Note 9. Income Taxes
The provision for income taxes for 2017 and 2016 consisted of the following:
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Current tax expense (benefit) | $ | - | $ | - | ||||
| Deferred tax expense (benefit) | - | - | ||||||
| Total tax expense | $ | - | $ | - | ||||
Reconciliation between the effective tax rate on income from continuing operations and the statutory tax rate is as follows:
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Income tax benefit for federal statutory rate | $ | (3,661,021 | ) | $ | (2,402,223 | ) | ||
| State and local income tax net of federal benefit | (106,486 | ) | (69,872 | ) | ||||
| Change in valuation allowance | (7,137,079 | ) | 2,099,532 | |||||
| Change in enacted federal tax rate | 9,873,046 | - | ||||||
| Repurchase premium on convertible debt | 1,030,632 | 371,984 | ||||||
| Other-net | 908 | 579 | ||||||
| Income tax expense (benefit) | $ | - | $ | - | ||||
Significant components of the deferred tax assets and liabilities are as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Accruals, reserves | $ | 146,533 | $ | 232,504 | ||||
| Net operating loss carryforwards | 17,463,940 | 24,562,130 | ||||||
| Other | 54,112 | 6,831 | ||||||
| Subtotal | 17,664,585 | 24,801,465 | ||||||
| Less: valuation allowance | (17,661,957 | ) | (24,799,036 | ) | ||||
| Total net defered tax assets | 2,628 | 2,429 | ||||||
| Fixed assets | (2,628 | ) | (2,429 | ) | ||||
| Total deferred tax liabilities | (2,628 | ) | (2,429 | ) | ||||
| Net deferred tax liability | $ | - | $ | - | ||||
We have federal and state income tax net operating loss carryforwards of $76.8 million and $24.3 million, respectively, which will expire on various dates from 2018 through 2037.
Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of our NOL may be limited in future periods. Further, a portion of the carryforwards may expire unutilized.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.
On the basis of this evaluation, as of December 31, 2017 and 2016, a full valuation allowance of $17.7 million and $24.8 million, has been recorded against the deferred tax assets, respectively. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.
Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. As of December 31, 2017, and 2016, we do not have unrecognized tax benefits as we believe the tax positions that remain subject to examination are fully supportable.
We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2017, tax years for 1998 through 2017 are subject to examination by the federal and state tax authorities, to the extent of available net operating loss carryforwards.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax (BEAT), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our analysis of the impact of the Tax Act, we have recorded a discrete tax expense of $9.9 million in the period ending December 31, 2017, resulting directly from the reduction in the corporate tax rate. This was offset by a corresponding tax benefit equal to a reduction in the valuation allowance for the same amount. Our accounting for changes resulting from the Tax Act is complete.