NOTE 14 – INCOME TAXES
The Company accounts for income taxes under ASC Topic 740: Income Taxes which requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. ASC Topic 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. The Company estimates its net operating loss carry forward for tax purposes to be approximately $9.7 million at December 31, 2016, expiring through the year 2036. As noted below, the Company is delinquent in its income tax filings and has not reported its losses to the taxing authorities since 2010. Therefore, utilization of tax losses may be limited due to non-filing of returns for 2011, 2012, 2013, 2014 and 2015. Also, Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carry forwards after certain ownership shifts.
The Company last filed an income tax return for the year ended December 31, 2010. Tax years ending December 31, 2014, 2013, 2012 and 2011 will be subject to IRS examination for a period of three years after the file dates, and the Company’s tax net operating loss carryforwards have not yet been established with the taxing authorities due to non-filing.
The table below summarizes the differences between the Company’s effective tax rate and the statutory federal rate as follows for the year ended December 31, 2016 and 2015:
| 2016 | 2015 | |||||||
| Tax benefit computed at “expected” statutory rate | $ | (1,356,000 | ) | $ | (1,531,000 | ) | ||
| State income taxes, net of federal benefit | (136,000 | ) | (153,000 | ) | ||||
| Stock based compensation and other permanent differences | 798,000 | 1,037,000 | ||||||
| Increase in valuation allowance | 694,000 | 647,000 | ||||||
| Net income tax benefit | $ | - | $ | - | ||||
Deferred tax assets and liabilities are provided for significant income and expense items recognized in different years for tax and financial reporting purposes. Temporary differences, which give rise to a net deferred tax asset is as follows:
| December 31, 2016 | December 31, 2015 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforward | $ | 3,800,000 | $ | 2,302,000 | ||||
| Accrued lease abandonment costs | 63,000 | 63,000 | ||||||
| Allowance for doubtful account | 104,000 | 15,000 | ||||||
| Accrued salaries | 1,570,000 | 608,000 | ||||||
| Derivative Expense | (134,000 | ) | - | |||||
| Amort of Debt Discount | (1,721,000 | ) | - | |||||
| Total Deferred tax asset | 3,682,000 | 2,988,000 | ||||||
| Less: Valuation allowance | (3,682,000 | ) | (2,988,000 | ) | ||||
| $ | - | $ | - | |||||
After consideration of all the evidence, both positive and negative, management has recorded a full valuation allowance at December 31, 2016 and 2015, due to the uncertainty of realizing the deferred income tax assets. The valuation allowance was increased by $694,000 and $647,000 during 2016 and 2015, respectively.