10. INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740 which prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim period, disclosure and transition. There were no unrecognized tax benefits as of January 1, 2016 and during the years ended December 31, 2017 and 2016.
The Company has identified its federal tax return and its state tax return in New York as "major" tax jurisdictions, as defined in ASC 740. Based on the Company's evaluation, it has concluded that there are no significant uncertain tax positions requiring recognition in the Company's consolidated financial statements. The Company's evaluation was performed for tax years ended 2014 through 2017. The Company believes that its income tax positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its consolidated financial position.
On December 22, 2017, President Trump signed into law the legislation generally known as the Tax Cut and Jobs Act (the “2017 Tax Act. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. During the fourth quarter of 2017, the Company recorded a material, non-cash, change in its net deferred income tax balances of approximately $5.7 million related to the tax rate change, which resulting in a corresponding reduction of its valuation allowance. Upon completion of the Company’s 2017 U.S. income tax return in 2018, it may identify additional remeasurement adjustments to its recorded deferred tax assets. The Company will continue to assess its provision for income taxes as future guidance is issued but does not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.
The Company's policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense. There were no amounts accrued for penalties or interest as of or during the year ended December 31, 2017. For the year ended December 31, 2017, the Company determined that, more likely than not, its deferred tax assets would not be realized and, accordingly, increased the valuation allowance. The increase in the valuation allowance is included in the income tax provision in the accompanying consolidated statement of operations for the year ended December 31, 2017. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
The provision for income tax consisted of the following:
| For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | (45,000 | ) | |||
| Foreign | 12,941 | 58,092 | ||||||
| State and Local | - | - | ||||||
| Total Current | 12,941 | 13,092 | ||||||
| Deferred | ||||||||
| Federal | 5,297,000 | (368,000 | ) | |||||
| Foreign | - | - | ||||||
| State and Local | (663,000 | ) | (54,000 | ) | ||||
| Adjustment to valuation allowance related to net deferred tax assets | (5,231,000 | ) | 422,000 | |||||
| Total Deferred | - | - | ||||||
| Provision for income taxes | $ | 12,941 | $ | 13,092 | ||||
The provision for income taxes for the years ended December 31, 2017 and 2016 of approximately $13,000 is the result of certain licensing revenues that are subject to withholding of income tax as mandated by the foreign jurisdiction in which the revenues are earned partially offset by a Federal income tax refund relating to alternative minimum tax credits.
Loss before income taxes is comprised of the following:
| For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Domestic | $ | (1,205,543 | ) | $ | (1,529,050 | ) | ||
| Foreign | 64,753 | 288,516 | ||||||
| Net loss before income taxes | $ | (1,140,790 | ) | $ | (1,240,534 | ) | ||
A reconciliation between the effective rate for income taxes and the amount computed by applying the statutory Federal income tax rate to loss before provision for income taxes is as follows:
| For the Years Ended December 31, | ||||||
| 2017 | 2016 | |||||
| Tax provision at statutory rate | (21 | )% | (34 | )% | ||
| State and local taxes | (5 | )% | (5 | )% | ||
| Foreign taxes | (1 | )% | (4 | )% | ||
| Foreign tax deduction | - | 2 | % | |||
| Incentive Stock Option Expense | 2 | % | 1 | % | ||
| Change in effective tax rate | (503 | )% | - | |||
| Change in valuation allowance for net deferred tax assets | 527 | % | 39 | % | ||
| (1 | )% | (1 | )% | |||
The components of temporary differences that give rise to significant portions of the deferred tax asset, net, are as follows:
| For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Accrued expenses | $ | 26,000 | $ | 56,000 | ||||
| Allowance for doubtful accounts | 1,000 | 3,000 | ||||||
| Reserve for obsolescence | 29,000 | 71,000 | ||||||
| Expense associated with non-qualified stock options | 90,000 | 121,000 | ||||||
| Revenue Sharing Agreement | 258,000 | 430,000 | ||||||
| General business credit | 1,337,000 | 1,222,000 | ||||||
| NOL carryforward | 11,084,000 | 16,153,000 | ||||||
| 12,825,000 | 18,056,000 | |||||||
| Less: valuation allowance | (12,825,000 | ) | (18,056,000 | ) | ||||
| Deferred tax asset, net | $ | - | $ | - | ||||
The change in the valuation allowance for deferred tax assets are summarized as follows:
| For the Years Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| Beginning Balance | $ | 18,056,000 | $ | 17,634,000 | |||
| Change in Allowance | (5,231,000 | ) | 422,000 | ||||
| Ending Balance | $ | 12,825,000 | $ | 18,056,000 | |||
As of December 31, 2017, Andrea had net operating loss and credit carryforwards of approximately $42.6 million expiring in varying amounts beginning in 2018 through 2037. Andrea has General Business Credits of approximately $1.3 million expiring in varying amounts beginning in 2018 through 2037. As a result of the Company’s adoption of ASU No. 2016-09 effective January 1, 2016, the Company records tax benefits and expense in the statements of earnings.