13. Income Taxes



The provision for income taxes consists of the following:



The provision for income taxes varies from the amount determined by applying the U.S. federal statutory rate to income before income taxes as a result of the following:





Included in permanent differences between book and tax in the above table are the impacts of the non-deductible mark-to-market activity associated with convertible debt and warrants as well as permanent differences such as nondeductible meals and entertainment and stock compensation shortfalls. The deferred state rate adjustments are a result of changes in apportionment and various state rate law changes. The deferred tax adjustments are primarily attributable to the write-off of deferred tax assets associated with the unexercised stock compensation awards that expired during the current year. The revaluation of the deferred tax assets reflects a $14.5 million provisional write-down as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017.



The components of the deferred tax asset are as follows:



On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was enacted, which made significant changes to the Internal Revenue Code. The TCJA lowered the U.S. federal income tax rate to 21%, beginning on January 1, 2018. Additionally, among other changes, the TCJA imposes a one-time transition tax on the mandatory repatriation of unremitted foreign earnings, as well as a minimum tax on global intangible low-taxed income ("GILTI") of foreign subsidiaries.

Additionally, in response to the enactment of the TCJA, the SEC issued SAB 118 on December 22, 2017. SAB 118 provides for a "measurement period" that allows the Company additional time to complete the accounting for certain tax effects of the TCJA that are considered "provisional" in the Company's financial statements as of December 31, 2017.

As of December 31, 2017, the Company had not yet completed its accounting for the TCJA as additional time is needed to evaluate certain factors that could impact the Company's accounting. Such factors include, but are not limited to, the completion of the Company's 2017 income tax returns and changes in interpretations of existing tax laws. However, the Company was able to determine a reasonable estimate of the impacts of the TCJA as of December 31, 2017. As of December 31, 2017, the Company recorded a provisional $14.5 million deferred income tax expense as a result of revaluing the Company's deferred tax assets to incorporate the newly-enacted federal statutory rate of 21%. The $14.5 million deferred tax expense was fully offset as a result of the Company's corresponding release of valuation allowance, resulting in a $14.5 million deferred tax benefit. Additionally, based upon the Company's initial analysis of the one-time transition tax, the Company recorded a provisional amount of $0 associated with the transition tax on mandatory repatriation, as it is estimated that all of the Company's foreign earnings will have been remitted in the U.S. through Subpart F inclusions prior to applying the mandatory repatriation provisions. Additionally, the Company is still in the process of evaluating whether or not to treat the GILTI provisions of the TCJA as a period expense or to provide deferred taxes on certain foreign basis differences. Such policy election will be made within the measurement period as additional guidance and interpretations of existing tax laws become available.

Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or the “Code”, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. Following significant ownership changes during 2013, the Company initiated a review of the availability of its U.S. net operating loss carryforwards.  As a result of this review, it was determined that approximately $288.1 million of the Company’s federal net operating loss carryovers would expire unused due to the limitation under IRC Section 382.  The Company reduced the net operating loss carryover and corresponding valuation allowance as a result of these limitations.  The remaining net operating loss carryforwards following the ownership change have been assigned a full valuation allowance against all deferred tax assets.



In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable losses, and projections for future periods over which the deferred tax assets are deductible, the Company determined that a 100% valuation allowance of deferred tax assets was appropriate. The valuation allowance for deferred tax assets includes amounts for which subsequently recognized tax benefits will be applied directly to the contributed capital.

As of December 31, 2017, we had gross federal net operating loss carryforwards of approximately $98.5 million. The federal net operating loss carryforwards reflect accumulated book losses reduced for the 2013 IRC Section 382 ownership change limitation of $288.1 million and approximately $90 million of book/ tax differences and expiration of unused carryforwards. The federal net operating loss carryforwards will expire between 2030 and 2037. As of December 31, 2017, we had state net operating loss deferred tax assets of approximately $1.7 million which will expire at various dates between 2018 and 2037 if not utilized.  

On February 28, 2018, the Company amended the outstanding warrants issued pursuant to the September 26, 2016 Stock Purchase Agreement providing for a temporary reduction in the exercise price to encourage early exercise.  During the restricted exercise period, Stereotaxis received exercise notices for a majority of the outstanding warrants. As a result of this transaction, the Company believes that an ownership change may have occurred under Section 382 of the Code. Any change could significantly limit the value of the existing net operating loss carryforward.  The Company is currently evaluating the impact of the warrant exercise on the availability of its U.S. net operating loss carryforward.  Refer to Note 20 for a full discussion of subsequent events.

The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. As the Company has a federal net operating loss carryforward from the year ended December 31, 1998 forward, all tax years from 1998 forward are subject to examination. As states have varying carryforward periods, and the Company has recently entered into additional states, the states are generally subject to examination for the previous 10 years or less.

The Company recognizes interest accrued, if any, net of tax and penalties, related to unrecognized tax benefits as components of income tax provision as applicable. As of December 31, 2017 accrued interest and penalties were less than $0.1 million.



At December 31, 2017 and 2016, the Company had approximately $0.1 in reserves for uncertain tax positions.