| 5. | INCOME TAXES |
The Company and subsidiaries file a consolidated federal income tax return. The Company’s consolidated provision for income taxes for the years ended December 31, 2017 and 2016 consists of the following:
| Year Ended | Year Ended | ||||||||
| December 31, 2017 | December 31, 2016 | ||||||||
| Income Tax Expense (benefit) | |||||||||
| Current federal tax expense | |||||||||
| Federal | $ | -0- | $ | -0- | |||||
| State | -0- | -0- | |||||||
| Deferred tax (benefit) | |||||||||
| Federal | $ | -0- | $ | -0- | |||||
| State | -0- | -0- | |||||||
| Total | $ | -0- | $ | -0- | |||||
The consolidated provision for income taxes for the years ended December 31, 2017 and 2016 differs from that computed by applying federal statutory rates to income before federal income tax expense, as indicated in the following analysis:
| Year Ended | Year Ended | ||||||||
| December 31, 2017 | December 31, 2016 | ||||||||
| Expected federal tax provision (benefit) at 35% rate | $ | (831,200 | ) | $ | (150,900 | ) | |||
| Surtax exemption | 23,700 | 21,600 | |||||||
| Meals and entertainment | 12,700 | 6,400 | |||||||
| Valuation allowance | (43,300 | ) | (20,000 | ||||||
| State income tax | 838,100 | 142,900 | |||||||
| Total income tax | $ | - | $ | - | |||||
| Effective tax rate | 0.0 | % | 0.0 | % | |||||
A summary of deferred tax assets and liabilities as of December 31, 2017 and 2016 is as follows:
| Year Ended | Year Ended | ||||||||
| December 31, 2017 | December 31, 2016 | ||||||||
| Deferred tax assets: | |||||||||
| Reserve for inventory obsolescence | $ | 41,700 | $ | 15,900 | |||||
| Reserve for bad debt | 34,200 | 16,600 | |||||||
| Stock option compensation | 273,500 | 172,800 | |||||||
| Federal tax loss carryforward | 1,058,000 | 258,200 | |||||||
| State tax loss carryforward | 201,000 | 39,900 | |||||||
| Less valuation allowance | (1,398,400 | ) | (398,700 | ) | |||||
| Total Deferred Tax Asset | $ | 210,000 | $ | 104,700 | |||||
| Year Ended | Year Ended | ||||||||
| December 31, 2017 | December 31, 2016 | ||||||||
| Deferred tax liabilities: | |||||||||
| Accumulated depreciation and amortization | $ | (210,000 | ) | $ | (104,700 | ) | |||
| Total deferred tax liabilities | (210,000 | ) | (104,700 | ) | |||||
| NET DEFERRED TAX | $ | -0- | $ | -0- | |||||
As of December 31, 2017, the Company had approximately $2.5 federal and state net operating loss carryforwards, which results in a Federal and State deferred tax asset of approximately $1.3 million, expiring in 2034 through 2038.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred since inception. 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, a valuation allowance of approximately $1.4 million has been recorded to record only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.