Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due. Our current effective tax rate is lower than the Federal and state effect rate primarily due to the reversal of significant timing differences (i.e. inventory reserve) upon the asset sale at our Aero-missile subsidiary.
Significant components of the income tax provision are as follows:
| For the years ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Current income tax | ||||||||
| Federal | $ | - | $ | - | ||||
| State | 712 | 22,100 | ||||||
| City | - | - | ||||||
| Total Current income tax | 712 | 22,100 | ||||||
| Non current income tax | ||||||||
| Federal | - | (66,752 | ) | |||||
| State | - | - | ||||||
| City | - | - | ||||||
| Total non current income tax | - | (66,752 | ) | |||||
| Total income tax (benefit) | $ | 712 | $ | (44,652 | ) | |||
The Company has an accumulated deficit of approximately $10.0 million and there are approximately $4,560,000 and $3,528,000 of net operating losses available to be used against Federal and state taxable income, respectively, which are subject to certain Section 382 limitations as a result of the change in control in January 2015. Benefits for income taxes were due to carryback of Federal operating losses.
A reconciliation of the statutory tax rate to the effective tax rate is as follows:
| For the years ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Expected federal statutory rate | 34.0 | % | 34.0 | % | ||||
| Increase (decrease) in taxes resulting from: | ||||||||
| State and local income taxes, net of federal benefit | 0.0 | % | 7.9 | % | ||||
| Permanent difference - amortization and disallowable expenses | 16 | % | 62.6 | % | ||||
| Reduction in federal tax rate | (13) | % | - | |||||
| Change in valuation allowance | (37.0) | % | (128.7) | % | ||||
| Other | 0.0 | % | 4.8 | % | ||||
| Effective income tax rate | 0.0 | % | (19.4) | % | ||||
The Company’s deferred tax assets and liability relates to a temporary timing difference in long-term assets. With the deferred tax asset for December 31, 2017 and 2016 consisting of:
| Deferred Tax Assets: | ||||||||||||
| December 31, 2017 | ||||||||||||
| Gross | Effective Tax Rate |
Tax Asset (Liability) |
||||||||||
| Depreciation and amortization | (365,842 | ) | 29% | (106,094 | ) | |||||||
| Decrease in inventory value | 302,334 | 29% | 87,677 | |||||||||
| Federal and state NOL | 3,705,121 | 29% | 1,074,485 | |||||||||
| Total | 3,641,613 | 1,056,068 | ||||||||||
| Less valuation allowance | (3,641,613 | ) | (1,056,068 | ) | ||||||||
| Net Deferred Tax Assets | $ | - | $ | - | ||||||||
| December 31, 2016 | ||||||||||||
| Depreciation and amortization | 1,275,513 | 42% | 535,700 | |||||||||
| Decrease in inventory value | 5,033,500 | 42% | 2,114,100 | |||||||||
| Federal and state NOL | 937,900 | 42% | 393,875 | |||||||||
| Total | 7,246,900 | 3,043,675 | ||||||||||
| Less valuation allowance | (7,246,900 | ) | (3,043,675 | ) | ||||||||
| Net Deferred Tax Assets | $ | - | $ | - | ||||||||
There were no significant uncertain tax positions taken, or expected to be taken, in a tax return that would be determined to be an unrecognized tax benefit taken or expected to be taken in a tax return that should have been recorded on the Company’s consolidated financial statements for the year ended December 31, 2017. Additionally, there were no interest or penalties outstanding as of or for each of the years ended December 31, 2017 and 2016.
The federal and state tax returns for the years ending December 31, 2014, 2015, and 2016 have been filed, but are still open to examination.