NOTE 5 – INCOME TAXES
At December 31, 2017, we had approximately $77 million of federal net operating tax loss carry-forward which begins to expire in 2029 and approximately $17 million of state net operating losses which begins to expire in 2029.
The differences between the actual income tax benefit and the amount computed by applying the statutory federal tax rate (35%) to the loss before taxes are as follows:
| Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Expected income tax benefit at statutory rate | $ | (6,968,974 | ) | $ | (6,514,444 | ) | ||
| Debt discount amortization | 701,472 | 701,240 | ||||||
| Permanently disallowed interest | 671,234 | 801,750 | ||||||
| Other permanent differences | 24,458 | 30,818 | ||||||
| State income tax benefit, net of tax effect at state statutory rate | — | — | ||||||
| Deferred pool true-ups/corrections related to: | ||||||||
| Net operating losses | — | 45,138 | ||||||
| Other | (83,190 | ) | (43,369 | ) | ||||
| Change in federal tax rate | 14,245,571 | — | ||||||
| Change in valuation account | (8,590,571 | ) | 4,978,867 | |||||
| Income tax expense (benefit) | $ | — | $ | — | ||||
The components of the deferred tax assets and liabilities are as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Deferred Tax Assets: | ||||||||
| Tax benefit of net operating loss carry-forward | $ | 16,247,978 | $ | 23,966,537 | ||||
| Accrued interest | 5,195,193 | 6,525,289 | ||||||
| Stock based compensation | 1,166,081 | 1,804,050 | ||||||
| Amortization of intangible assets | 191,457 | 389,695 | ||||||
| Depreciation of property and equipment | 305,987 | 223,211 | ||||||
| Accrued expenses and other liabilities | 94,619 | 105,674 | ||||||
| Research and development credit carry-forward | 29,084 | 29,084 | ||||||
| Donations | 7,102 | 11,241 | ||||||
| Beneficial conversion feature debt discount | (1,840,060 | ) | (3,066,771 | ) | ||||
| Total deferred tax assets | 21,397,441 | 29,988,010 | ||||||
| Valuation allowance for deferred tax assets | (21,397,441 | ) | (29,988,010 | ) | ||||
| Deferred tax assets, net of valuation allowance | $ | — | $ | — | ||||
As a result of certain income tax accounting realization requirements with respect to accounting for share-based compensation, the table of deferred tax assets shown above does not include certain deferred tax assets at December 31, 2017 that arose directly from tax deductions related to equity compensation that is greater than the compensation recognized for financial reporting. If such deferred tax assets are subsequently realized, they will be recorded to contributed capital in the amount of approximately $1,166,000.
In 2017 the deferred tax valuation allowance decreased by $8,590,571. In 2016 the deferred tax valuation allowance increased by $4,978,867. The realization of the tax benefits is subject to the sufficiency of taxable income in future years. The combined deferred tax assets represent the amounts expected to be realized before expiration.
We periodically assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits.
As of December 31, 2017 and 2016, we established valuation allowances equal to the full amount of the net deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.
For the years ended December 31, 2017 and 2016, no amounts have been recognized for uncertain tax positions and no amounts have been assessed or recognized related to interest or penalties related to uncertain tax positions. We have determined that it is not reasonably likely for the amounts of unrecognized tax benefits to significantly increase or decrease within the next twelve months. We are currently subject to the general three-year statute of limitation for federal tax. Under this general rule, the earliest period subject to potential audit is 2014. For years in which the company may utilize its net operating losses, the IRS the ability to examine the tax year that generated those losses and propose adjustments up to the amount of losses utilized.
The Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017. Among its numerous changes to the Internal Revenue Code, the Act reduces U.S. corporate rates from 35% to 21%. Additionally, the Act limits the use of net operating loss carry backs, however any future net operating losses will instead be carried forward indefinitely. Only 80% of current income will be able to be offset with a net operating loss carryforward, with the remainder of the net operating loss continuing to carry forward. Based on an initial assessment of the Act, the Company believes that the most significant impact on the Company’s consolidated financial statements will be reduction of deferred tax assets related to net operating losses and research and development tax credits. Such reduction is expected to be largely offset by changes to the Company’s valuation allowance.