NOTE 8. INCOME TAXES
The following table presents the current and deferred income tax provision for federal and state income taxes for the years ended September 30, 2016 and 2015:
| 2016 | 2015 | |||||||
| Current tax provision (benefit): | ||||||||
| Federal | $ | - | $ | - | ||||
| State | 1,800 | 2,209 | ||||||
| Total | 1,800 | 2,209 | ||||||
| Deferred tax provision (benefit) | ||||||||
| Federal | (790,000 | ) | (376,000 | ) | ||||
| State | - | - | ||||||
| Valuation allowance | 790,000 | 376,000 | ||||||
| Total | - | - | ||||||
| Total provision (benefit) for income taxes | $ | 1,800 | $ | 2,209 | ||||
Reconciliations of the U.S. federal statutory rate to the actual tax rate for the years ended September 30, 2016 and 2015:
| 2016 | 2015 | |||||||
| US federal statutory income tax rate | (34.0 | %) | (34.0 | %) | ||||
| State tax – net of benefit | (6.0 | %) | (6.0 | %) | ||||
| (40.0 | %) | (40.0 | %) | |||||
| Permanent differences: | ||||||||
| Stock-based compensation | 0.03 | % | 13.9 | % | ||||
| Amortization of debt discounts and non-cash interest | 12.1 | % | 24.8 | % | ||||
| Non-deductible gains and losses | 12.2 | % | (12.2 | )% | ||||
| Increase in valuation allowance | 15.4 | % | 13.5 | % | ||||
| Effective tax rate | - | % | - | % | ||||
The Company incurred certain non-cash transactions which are not includable or deductible for income tax reporting purposes, such the change in fair value of warrant liability, certain stock-based compensation and accretion of debt discounts.
The components of the Company’s deferred tax assets and (liabilities) for federal and state income taxes as of September 30, 2016 and 2015:
| As of September, | ||||||||
| 2016 | 2015 | |||||||
| Current deferred tax assets (liabilities): | ||||||||
| Accrued expenses and other | $ | - | $ | - | ||||
| Total current deferred tax assets | - | - | ||||||
| Non-current deferred tax assets and liabilities: | ||||||||
| Property, plant and equipment | - | 29,000 | ||||||
| Net operating losses | 1,457,000 | 638,000 | ||||||
| Total non-current deferred tax assets | 1,457,000 | 667,000 | ||||||
| Valuation allowance | (1,457,000 | ) | (667,000 | ) | ||||
| Total non-current deferred tax assets | - | - | ||||||
| Net deferred tax assets | $ | - | $ | - | ||||
During the years ended September 30, 2016 and 2015 the valuation allowance increased by $790,000 and $376,000, respectively. At September 30, 2016, the Company had approximately $1,457,000 of federal and state gross net operating losses allocated to continuing operations available. The net operating loss carry forwards, if not utilized, will begin to expire in 2033 for federal purposes and 2031 for state purposes.
Based on the available objective evidence, including the Company’s limited operating history and current liabilities in excess of assets, management believes it is more likely than not that some of the net deferred tax assets, specifically certain net operating losses, at September 30, 2016 will not be fully realizable. In addition, subsequent to year end significant shares were issued to shareholders in connection with the conversion of notes payable and a subscription for the purchase of common stock. In connection, with these issuances the Company determined that the historical NOLs have probably been impaired due to IRS Section 382 limitations. Due to the uncertainty surrounding realization of the remaining deferred tax assets, specifically the NOLs, the Company has provided a valuation allowance of $1,457,000 and $667,000 against its net deferred tax assets at September 30, 2016 and 2015, respectively. We will continue to monitor the recoverability of our net deferred tax assets.
As of September 30, 2016 and 2015, the Company has a State tax liability of $0 and $0, respectively. As of September 30, 2016 and 2015, the Company recorded no estimated taxes payable for Federal and State.
The Company has filed all United States Federal and State tax returns. The Company has identified the United States Federal tax returns as its “major” tax jurisdiction. The United States Federal return years 2015 through 2016 are still subject to tax examination by the United States Internal Revenue Service; however, we do not currently have any ongoing tax examinations. The Company is subject to examination by the California Franchise Tax Board for the years ended 2015 through 2016 and currently does not have any ongoing tax examinations.