Note 7: Income Taxes

Income tax expense from continuing operations consists of the following:

Items accounting for the differences between income taxes at statutory income tax rates and the actual effective rate are as follows:

The components of deferred income tax assets and liabilities were as follows:

The Tax Cuts and Jobs Act (“Tax Act”) was signed into law on December 22, 2017. The Tax Act includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from the maximum rate of 35% to 21%; limitations on the deductibility of interest expense and executive compensation; eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; changing the rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; and, the transition of U.S. international taxation from a worldwide tax system to a territorial tax system.

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the federal tax rate, the Company is required to revalue its ending net deferred tax liabilities as of December 31, 2017 and alter the ending valuation allowance on the net deferred tax assets accordingly.

The Company records a valuation allowance for certain temporary differences for which it is more likely than not that it will not receive future tax benefits. The Company assesses its past earnings history and trends and projections of future net income. The Company recorded a valuation allowance for the entire amount of the net deferred tax asset at December 31, 2017 and 2016. The change in the valuation allowance during the years ended December 31, 2017 and 2016 was an increase/(decrease) of $(279,000) and $626,000, respectively. The Company will continue to review this valuation allowance and make adjustments as appropriate.

As of December 31, 2017 and 2016, the Company maintained net operating loss (“NOL”) carryforwards of approximately $6,380,000 and $5,195,000. Use of NOL carryforwards are limited by the provisions of Section 382 of the Internal Revenue Code. At this point, the Company has not performed an analysis to determine whether an ownership change (as defined under Section 382) occurred during this year or preceding year(s). A determination of the potential impact these provisions might have on the utilization of net operating losses will be made when the net operating loss is projected to be utilized. The NOL carryforwards expire at various intervals through 2037. In addition, the Company has R&D credits of $253,000 that will expire at various intervals through 2037.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. At this time, the Company does not have any uncertain tax positions to assess.