NOTE 8: INCOME TAXES
The 2017 Tax Act, which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation. The 2017 Tax Act also transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as global intangible low taxed income (GILTI). These changes are effective beginning in 2018.
Deferred income taxes 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. Significant components of the Company’s deferred tax assets as of December 31, 2017 and 2016 are summarized below:
| Deferred tax assets: | 2017 | 2016 | ||||||
| Share-based compensation expense | $ | 88,211 | $ | 42,854 | ||||
| Net operating loss carry forward | 2,434,289 | 2,112,856 | ||||||
| Deferred tax liabilities: | ||||||||
| Property and equipment | (24,878 | ) | (15,387 | ) | ||||
| Federal research and development credit | 259,615 | 178,158 | ||||||
| Oregon research and development credit | 129,675 | 83,012 | ||||||
| Total deferred tax asset | 2,886,912 | 2,401,493 | ||||||
| Valuation Allowance | (2,886,912 | ) | (2,401,493 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
In assessing the potential realization of these deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the periods in which those temporary differences become deductible. As of December 31, 2017 and 2016, management was unable to determine if it is more likely than not that the Company’s deferred tax assets will be realized, and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates. The valuation allowance for deferred tax assets increased approximately $485,000 and $836,000 during the years ended December 31, 2017 and 2016, respectively.
No federal tax provision has been provided for the years ended December 31, 2017 and 2016 due to the losses incurred during such periods. The Company’s effective tax rate is different from the federal statutory rate of 34% due primarily to operating losses that receive no tax benefit as a result of a valuation allowance recorded for such losses.
| 2017 | 2016 | |||||||
| Statutory U.S. Federal tax rate | 34.0 | % | 34.0 | % | ||||
| Effect of U.S. tax law change (1) | (30.0 | %) | - | |||||
| State and local income taxes– net of Federal benefit | 6.6 | % | 6.6 | % | ||||
| Nondeductible expenses and other | 4.0 | % | 3.0 | % | ||||
| Valuation Allowance | (14.6 | %) | (43.6 | %) | ||||
| Effective rate tax | 0.0 | % | 0.0 | % | ||||
| (1) | Due to the Tax Act, our U.S. deferred tax assets and liabilities as of December 31, 2017 were re-measured from 34% to 21%. The change in tax rate resulted in a decrease to our gross U.S. deferred tax assets which is offset by a corresponding decrease to our valuation allowance. This resulted in an adjustment to the Company’s deferred tax assets of $676,000 from the prior period. |
As of December 31, 2017, the Company had net operating loss carry forwards of approximately $8,820,000 which will expire at various dates from 2029 through 2037. The Federal R&D tax credits will expire at various dates from 2032 through 2037, and the Oregon R&D tax credits will expire at various dates from 2018 through 2022.
The Company has evaluated its income tax positions and has determined that it does not have any uncertain tax positions. The Company policy is to record interest and penalties on uncertain tax positions as income tax expense. The Company may in the future become subject to federal, state and local income taxation though it has not been since its inception. The Company is not presently subject to any income tax audit in any taxing jurisdiction.
The Company has identified the United States Federal and Oregon State tax returns as its “major” tax jurisdiction. The United States Federal and Oregon State return years 2014 through 2017 are still subject to tax examination by the United States Internal Revenue Service; however, we do not currently have any ongoing tax examinations.