Note 9: Income Taxes
The significant components of deferred tax assets as of December 31, 2016 and 2015 are shown below. A valuation allowance has been established to offset the deferred tax assets, as realization of such assets is uncertain.
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Excess of financial accounting over tax depreciation | $ | 10,000 | $ | 20,000 | ||||
| State income tax benefits | 1,903,000 | 1,971,000 | ||||||
| Net operating loss carryforward | 14,730,000 | 13,766,000 | ||||||
| Derivative liability expense | 2,460,000 | 1,843,000 | ||||||
| Research and development credit carryforwards | 711,000 | 663,000 | ||||||
| Obsolete inventory reserve | 78,000 | - | ||||||
| Patent amortization | (408,000 | ) | (472,000 | ) | ||||
| Vacation accrual | 9,000 | 9,000 | ||||||
| Valuation reserve | (19,493,000 | ) | (17,800,000 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
The following reconciles the tax provision with the expected provision obtained by applying statutory rates to pretax income:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Federal income tax benefit computed at the Federal statutory rate | $ | (1,519,000 | ) | $ | (1,236,000 | ) | ||
| Net operating loss | 965,000 | 1,080,000 | ||||||
| Timing differences | 641,000 | 291,000 | ||||||
| Permanent differences | (104,000 | ) | (27,000 | ) | ||||
| Research and development credit | 16,000 | 19,000 | ||||||
| Other | 1,000 | (127,000 | ) | |||||
| Income tax benefit | $ | - | $ | - | ||||
The components of federal income tax benefit from continuing operations consisted of the following for the year ended:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Current income tax expense (benefit): | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| Net current tax expense (benefit) | $ | - | $ | - | ||||
| Deferred tax expense (benefit) resulted from: | ||||||||
| Difference between financial and tax depreciation | $ | 10,000 | $ | 12,000 | ||||
| State income tax benefits | 68,000 | 121,000 | ||||||
| Net operating loss | (965,000 | ) | (1,080,000 | ) | ||||
| Research and development credits | (47,000 | ) | (57,000 | ) | ||||
| Obsolete inventory reserve | (78,000 | ) | - | |||||
| Amortization of patents | (64,000 | ) | (64,000 | ) | ||||
| Derivative liability recognition | (617,000 | ) | (293,000 | ) | ||||
| Vacation accrual | - | 1,000 | ||||||
| Warranty expense | - | 5,000 | ||||||
| Valuation reserve | 1,693,000 | 1,355,000 | ||||||
| Net deferred tax benefit | $ | - | $ | - | ||||
| $ | - | $ | - | |||||
At December 31, 2016, the Company had federal net operating loss carry-forwards of approximately $43,324,000 that expire from 2018 through 2036. In addition, the Company had research and development tax credits of approximately $648,000 that expire from 2018 through 2036. As a result of previous stock transactions, the Company’s ability to utilize its net operating loss carry-forwards to offset future taxable income and utilize future research and development tax credits is subject to certain limitations under Section 382 and Section 383 of the Internal Revenue Code due to changes in equity ownership of the Company.
The Company has a history of operating losses and, as of yet, has not had any taxable income. The Company has calculated a deferred tax asset for its tax credits but offsets the tax asset with a valuation allowance. As a result, the Company has not realized or recorded any tax benefit related to its tax credits.