| 10. | Income Taxes |
Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
We are subject to taxation in the United States and various state jurisdictions. We are not currently under examination by the Internal Revenue Service (IRS) or any state taxing authority. With a few exceptions, the company is no longer subject to income tax examination by the IRS for the tax years ended on or before September 30, 2013. To the extent net operating losses are utilized, the tax years in which the losses were generated remain open to examination by the IRS.
Our accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of our net deferred tax assets. We primarily considered such factors as our history of operating losses, the nature of our deferred tax assets and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At present, we do not believe that it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying consolidated balance sheets.
| December 31, | |||||||||
| 2016 | 2015 | ||||||||
| U.S. statutory rate | 34.00 | % | 34.00 | % | |||||
| State, net of federal benefit | (4.61 | )% | - | % | |||||
| Permanent differences | (3.81 | )% | (0.79 | )% | |||||
| Less: valuation allowance | (34.50 | )% | (10.73 | )% | |||||
| Effective tax rate | (8.92 | )% | 22.48 | % | |||||
For 2016 and 2015, our effective tax rate differs from the amount computed by applying the statutory federal and state income tax rates to net loss before income tax, primarily as the result of changes in valuation allowance.
The significant components of deferred tax assets and liabilities are as follows:
| December 31, | |||||||||
| 2016 | 2015 | ||||||||
| Deferred tax assets | |||||||||
| Net operating losses | $ | 14,020,558 | $ | 14,957,128 | |||||
| Stock based compensation | 1,772,228 | 1,259,047 | |||||||
| Allowance for doubtful accounts | 181,175 | 17,424 | |||||||
| Intangible assets | 544,333 | 367,247 | |||||||
| Deferred revenue | 5,166 | 60,372 | |||||||
| Accrued expenses | 422,133 | 271,107 | |||||||
| Charitable contributions | 10,116 | - | |||||||
| AMT | 24,965 | - | |||||||
| 16,980,674 | 16,932,325 | ||||||||
| Deferred tax liability | |||||||||
| Property and equipment | (216,473 | ) | (222,753 | ) | |||||
| Intangible assets | - | - | |||||||
| Net deferred tax assets | 16,764,201 | 16,709,572 | |||||||
| Less: valuation allowance | (16,764,201 | ) | (16,709,572 | ) | |||||
| Deferred tax asset - net valuation allowance | $ | - | $ | - | |||||
The net change in the valuation allowance for the year ended December 31, 2016 was $(54,629).
As of December 31, 2016, the Company has a federal net operating loss carryover of approximately $39,670,211 available to offset future income for income tax reporting purposes, which will expire in various years through 2036, if not previously utilized.
The Company’s ability to use the carryover net operating loss may be substantially limited or eliminated pursuant to Internal Revenue Code Section 382. A limitation may apply to the use of the net operation loss and credit carryforwards, under provisions of the Internal Revenue Code that are applicable if we experience an “ownership change”. That may occur, for example, as a result of trading in our stock by significant investors as well as issuance of new equity. Should these limitations apply, the carryforwards would be subject to an annual limitation, resulting in a substantial reduction in the gross deferred tax.
We adopted the provisions of ASC 740-10. ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of uncertain tax provisions that have been taken or expected to be taken on a tax return. We evaluated our tax positions and state filings and have determined we had no material unrecognized income tax assets or liabilities for the years ended December 31, 2016 and 2015.
Our policy regarding income tax interest and penalties is to expense those items as general and administrative expense but to identify them for tax purposes. During the years ended December 31, 2016 and 2015, there were no federal income tax, or related interest and penalty items in the income statement, or liability on the balance sheet.
Income tax expense for 2016, and 2015, which was composed of the following, relates to state income and minimum tax and alternative minimum tax.
| December 31, | |||||||||
| 2016 | 2015 | ||||||||
| Federal | $ | 24,572 | $ | - | |||||
| State | 90,099 | - | |||||||
| Total current income taxes | $ | 114,671 | $ | - | |||||
We are not currently involved in any income tax examinations.