Following the conversion of Celcuity LLC to Celcuity Inc. on September 15, 2017, Celcuity Inc. will begin filing federal and state returns where required. No income tax benefit was recorded for the period September 16, 2017 through December 31, 2017, due to net losses and recognition of a valuation allowance. The following table presents a reconciliation of the tax expense computed at the statutory federal rate and the Company’s tax expense for the years ending December 31:
| | | 2017 | | 2016 | |
| Tax benefit at statutory federal rate | | $ | (682,000) | | $ | - | |
| State income tax benefit, net of federal tax effect | | | (130,000) | | | - | |
| Change in valuation allowance on deferred tax assets | | | 897,000 | | | - | |
| Other permanent items | | | 3,000 | | | - | |
| Revaluation of deferred taxes due to U.S. Tax Reform | | | 366,000 | | | - | |
| Change in tax status | | | (454,000) | | | - | |
| Income tax benefits | | $ | - | | $ | - | |
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s deferred tax assets relate primarily to its net operating loss carryforwards and other balance sheet basis differences. In accordance with ASC 740, “Income Taxes,” the Company recorded a valuation allowance to fully offset the net deferred tax asset, because it is more likely than not that the Company will not realize future benefits associated with these deferred tax assets at December 31, 2017. The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets are as follows:
| | | 2017 | | 2016 | |
| Deferred tax assets (liabilities): | | | | | | | |
| Accrued expenses | | $ | 112,000 | | $ | - | |
| Share-based compensation | | | 325,000 | | | - | |
| Property and equipment | | | 68,000 | | | - | |
| Net operating losses | | | 392,000 | | | - | |
| Valuation allowance | | | (897,000) | | | - | |
| Net deferred tax assets (liabilities) | | $ | - | | $ | - | |
On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into United States tax law. As a result, certain provisions in this Act effect the deferred tax assets and liabilities and the deferred tax provision of the Company as of and for the year ended December 31, 2017. Among other provisions included in the Act, the US federal corporate tax rate is reduced from a graduated rate up to 35% to a flat rate of 21%. The Company has adjusted its deferred tax assets and liabilities at December 31, 2017 to reflect the Act’s reduction of corporate tax rates which are expected to be in effect in future years as the deferred tax assets and liabilities are realized. The effect of this adjustment has been recognized as an increase in the deferred provision for income taxes of $366,000.
At December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $1.36 million each. The net operating loss carryforwards will expire in the year ending December 31, 2037.
Under the provisions of Section 382 of the Internal Revenue Code of 1986, certain substantial changes in the Company’s ownership, including a sale of the Company, or significant changes in ownership due to sales of equity, may limit in the future the amount of net operating loss carryforwards available to offset future taxable income.
The Company recognizes uncertain tax positions in accordance with ASC 740 on the basis of evaluating whether it is more likely than not that the tax positions will be sustained upon examination by tax authorities. For those tax positions that meet the more-likely-than not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement. As of December 31, 2017 and 2016, the Company has no unrecognized tax benefits. There are no unrecognized tax benefits included on the balance sheet that would, if recognized, impact the effective tax rate. The Company does not anticipate there will be a significant change in unrecognized tax benefits within the next 12 months.
Prior to the conversion, Celcuity was a limited liability company and therefore was a disregarded legal entity for income tax purposes. Accordingly, no benefit for income taxes was recorded prior to the conversion.
For years before 2013, the Company is no longer subject to U.S. federal or state income tax examinations. The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of general and administrative expenses. As of September 30, 2017, and December 31, 2016, the Company did not have any significant uncertain tax positions.