10. Income Taxes
The tax reform bill that Congress voted to approve December 20, 2017, also known as the “Tax Cuts and Jobs Act”, made sweeping modifications to the Internal Revenue Code, including a much lower corporate tax rate, changes to credits and deductions, and a move to a territorial system for corporations that have overseas earnings.
The act replaced the prior-law graduated corporate tax rate, which taxed income over $10 million at 35%, with a flat rate of 21%.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. For financial reporting purposes, the provision for income taxes is based on pre-tax income of $945,103 for the year ended December 31, 2017 and a pre-tax loss of $690,956 for the year ended December 31, 2016. An estimated blended tax rate of 1.2% has been used to calculate the provision for income before taxes of $11,036 for the year ended December 31, 2017, which consists solely of state taxes due to the utilization of a Net Operating Loss Carryforward for Federal tax purposes. In 2017, and for fourteen years thereafter, there will be a permanent book versus tax difference of $546,667 each year related to the amortization of the trademark, which is deductible for tax purposes but is not amortized and expensed for financial reporting purposes. The benefit resulting from the loss before income taxes for taxes based on income for the year ended December 31, 2016 is based on a 30% rate for the provision for taxes. This resulted in an income tax benefit of $208,668. The provision (benefit) for income taxes for the years ended December 31, 2017 and 2016 consisted of the following:
| Year Ended | ||||||||
| December 31, 2017 | December 31, 2016 | |||||||
| U.S. Federal | $ | - | $ | 259,624 | ||||
| U.S. State | (11,306 | ) | (50,956 | ) | ||||
| Total | (11,306 | ) | 208,668 | |||||
| Deferred | - | - | ||||||
| Total benefit (provision) for income taxes | $ | (11,306 | ) | $ | 208,668 | |||
As of December 31, 2017, we had a tax loss carryforward of approximately $849,000 which can be used to offset future Federal income taxes.
Deferred income tax assets at December 31 are as follows:
| 2017 | 2016 | |||||||
| Deferred income tax assets | ||||||||
| Net operating loss carryforward | $ | 1,233,424 | $ | 854,244 | ||||
| Stock-based compensation | 28,530 | — | ||||||
| Depreciation, amortization and other | 546,667 | — | ||||||
| Total deferred tax assets | 1,808,621 | 854,244 | ||||||
| Valuation allowance | (1,808,621 | ) | (854,244 | ) | ||||
| Deferred income tax, net | $ | — | $ | — | ||||
The Company generated a deferred tax asset through net operating loss carry-forwards. The Company has not completed its IRC Section 382 Valuation, as required and the NOL’s because of potential Change of Ownerships might limit the usage or render the NOL’s completely worthless. Therefore, Management of the Company based upon Management’s evaluation has recorded a Full Valuation Reserve (100%), since it is more likely than not that no benefit will be realized for the Deferred Tax Assets.