NOTE 10 - INCOME TAXES
The Company has net operating loss carry forwards for federal income tax purposes of approximately $48,900,000 at December 31, 2017, the unused portion of which expires in years 2026 through 2037. The Company accounts for income taxes under Accounting Standards Codification 740, Income Taxes “ASC 740”. ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Internal Revenue Code Section 382 “IRC 382” places a limitation on the amount of taxable income that can be offset by carry forwards after a change in control (generally greater than a 50 percent change in ownership). The issuance of the Company’s Series A Preferred Stock on January 15, 2009 resulted in a change of control as defined under IRC 382.
Components of income taxes for the years ending December 31 were as follows:
| For the Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Federal | $ | 28,000 | $ | - | ||||
| State | 142,000 | - | ||||||
| $ | 170,000 | $ | - | |||||
The table below summarizes the differences between the Company’s effective tax rate and the statutory federal rate as follows for the periods ended December 31, 2017 and 2016:
| For the Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| U.S. statutory rate | 35.0 | % | 35.0 | % | ||||
| State income taxes | 6.5 | 3.0 | ||||||
| Amortization/impairment of acquisition related assets | (0.3 | ) | 0.2 | |||||
| Stock based compensation | 3.6 | (3.2 | ) | |||||
| Stock based fees paid to client | 0.0 | (18.5 | ) | |||||
| Other permanent differences | 1.7 | (0.6 | ) | |||||
| Valuation allowance | (36.8 | ) | (15.9 | ) | ||||
| 9.70 | % | 0.00 | % | |||||
Deferred tax assets and liabilities are provided for significant income and expense items recognized in different years for tax and financial reporting purposes. The components of the net deferred tax assets for the years ended December 31, 2017 and 2016 were as follows:
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forward | $ | 14,201,084 | $ | 19,227,610 | ||||
| Depreciation | 67,099 | 88,909 | ||||||
| Compensation expense | 123,093 | 64,230 | ||||||
| Accrued expense | 41,681 | - | ||||||
| Deferred revenue | 449,500 | 686,297 | ||||||
| All Miscellaneous Other | 3,386 | 2,874 | ||||||
| Total deferred tax asset | 14,885,843 | 20,069,920 | ||||||
| Deferred tax liabilities | - | - | ||||||
| Net deferred tax asset | 14,885,843 | 20,069,920 | ||||||
| Less: valuation allowance | (14,885,843 | ) | (20,069,920 | ) | ||||
| $ | - | $ | - | |||||
The Company has fully reserved the deferred tax asset in excess of the deferred tax liabilities due to the limitation on taxable income that can be offset by net operating loss carry forwards in future periods under IRC section 382 as a result of changes in control and substantial uncertainty of the realization of any tax assets in future periods. The valuation allowance was decreased by $5,184,077 from the prior year.