | | | (4,764) | |
| Net deferred tax asset | | $ | — | | $ | — | |
In evaluating the Company’s ability to recover deferred tax assets in future periods, management considers the available positive and negative factors, including the Company’s recent operating results, the existence of cumulative losses and near term forecasts of future taxable income that is consistent with the plans and estimates management is using to manage the underlying business. A significant piece of objective negative evidence evaluated was the cumulative loss incurred by the Company over the three-year period ended December 31, 2016. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.
On the basis of this evaluation, as of December 31, 2016 and 2015, the Company concluded it was more likely than not that it would not be able to realize any portion of the benefit on the deferred tax assets and the valuation allowance was increased by $151,000 and $185,000, respectively, to provide a full valuation against the deferred tax assets.
The Company files income tax returns in the United States, which typically provides for a three-year statute of limitations on assessments. The Company is no longer subject to federal income tax examinations by tax authorities for the years before 2013 and state or local income tax examinations by tax authorities for the years before 2012.
The guidance for accounting for uncertainties in income taxes requires that we recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. There were no unrecognized tax benefits that impacted our effective tax rate and accordingly, there was no material effect to our financial position, results of operations or cash flows.
Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. To date, there have been no interest or penalties charged to us in relation to the underpayment of income taxes.
We do not anticipate that our unrecognized tax benefits will significantly increase in the next 12 months.