Note 5. Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Tax Cuts and Jobs Act, enacted on December 22, 2017, reduced the U.S. corporate statutory tax rate from 35% to 21% beginning on January 1, 2018. We used 26% as an effective tax rate.
Net deferred tax liabilities consist of the following components as of December 31, 2017 and 2016:
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| NOL Carryover | $ | 1,058,800 | $ | 1,490,500 | ||||
| Accrued Payroll | 278,600 | 329,000 | ||||||
| Deferred Rent | 300 | - | ||||||
| Deferred tax liabilities | ||||||||
| Depreciation | (300 | ) | (1,100 | ) | ||||
| Valuation allowance | (1,337,400 | ) | (1,818,400 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years ended December 31, 2017 and 2016 due to the following:
| 2017 | 2016 | |||||||
| Book Loss | $ | (268,600 | ) | $ | (4,361,200 | ) | ||
| Depreciation | (100 | ) | 300 | |||||
| Contributed Services | 57,700 | 107,100 | ||||||
| Meals & Entertainment | 3,600 | 6,100 | ||||||
| Stock for Expense Accounts | 255,400 | 14,300 | ||||||
| Contributed Interest Expense | 92,500 | 1,500 | ||||||
| Gain/Loss on settlement of debt through equity | 112,900 | (775,700 | ) | |||||
| Amortization of debt discount | 108,800 | 277,800 | ||||||
| Accrued Payroll | 34,200 | 92,100 | ||||||
| Loss on derivative | (720,700 | ) | 3,611,600 | |||||
| Related Party Interest | 92,500 | 1,500 | ||||||
| Valuation allowance | 231,800 | 1,024,600, | ||||||
| $ | - | $ | - | |||||
At December 31, 2017, the Company had net operating loss carryforwards of approximately $4,072,000 that may be offset against future taxable income from the year 2018 through 2037. No tax benefit has been reported in the December 31, 2017 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
The Company’s policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended December 31, 2017 and 2016, the Company did not recognize any interest or penalties, nor did we have any interest or penalties accrued related to unrecognized benefits.
The tax years ended December 31, 2016, 2015 and 2014 are open for examination for federal income tax purposes and by other major taxing jurisdictions to which we are subject.