Vuzix Corp

Note 10 — Income Taxes

The Company files U.S. federal and various state and foreign tax returns.

Pre-tax earnings consisted of the following for the years ended:

	December 31,		December 31,		December 31,
	2017		2016		2015

Pre-Tax (Loss)
U.S.	$	(19,680,720)	$	(19,263,625)	$	(13,425,887)
Outside the U.S.		47,218		43,543		(1,591)
Total Pre-Tax (Loss)	$	(19,633,502)	$	(19,250,082)	$	(13,427,478)

The provision expense/(benefit) for income taxes for the years ended December 31, 2017, 2016 and 2015 was as follows:

	2017		2016		2015

U.S. Income Taxes:
Current Provision	$	—	$	—	$	—
Deferred Provision		3,639,752		(5,963,589)		(3,730,342)
Valuation Allowance		(3,639,752)		5,963,589		3,730,342
Income Taxes Outside the U.S.:
Current Provision		—		—		—
Deferred Provision		215,745		(197,907)		—
Valuation Allowance		(215,745)		197,907		—
State Income Taxes:
Current Provision		—		—		—
Deferred Provision		(59,530)		(75,442)		(128,572)
Valuation Allowance		59,530		75,442		128,572

Total Provision	$	—	$	—	$	—

A reconciliation of the statutory U.S. federal income tax rate to the effective rates for the years ended December 31, 2017, 2016 and 2015 is as follows:

	2017 %		2016 %		2015 %
Federal Income Tax at Statutory Rate		34.0		34.0		34.0
State Tax Provision, Net of Federal Benefit		0.3		0.3		0.3
Foreign Income Taxed at Other Than 34%		—		(0.7)		—
Change in Corporate Tax Rates from 34% to 21%		(52.9)		—		—
Loss on Derivative Valuation		—		—		(6.3)
Other		(0.7)		0.5		0.7

Effective Tax Rate		(19.3)		34.1		28.7
Change in Valuation Allowance		19.3		(34.1)		(28.7)

Net Effective Tax Rate		—		—		—

Significant components of the Company’s deferred tax assets and liabilities at year end are as follows:

	December 31,		December 31,		December 31,
	2017		2016		2015

Deferred Tax Assets:
Net Operating Loss Carry-forwards	$	16,167,791	$	19,752,311	$	15,027,603
Tax Credit Carry-forwards		2,404,490		2,398,817		1,823,661
Inventory Valuation Adjustment		675,830		622,168		161,944
Officer’s Compensation		86,670		271,095		141,491
Loss from Foreign Operations		—		197,907		—
Other		108,734		44,372		89,783
Total Deferred Tax Assets		19,443,515		23,286,670		17,244,482

Deferred Tax Liabilities:
Income from Foreign Operations		17,838
Other		11,789
Total Deferred Tax Liabilities		29,627		76,815		271,565

Net Deferred Tax Assets Before Valuation Allowance	$	19,413,888	$	23,209,855	$	16,972,917
Valuation Allowance		(19,413,888)		(23,209,855)		(16,972,917)

Net Deferred Tax Assets	$	—	$	—	$	—

As of December 31, 2017, the Company has approximately $76 million in net operating loss carry-forwards and approximately $2.4 million of federal and state credit carry-forwards which will begin to expire in 2018 if not utilized. Utilization of the NOL carry-forwards may be subject to an annual limitation in the case of sufficient equity ownership changes under Section 382 of the tax law or the NOL’s may expire unutilized.

As a result of the assessment of the FASB ASC 740-10 (Prior Authoritative Literature: FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109), the Company has no unrecognized tax benefits. By statute, tax years 2013-2017 are open to examination by the major taxing jurisdictions to which the Company is subject.

FASB ASC 740 “Accounting for Income Taxes”, requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differing treatment of items for financial reporting and income tax reporting purposes. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. In light of the historic losses of the Company, a 100% valuation allowance has been recorded to fully offset any benefit associated with the net deferred tax assets, for which realization is not considered more likely than not to occur.

The Tax Cuts and Jobs Act (the “Tax Act”) enacted on December 22, 2017 significantly lowered the corporate income tax rate to a flat 21% effective January 1, 2018. There was no impact on the income tax provision for the lowering of the corporate tax rate because the change in the net deferred tax asset resulting from the lower rate was fully offset by the corresponding change in the Company’s valuation allowance.