NOTE 11 - INCOME TAXES
The Company maintains deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax assets at December 31, 2017 and 2016 consist of net operating loss carryforwards. The net deferred tax asset has been fully offset by a valuation allowance because of the uncertainty of the attainment of future taxable income.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current federal income tax rate to 21% from 34%. The rate reduction is effective January 1, 2018, and is permanent.
The Act has caused the Company’s deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the Act for which measurement could be reasonably estimated. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented. The ultimate impact of the Act may differ from these estimates due to the Company’s continued analysis or further regulatory guidance that may be issued as a result of the Act.
As a result of the reduction of the federal corporate income tax rate, the Company reduced the value of its net deferred tax asset by $87,587 which was recorded as a corresponding reduction to the valuation allowance during the fourth quarter of 2017.
The items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for the years ended December 31, 2017 and 2016 were as follows:
| Years Ended December 31, |
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| 2017 | 2016 | |||||||
| Income tax expense (benefit) at U.S. statutory rate of 34% | $ | 468,487 | $ | (170,536 | ) | |||
| Income tax benefit – state | 89,564 | (32,602 | ) | |||||
| Non-deductible expenses | 51,316 | 226,629 | ||||||
| Effect of change in effective rate | 87,587 | - | ||||||
| Change in valuation allowance | (696,953 | ) | (23,491 | ) | ||||
| Total provision for income tax | $ | - | $ | - | ||||
The Company’s approximate net deferred tax asset as of December 31, 2017 and 2016 was as follows:
| Deferred Tax Asset: | December 31, 2017 |
December 31, 2016 |
||||||
| Net operating loss carryforward | $ | 655,183 | $ | 1,296,400 | ||||
| Total deferred tax asset | 655,183 | 1,296,400 | ||||||
| Less: deferred tax liability: deferred rent receivable | (469,902 | ) | (414,166 | ) | ||||
| Net deferred tax assets before valuation allowance | 185,281 | 882,234 | ||||||
| Valuation allowance | (185,281 | ) | (882,234 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
The net operating loss carryforward was approximately $2,382,000 at December 31, 2017. The Company provided a valuation allowance equal to the net deferred income tax asset as of December 31, 2017 and 2016 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward. The decrease in the allowance was $696,953 in 2017. The potential tax benefit arising from the loss carryforward will expire in 2037.
Additionally, the future utilization of the net operating loss carryforward to offset future taxable income may be subject to an annual limitation as a result of ownership changes that occurred in 2014 and may occur in the future. If necessary, the deferred tax assets will be reduced by any carryforward that may not be utilized or expires prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance. As of the date of this report, the Company has not completed a study to determine the limitation on the utilization of its net operating loss carryforward amounts.
The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2017, 2016 and 2015 Corporate Income Tax Returns are subject to Internal Revenue Service examination.