8. Income Taxes
We compute income taxes using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Under the asset and liability method, we determine deferred income tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities and measure them using currently enacted tax rates and laws. We provide a valuation allowance for the amount of deferred tax assets that, based on available evidence, are more likely than not to be realized. Realization of our net operating loss carryforward was not reasonably assured as of December 31, 2016 and 2015, and we have recorded a valuation allowance of $15,555,000 and $12,313,000, respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying consolidated financial statements.
The components of net deferred taxes are as follows:
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|
|
As of December 31, |
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|||||
|
|
|
2016 |
|
|
2015 |
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||
|
Deferred tax assets (liabilities): |
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|
|
|
|
|
|
|
|
Net operating loss |
|
$ |
7,199,000 |
|
|
$ |
5,670,000 |
|
|
Amortization |
|
|
5,204,000 |
|
|
|
3,761,000 |
|
|
Stock-based compensation |
|
|
3,683,000 |
|
|
|
3,215,000 |
|
|
Capitalized software costs |
|
|
(753,000 |
) |
|
|
(612,000 |
) |
|
Accrued interest expense |
|
|
14,000 |
|
|
|
9,000 |
|
|
Allowance for doubtful accounts |
|
|
130,000 |
|
|
|
229,000 |
|
|
Deferred lease liability |
|
|
78,000 |
|
|
|
41,000 |
|
|
Total deferred tax assets (liabilities), net |
|
|
15,555,000 |
|
|
|
12,313,000 |
|
|
Less: valuation allowance |
|
|
(15,555,000 |
) |
|
|
(12,313,000 |
) |
|
Net deferred taxes |
|
$ |
— |
|
|
$ |
— |
|
The reconciliation between the income tax expense (benefit) calculated by applying statutory rates to net loss and the income tax benefit reported in the accompanying consolidated financial statements is as follows:
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|
Years Ended December 31, |
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|
|
|
2016 |
|
|
2015 |
|
||
|
U.S. federal statutory rate applied to pretax income |
|
$ |
(2,735,499 |
) |
|
$ |
(2,531,616 |
) |
|
Permanent differences |
|
|
17,155 |
|
|
|
17,155 |
|
|
State taxes and other |
|
|
(523,656 |
) |
|
|
(690,539 |
) |
|
Change in valuation allowance |
|
|
3,242,000 |
|
|
|
3,205,000 |
|
|
|
|
$ |
— |
|
|
$ |
— |
|
As of December 31, 2016 and 2015, we had federal income tax net operating loss carryforwards of approximately $18,500,000 and $14,500,000, respectively, which expire at various dates beginning in 2031. We are subject to limitations existing under Internal Revenue Code Section 382 (Change of Control) relating to the availability of the operating loss. Such limitation of the net operating losses may have occurred, which we have not fully analyzed at this time as we have fully reserved the deferred tax asset.
As of December 31, 2016 and 2015, we did not recognize any assets or liabilities relative to uncertain tax positions, nor do we anticipate any significant unrecognized tax benefits will be recorded during 2017. It is our policy to classify interest and penalties on income taxes as interest expense or penalties expense.
Tax positions are positions taken in a previously filed tax return or positions expected to be taken in a future tax return that are reflected in measuring current or deferred income tax assets and liabilities reported in the financial statements. Tax positions include the following:
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• |
an allocation or shift of income between taxing jurisdictions; |
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• |
the characterization of income or a decision to exclude reportable taxable income in a tax return; or |
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• |
a decision to classify a transaction, entity, or other position in a tax return as tax exempt. |
We are potentially subject to tax audits for federal and state tax returns for tax years ended 2014 to 2016. Tax audits by their very nature are often complex and can require several years to complete.