NOTE 17 - INCOME TAXES

At December 31, 2017, the Company had an aggregate net operating loss carryforward of approximately $78,966,000 for U.S. federal income tax purposes. At December 31, 2017, the Company had an aggregate net operating loss carryforward of approximately $56,162,000 for state income tax purposes and a foreign net operating loss carryforward of approximately $2,813,000. Substantially all of the net operating loss carryforwards expire from 2021 through 2037 for federal purposes and from 2018 through 2037 for state purposes. The net operating loss carryforwards may be limited to use in any particular year based on Internal Revenue Code (“IRC”) Section 382 related to change of ownership restrictions. Section 382 of the IRC imposes an annual limitation on the utilization of NOL carryforwards based on long-term bond rates and the value of the corporation at the time of a change in ownership as defined by Section 382 of the IRC. In addition, future stock issuances may subject the Company to further limitations on the utilization of its net operating loss carryforwards under the same Internal Revenue Code provision.

At December 31, 2017, the Company has New Jersey net operating loss carryforwards (“NJ NOLs”) included above in the approximate amount of $34,383,000 expiring through 2037, which are available to reduce future earnings which would otherwise be subject to state income tax. In 2017, the Company sold approximately $332,000 of NJ research and development tax credits, subject to a 6.2% seller’s allocation factor for approximately $311,000.

On December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act (the “Tax Act”) into law. Effective January 1, 2018, among other changes, the Tax Act (1) reduces the U.S. federal corporate tax rate from 35 percent to 21 percent, (2) changes the rules relating to net operating loss carryforwards and carrybacks, (3) eliminates the corporate alternative minimum tax (“AMT”) and changes how existing AMT credits can be realized; and (4) requires companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries.

The Tax Act did not have a material impact on our consolidated financial statements since our deferred temporary differences in the United States are fully offset by a valuation allowance and we do not have any significant off shore earnings from which to record the mandatory transition tax.

On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the Tax Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. The changes in the Tax Act are broad and complex. The final impacts of the Tax Act may differ from the Company’s estimates due to, among other things, changes in interpretations of the Tax Act, further legislation related to the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates to estimates the Company has utilized to calculate the impacts of the Tax Act. The SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the related tax impacts. The Company currently anticipates finalizing any resulting adjustments by the end of our next fiscal year ending December 31, 2018. The Company, based on current knowledge, did estimate the impact of SAB 118 on its income tax provision for the year ended December 31, 2017. The impact on the Company’s consolidated financial statements for the year ended December 31, 2017 is immaterial, primarily because the Company has a valuation allowance on deferred tax assets.

The Company has net deferred tax assets of approximately $31,753,000 and $26,112,000 at December 31, 2016 and 2017, respectively. The net deferred tax assets decreased by approximately $10,848,000 with a corresponding decrease to the valuation allowance as a result of the decrease in federal corporate tax rate to 21% as a result of the Tax Act. A significant portion of the deferred tax assets recognized relate to net operating losses. The Company had other temporary differences between financial and tax reporting for stock-based compensation, fixed asset depreciation expense, deferred revenue, deferred expenses, bad debt reserves, inventory reserves, warranty reserves and acquisition-related expenses.

For the year ended December 31, 2017, the Company’s valuation allowance has decreased to $26,112,000 compared to $31,753,000 as of December 31, 2016, largely due to the decrease in federal corporate tax rate to 21% as a result of the Tax Act. The Company has provided a valuation allowance against the full amount of its deferred tax assets. The valuation allowance was established because of the uncertainty of realization of the deferred tax assets due to lack of sufficient history of generating taxable income. Realization is dependent upon generating sufficient taxable income prior to the expiration of the net operating loss carryforwards in future periods. The valuation allowance increased (decreased) in 2015, 2016 and 2017 by $4,148,000, $2,287,000 and $(5,641,000) (net of the decrease of $10,848,000 due to the decrease in federal corporate tax rate to 21% as a result of the Tax Act), respectively.

Loss before income taxes consists of the following:

The difference between income taxes at the statutory federal income tax rate and income taxes reported in the Consolidated Statements of Operations is attributable to the following:

The change in the valuation allowance is adjusted for the tax effects of ASU No. 2016-09 and other comprehensive loss.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2016 and 2017 are presented below: