NOTE 13 – INCOME TAXES
We did not provide any current or deferred U.S. federal income tax provision or benefit for the year ended December 31, 2016 due to the operating losses experienced during the year ended December 31, 2016. During the year ended December 31, 2015 we recorded income tax expense of $92,804 for a federal income tax due arising from an examination by the Internal Revenue Service as discussed in Note 11 – Commitments and Contingencies. When it is more likely than not that a tax asset cannot be realized through future income the Company must allow for this future tax benefit. We provided a full valuation allowance on the net deferred tax asset, consisting of net operating loss carry forwards, because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carry forward period.
The Company has not taken a tax position that, if challenged, would have a material effect on the financial statements for the years ended December 2016 or 2015 applicable under FASB ASC 740. We did not recognize any adjustment to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of accumulated deficit on the balance sheet. All tax returns for the Company remain open.
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The sources and tax effects of the differences for the periods presented are as follows:
| Income tax provision at the federal statutory rate | 35.00 | % | ||
| California state corporation income tax rate, net of benefit from federal income tax | 5.75 | % | ||
| Combined tax rate | 40.75 | % | ||
| Effect of permeant differences between book and tax net losses | (38.47 | )% | ||
| Change in valuation allowance | (2.28 | )% | ||
| Effect on operating losses | 0.00 | % |
Net deferred tax assets consist of the following:
| 2016 | 2015 | |||||||
| Net operating loss carry forward | $ | 2,445,041 | $ | 2,279,219 | ||||
| Valuation allowance | (2,445,041 | ) | (2,279,219 | ) | ||||
| Net deferred tax asset | $ | — | $ | — | ||||
A reconciliation of income taxes computed at the statutory rate is as follows:
| 2016 | 2015 | |||||||
| Computed federal income tax expense at statutory rate of 40.75% | $ | (4,780,595 | ) | $ | (1,491,995 | ) | ||
| Stock issued for services | - | 205,578 | ||||||
| Amortization of deferred loan costs | 6,201 | 42,127 | ||||||
| Amortization of debt discount | 99,290 | 272,552 | ||||||
| Depreciation and amortization | 1,890 | 4,067 | ||||||
| Change in derivative liability | 4,392,988 | 212,885 | ||||||
| Stock issued for legal settlement | - | 8,108 | ||||||
| Stock issued for penalties | - | 8,726 | ||||||
| Excess derivative liability charged to interest | 14,926 | 236,167 | ||||||
| Gain on extinguishment of debt | - | (69,362 | ) | |||||
| Non-deductible penalties | - | 13,991 | ||||||
| Increase in convertible notes outstanding for default penalties | - | 56,279 | ||||||
| Non-deductible change in accrued expenses | 50,948 | - | ||||||
| Non-deductible change in paid time off accrual | 2,351 | 2,351 | ||||||
| Non-deductible change in payroll accrual | 46,179 | - | ||||||
| Change in valuation allowance | 165,822 | 591,330 | ||||||
| Income tax expense | $ | - | $ | 92,804 | ||||
The net federal operating loss carry forward will expire in 2031. This carry forward may be limited upon the consummation of a business combination under IRC Section 382.