(12) Income Taxes
We had a current income tax liability of $0 as of both December 31, 2017 and 2016. The components of our income tax expense (benefit) and the reconciliation at the statutory federal tax rate to our actual income tax expense (benefit) for the years ended December 31, 2017 and 2016 consisted of the following:
|
| 2017 |
| 2016 | |||||||||
Statutory federal income tax (benefit) |
| $ | (7,728,000 | ) |
| 34.0 | % |
| $ | 247,000 |
| 34.0 | % |
State income taxes (benefit), net of federal benefit |
|
| (1,433,000 | ) |
| 6.3 | % |
|
| 56,000 |
| 7.8 | % |
Impact of change in enacted rate |
|
| 2,605,000 |
|
| (11.4 | )% |
|
| — |
| — |
|
Change in valuation allowance |
|
| 4,222,000 |
|
| (18.6 | )% |
|
| — |
| — |
|
Other permanent differences |
|
| 237,000 |
|
| (1.1 | )% |
|
| 30,000 |
| 4.2 | % |
Total income tax expense (benefit) |
| $ | (2,097,000 | ) |
| 9.2 | % |
| $ | 333,000 |
| 46.0 | % |
The tax effects of temporary differences that give rise to deferred income taxes were as follows:
|
| As of |
| As of | ||||
Deferred tax assets: |
|
|
|
|
|
|
|
|
| $ | 1,437,000 |
|
| $ | 2,023,000 |
| |
|
| 9,995,000 |
|
|
| 10,781,000 |
| |
|
| 1,724,000 |
|
|
| 1,130,000 |
| |
| $ | 13,156,000 |
|
| $ | 13,934,000 |
| |
|
| (6,386,000 | ) |
|
| (2,164,000 | ) | |
Deferred tax assets |
| $ | 6,770,000 |
|
| $ | 11,770,000 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
| $ | (6,630,000 | ) |
| $ | (13,867,000 | ) | |
|
| (140,000 | ) |
|
| — |
| |
Net deferred tax asset/(liability) |
| $ | — |
|
| $ | (2,097,000 | ) |
At December 31, 2017 and 2016, we had federal net operating loss (“NOL”) carryforwards of $34,775,000 and $26,642,000, respectively, and aggregate state NOL carryforwards of approximately $34,749,000 and $26,616,000, respectively. The NOL carryforwards will begin to expire in 2031. Future utilization of NOL carryforwards is subject to limitations under Section 382 of the Internal Revenue Code. This section generally relates to a more than 50 percent change in ownership over a three-year period. We currently do not believe that any prior issuance of common stock has resulted in an ownership change under Section 382 through December 31, 2017.
We provide for a valuation allowance when it is not considered “more likely than not” that our deferred tax assets will be realized. As of December 31, 2017, based on all available evidence, we have provided a valuation allowance against our total net deferred tax asset of $6,386,000 due to uncertainty as to the realization of our deferred tax assets during the carryover periods. As of December 31, 2016, we had provided a valuation allowance of $2,164,000 against deferred tax assets related to the likelihood of recovering the tax benefit of a capital loss on a note receivable from a related entity and other capital losses.
On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“Tax Reform Bill”). The Tax Reform Bill changed existing United States tax law, including a reduction of the U.S. corporate income tax rate. The Company re-measured deferred taxes as of the date of enactment, resulting in a $2,605,000 reduction of net deferred income tax assets. The Company’s measurement of the income tax effects of the Tax Reform Bill for the year ended December 31, 2017 is reasonably estimated and, therefore, included in these financial statements in accordance with SEC Staff Accounting Bulletin No. 118.
ASC 740 requires the reporting of certain tax positions that do not meet a threshold of “more-likely-than-not” to be recorded as uncertain tax benefits. It is management’s responsibility to determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation, based upon the technical merits of the position. Management has reviewed all income tax positions taken or expected to be taken for all open years and has determined that the income tax positions are appropriately stated and supported. We do not anticipate that the total unrecognized tax benefits will significantly change prior to December 31, 2018.
Under our accounting policies, interest and penalties on unrecognized tax benefits, as well as interest received from favorable tax settlements are recognized as components of income tax expense. At December 31, 2017 and 2016, we recorded no accrued interest or penalties related to uncertain tax positions.
Our income tax returns for tax years ended December 31, 2014, 2015, 2016 and 2017, when filed, remain open to examination by the Internal Revenue Service and various state taxing jurisdictions. Our income tax return for tax year ended December 31, 2013 also remains open to examination by various state taxing jurisdictions.