Note 9. Income Taxes

 

The provision for income taxes consists of the following for the years ended June 30, 2017 and 2016:

 

		Years Ended June 30,
		2017			2016
Current
Federal		$	-		$	-
State			5,943			3,796
Foreign (Mexico)			29,552			24,366
Deferred
Federal			-			-
Foreign			-			-
State			-			-
Provision for income tax expense		$	35,495		$	28,162

 

During the year ended June 30, 2017, the Company recorded a provision for income tax expense of $35,495 which consisted of $5,943 in state income tax payments and $29,552 in foreign (Mexico) income tax payments. During the year ended June 30, 2016, the Company recorded a provision for income tax expense of $28,162 which consisted of $3,796 in state income tax payments and $24,366 in foreign (Mexico) income tax payments

 

The reconciliation of the effective income tax rate to the federal statutory rate is as follows:

 

		Years Ended June 30,
		2017			2016
Federal income tax rate			34.0	%		34.0	%
State tax, net of federal benefit			(5.0)	%		(5.0)	%
Permanent differences			1.6	%		(5.6)	%
Effect of reversal of deferred tax liability			-	%		-	%
Change in valuation allowance			(32.2)	%		(29.6)	%
Other			-	%		-	%
Effective income tax rate			(1.6)	%		(6.2)	%

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at June 30, 2017 and 2016 are as follows:

 

  

		June 30, 2017			June 30, 2016
Deferred tax assets:
Federal net operating loss carryforward		$	2,447,315		$	2,016,304
State net operating loss carryforward			527,342			415,279
Intangibles amortization			244,620			243,929
Stock based compensation			1,638,123			1,378,602
Other			234,602			200,602
Total deferred tax assets			5,092,002			4,254,716
Deferred tax liability:
Intangible Assets			-			-
Fixed asset depreciation			57,318			48,252
Net deferred tax assets			5,149,320			4,302,968
Less valuation allowance			(5,149,320)			(4,302,968)
		$	-		$	-

 

The Company has provided a valuation allowance on the deferred tax assets at June 30, 2017 and 2016 to reduce such asset to zero, since there is no assurance that the Company will generate future taxable income to utilize such asset. Management will review this valuation allowance requirement periodically and make adjustments as warranted.  The net change in the valuation allowance for the year ended June 30, 2017 was an increase of $846,352.  

 

At June 30, 2017 and 2016, the Company had federal net operating loss (“NOL”) carryforwards of approximately $11,619,000 and $10,351,000, respectively, and state NOL carryforwards of approximately $7,254,000 and $5,986,000, respectively. Federal NOLs could, if unused, completely expire in 2032. State NOLs, if unused, completely expire in 2037.

 

Effective January 1, 2007, the Company adopted FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of June 30, 2017 and 2017, the Company did not have a liability for unrecognized tax benefits, and no adjustment was required at adoption.

 

The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of June 30, 2017 and 2016, the Company has no accrued interest or penalties related to uncertain tax positions.

 

Company is subject to taxation in the United States and various states and Mexico. The Company is subject to United States federal or state income tax examinations by tax authorities for fiscal years after 2013.