NOTE 10 – INCOME TAXES
The Company maintains deferred tax assets and liabilities that 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. The net deferred tax asset has been fully offset by a valuation allowance because of the uncertainty of the attainment of future taxable income.
The items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for the years ended December 31, 2016 and 2015 were as follows:
| Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Income tax benefit at U.S. statutory rate of 34% | $ | (189,000 | ) | $ | (628,000 | ) | ||
| Forfeiture of stock options | 21,000 | 215,000 | ||||||
| Non-deductible expenses | 80,000 | 54,000 | ||||||
| Change in valuation allowance | 88,000 | 359,000 | ||||||
| Total provision for income tax | $ | - | $ | - | ||||
The Company’s approximate net deferred tax assets as of December 31, 2016 and 2015 were as follows:
| December 31, 2016 | December 31, 2015 | |||||||
| Deferred Tax Assets: | ||||||||
| Net operating loss carryforward | $ | 3,002,000 | $ | 2,917,000 | ||||
| Stock-based compensation | 156,000 | 177,000 | ||||||
| Allowance for inventory obsolescence | 79,000 | 60,000 | ||||||
| Accrued compensation | 106,000 | 101,000 | ||||||
| Other | 61,000 | 61,000 | ||||||
| Total deferred tax assets | 3,404,000 | 3,316,000 | ||||||
| Valuation allowance | (3,404,000 | ) | (3,316,000 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
The estimated net operating loss carryforward was approximately $8,829,000 at December 31, 2016, which is an estimate of the Company’s net operating loss carryforward acquired in the Combination after giving effect to the limitation on the usage of such net operating loss carryforwards due to a change in ownership in accordance with Section 382 of the Internal Revenue Code plus net operating loss carryforwards since the Combination. The Company provided a valuation allowance equal to the net deferred income tax asset for the year ended December 31, 2016 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward. The increases in the valuation allowance was $88,000 from the prior year ended December 31, 2015. The potential tax benefit arising from tax loss carryforwards will expire between 2018 and 2036.
In accordance with Section 382 of the Internal Revenue Code, the usage of the Company’s net operating loss carry forwards are subject to annual limitations due to greater than 50% ownership changes. Additionally, the future utilization of the net operating loss carryforwards to offset future taxable income may be subject to special tax rules which may limit their usage under the Separate Return Limitation Year (“SRLY”) rules. If necessary, the deferred tax assets will be reduced by any carryforward that expires prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.
The Company’s 2013, 2014, 2015 and 2016 Corporate Income Tax Returns are subject to Internal Revenue Service examination.