NOTE 20. - INCOME TAXES

 

The Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law on December 22, 2017. The TCJA includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%. The Company’s income tax provision (benefit) reflects the effect of this change in Federal corporate tax rates, primarily from the re-measurement of the Company’s deferred tax assets and liabilities, including prior net operating loss carry-forwards. The effect of the rate change attributable to the TCJA on the Company’s effective tax rate was a decrease of approximately 46% in the net deferred tax assets before the valuation allowance. Since the Company is in a full valuation allowance situation, the change in the Federal corporate rate had no effect on the calculation of the Company’s tax provision, which remained at zero.

 

The following is a summary of the components giving rise to the income tax provision (benefit) for the years ended December 31, 2017, 2016 and 2015:

  

		2017			2016			2015
Current:
Federal		$	-		$	-		$	-
State			-			-			-
Total current			-			-			-
Deferred:
Federal			1,263,677			(2,424,497)			(3,372,964)
State			214,628			21,452			(155,352)
Total deferred			1,478,305			(2,403,045)			(3,528,316)
Change in valuation allowance			(1,478,305)			2,403,045			3,528,316
		$	-		$	-		$	-

 

The provision (benefit) for income tax varies from that which would be expected based on applying the statutory federal rate to pre-tax accounting loss, including the effect of the change in the U.S. corporate income tax rates, as follows:

 

		2017			2016			2015
Statutory federal rate			(34.0)	%		(34.0)	%		(34.0)	%
Other items			(2.4)			(0.2)			0.0
Derivative liability			0.4			11.9			(0.5)
Stock based compensation			2.0			1.5			3.1
Research and development credit carryforward			(1.8)			-			-
State tax provision, net of federal benefit			1.1			0.1			(0.9)
Federal tax rate change			46.1			-			-
Valuation allowance			(11.4)			20.7			32.3
Effective tax rate (benefit) provision			0.0	%		0.0	%		0.0	%

 

Individual components of deferred taxes consist of the following as of December 31:

 

		2017			2016			2015
Deferred tax assets:
Net operating loss carry-forward		$	9,917,641		$	11,626,143		$	7,745,734
Accounts receivable reserve			-			3,499			3,499
Inventory			48,011			96,934			38,707
Stock-based compensation			388,925			282,850			1,599,916
Start-up expenditures			279,709			477,917			514,680
Research and development credit carryforward			232,198			-			-
Loss on equity investment			11,760			139,676			68,877
Severance liability			-			69,860			147,070
Other			4,272			21,423			9,272
			10,882,516			12,718,302			10,127,755
Deferred tax liabilities:
Machinery and equipment			(220,888)			(316,232)			(227,186)
Patents and trademarks			(558,760)			(807,137)			(767,044)
Other intangible assets			(124,953)			(138,713)			(80,349)
			(904,601)			(1,262,082)			(1,074,579)
Valuation allowance			(9,977,915)			(11,456,220)			(9,053,176)
Net deferred taxes		$	-		$	-		$	-

 

The Company has incurred a net operating loss (“NOL”) of approximately $47,000,000 through December 31, 2017 and this amount is being carried forward to future years and begins to expire in 2031. Due to the uncertainty of the Company’s ability to generate sufficient taxable income in the future before they expire, the Company has recorded a valuation allowance to reduce the net deferred tax asset to zero. This NOL is included in the net deferred tax asset that has been fully offset by the valuation allowance. Utilization of the NOL carryforwards may be subject to an annual limitation (or the NOL’s may expire unutilized) in the case of equity ownership changes, as defined by tax law.

 

ASC 740 provides guidance on the financial statement recognition and measurement for uncertain income tax positions that are taken or expected to be taken in a company’s income tax return. The Company has no uncertain tax positions as of December 31, 2017.