Note 4 — Income Taxes
We incurred a net loss in each year of operation since inception resulting in no current or deferred tax expense for 2017, 2016 or 2015.
Due to our operating losses, the 2017 Tax Act did not impact our 2017 operating results or income tax expense. The primary impact of the 2017 Tax Act was the re-measurement of our deferred tax assets, based upon the new U.S. statutory corporate tax rate of 21% and the required change to the related valuation allowance. We have completed our determination of the accounting implications of the 2017 Tax Act, the impact of which is a $2,380,000 reduction in net deferred tax assets. The effective rate adjustment to deferred tax assets, a discrete item for the quarter, is fully offset by a decrease in the valuation allowance. As such, there is no net effective rate impact in our financial statements. No income tax provision was required for the deemed repatriation tax under the 2017 Tax Act, as our foreign subsidiaries had no cumulative positive earnings and profits.
The benefit for income taxes differs from the amount obtained by applying the federal statutory income tax rate to loss before benefit for income taxes for 2017, 2016 and 2015 as follows:
| 2017 | 2016 | 2015 | ||||||||||
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Tax benefit computed at federal statutory rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||||
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Increase (decrease) in taxes due to: |
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Change in tax rate under tax reform |
(25.0 | ) | ||||||||||
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Change in valuation allowance |
(9.0 | ) | (34.0 | ) | (34.0 | ) | ||||||
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The significant components of deferred tax assets at December 31 are as follows:
| 2017 | 2016 | |||||||
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Loss carryforwards |
$ | 2,563,000 | $ | 1,173,000 | ||||
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Depreciation & Amortization |
951,000 | 1,755,000 | ||||||
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Stock Option Compensation |
358,000 | 0 | ||||||
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Other |
34,000 | 71,000 | ||||||
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Less: valuation allowance |
(3,906,000 | ) | (2,999,000 | ) | ||||
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As of December 31, 2017, we had net operating loss carryforwards for federal and state income tax purposes of approximately $353.6 million which expire in the years 2018 through 2037. Of these amounts, $77.5 million resulted from the acquisition of Conductus. Under the Internal Revenue Code change of control limitations, a maximum of $12.3 million will be available for reduction of future taxable income.
Due to the uncertainty surrounding their realization, we have recorded a full valuation allowance against our net deferred tax assets. Accordingly, no deferred tax asset has been recorded in the accompanying balance sheet. The valuation allowance increased by $ 907,000 in 2017 and decreased by $14,276,000 in 2016.
Section 382 of the Internal Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards based on a statutory rate of return (usually the “applicable federal funds rate,” as defined in the Internal Revenue Code) and the value of the corporation at the time of a “change of ownership” as defined by Section 382. We had changes in ownership in August 1999, December 2002, June 2009, August 2013, and December 2016. In addition, we acquired the right to Conductus’ net operating losses, which are also subject to the limitations imposed by Section 382. Conductus underwent five ownership changes, which occurred in February 1999, February 2001, December 2002, June 2009, August 2013, and December 2016. Therefore, the ability to utilize Conductus’ and our net operating loss carryforwards of $77.5 million which were incurred prior to the 2016 ownership changes, will be subject in future periods to annual limitations of $126,000. Net operating losses released from this limitation and/or incurred by us subsequent to the ownership changes and therefore not subject to this limitation totaled $9.9 million. An additional $126,000 in losses were released from limitation during the year under Section 382.