Entity information:
NOTE
11
 
- INCOME TAXES
 
The Company accounts for income taxes in accordance with FASB ASC Topic
740,
Accounting for Income Taxes; which requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carry forwards. The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company
’s future earnings, and other future events, the effects of which cannot be determined. In accordance with prevailing accounting guidance, the Company is required to recognize and disclose any income tax uncertainties. The guidance provides a
two
-step approach to recognizing and measuring tax benefits and liabilities when realization of the tax position is uncertain. The
first
step is to determine whether the tax position meets the more-likely-than-
not
condition for recognition and the
second
step is to determine the amount to be recognized based on the cumulative probability that exceeds
50%,
Actual results could differ from these estimates.
 
As of
December 31,
201
7,
the Company had net operating loss carryovers of approximately
$13,683,343
for U.S. federal tax purposes expiring through
2037;
approximately
$6,517,915
for Danish tax purposes, which do
not
expire; approximately
$499,020
for German tax purposes, which do
not
expire and approximately
$648,358
for Singapore tax purposes which do
not
expire.
 
As of
December 31, 2017
and
December 31, 2016,
the Company established a valuation allowance of
$2,833,000
and
$3,542,000
for the tax components of LiqTech International Inc. and Liqtech NA, respectively,
$1,850,000
and
$1,095,000
for the tax components of LiqTech International AS and LiqTech Systems, respectively,
$139,000
and
$122,000
for the tax component of LiqTech Germany and
$110,000
and
$97,000
for the tax component of LiqTech Singapore as management could
not
determine that it was more than likely
not
that sufficient income could be generated by these components to realize the resulting net operating loss carry forwards and other deferred tax assets of these components.
The change in the valuation allowance for the year ended
December 31, 2017
was $(
709,000
),
$755,000,
$17,000
and
$13,000
for the US, Danish, German and Singapore components. The change in the valuation allowance for the year ended
December 31, 2016
was
$3,542,000
,
$1,095,000,
$4,000
and
$12,000
for the US, Danish, German and Singapore components.
 
The Company is
not
relying on the reversal of deferred tax liabilities to realize the deferred tax assets. The same variable used by the Company in evaluating goodwill for impairment were used in assessing the realization of deferred tax assets (See Note
7
).
 
The temporary differences, tax credits and carry forwards gave rise to the following deferred tax asset (liabilities) at
December 31,
201
7
and
December 31, 2016:
 
   
2017
    
2016
  
Vacation accrual
   $
2,900
     $
5,450
  
Allowance for doubtful accounts
    
743
      
1,202
  
Reserve for obsolete inventory
    
305,425
      
200,118
  
Business tax credit carryover
    
30,935
      
30,935
  
Deferred Compensation
    
16,787
      
8,500
  
Net operating loss carryover
    
4,646,434
      
4,906,974
  
Excess of book over tax depreciation
    
(71,116
)
    
(296,227
)
Valuation allowance
    
(4,932,108
)
    
(4,856,952
)
Long term deferred tax asset
   $
-
     $
-
  
 
A reconciliation of income tax expense at the federal statutory rate to income tax expense at the Company
’s effective rate is as follows for the years ended 
December 31, 2017
and
2016:
 
 
   
2017
    
2016
  
Computed tax at expected statutory rate
   $
(1,624,575
)
   $
(4,487,649
)
State and local income taxes, net of federal benefit
    
(4,350
 )    
(3,721
 )
Non-US income taxed at different rates
    
256,207
      
1,325,180
  
Effect of change in corporate tax rate    
994,336
      
(21,489
 )
Non-deductible impairment of goodwill    
-
      
1,615,506
  
Non-deductible deferred compensation    
-
      
148,170
  
Non-deductible expenses    
4,664
      
4,242
  
Valuation allowance
    
75,156
      
4,739,806
  
Other
    
(19,248
 )    
(100,368
 )
Income tax expense (benefit)
   $
(317,810
 )   $
3,219,677
  
 
The components of income tax expense (benefit) from continuing operations for the years ended
December 31,
201
7
and
2016
consisted of the following:
 
   
2017
    
2016
  
Current income tax expense:
                
Danish
   $
(317,810
 )   $
(329,816
)
Federal
    
-
      
-
  
State
    
-
      
580
  
Current tax (benefit)
   $
(317,810
 )   $
(329,236
)
                 
                 
Book in excess of tax depreciation
   $
(225,111
 )   $
(158,684)
  
Allowance for doubful accounts    
459
      
12,705
  
Net operating loss carryover
    
260,540
      
(1,000,650
)
Valuation allowance
    
75,156
 
    
4,756,011
  
Deferred compensation
    
(8,287
 )    
(8,500
 )
Accrued vacation
    
2,550
      
(1,517
 )
Reserve for obsolete inventory
    
(105,307
 )    
(50,452
 )
Deferred tax expense (benefit)
   $
-
     $
3,548,913
  
Total tax expense (benefit)
   $
(317,810
 )   $
3,219,677
  
 
Deferred income tax expense / (benefit) results primarily from the reversal of temporary timing differences between tax and financial statement income.
 
 
 
The Company files Danish and U.S. federal and
 Minnesota state income tax returns. LiqTech International AS is generally
no
longer subject to tax examinations for years prior to
2013
for their Danish tax returns. LiqTech NA is generally
no
longer subject to tax examinations for years prior to
2013
for U.S. federal and U.S. states tax returns.