NOTE 13 – INCOME TAXES

 

The components of income tax expense (benefit) are as follows for the years ended December 31, 2017 and 2016:

 

 

The income tax expense component table above for 2016 does not include $25,802 of income tax expense related to discontinued operations.

 

The differences between the statutory federal income tax rate of 34% and the effective tax rate for the Company are reconciled as follows:

 

 

Deferred tax assets and liabilities resulting from the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes at December 31, 2017 and 2016 are as follows:

 

 

The bargain purchase gain recognized in 2016 was the result of the Hopkins Merger, which was an all cash merger that was treated as an asset purchase and, thus, a taxable transaction. Therefore, there was no impact from the Hopkins Merger on the effective tax rate for 2016.

 

At December 31, 2017 and 2016, the Company had federal net operating loss carryforwards of $0.9 million and $1.2 million, respectively, which begin to expire in 2033. As a result of the Jefferson Merger, $0.8 million of these net operating losses are subject to an annual limitation of $0.35 million. At December 31, 2017 and 2016, the Company had state net operating loss carryforwards of $5.5 million and $5.3 million, respectively, which begin to expire in 2033. At December 31, 2017, there was a valuation allowance of approximately $146,000 and $91,000 respectively, established against the corresponding deferred tax assets and state net operating losses that are not deemed to be more likely than not to be realized.

 

Realization of deferred tax assets is dependent upon the generation of sufficient future taxable income during the periods in which existing deferred tax assets are expected to become deductible for income tax purposes. Management has determined that the Company is more likely than not to realize existing net deferred tax assets at December 31, 2017, with the exception of the items noted above.

 

At December 31, 2017 and 2016, the Company did not have any unrecognized tax benefits. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized upon examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next 12 months.

 

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax by the State of Maryland. In 2016 the Company concluded its audit by the Internal Revenue Service for the 2011 and 2013 tax years. The result of the audits produced no changes to the tax liability for either year. The Company is no longer subject to examination by taxing authorities in these jurisdictions for the years before 2013.

 

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduces the maximum U.S. federal corporate tax rate from 35% to 21%. At December 31, 2017, the Company completed its accounting estimates for the tax effects of enactment of the Tax Act which were provisional and will be trued up through the filing of the Company’s 2017 tax return.

 

As described below, the Company has made a reasonable estimate of the effects on our existing deferred

tax balances as of December 31, 2017. The Company revalued all of its deferred tax assets and liabilities based

on the rates at which they are expected to reverse in the future. The Company recognized a tax expense of $625,000 in the Company’s tax provision for the year ended December 31, 2017 related to adjusting its net deferred tax balance to reflect the new corporate tax rate.

 

A reconciliation of income tax provision for the year ended December 31, 2017 is as follows: