NOTE 12. INCOME TAXES
The provision for federal and state income taxes for the years ended December 31, 2017 and 2016 included the following:
|
|
|
2017 |
|
|
2016 |
|
||
|
Current benefit (provision): |
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
Deferred provision: |
|
|
|
|
|
|
|
|
|
Federal |
|
|
1,271,323 |
|
|
|
16,047 |
|
|
State |
|
|
(4,310 |
) |
|
|
30,535 |
|
|
Valuation allowance |
|
|
(1,267,013 |
) |
|
|
(46,582 |
) |
|
Total income tax provision |
|
$ |
— |
|
|
$ |
— |
|
Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2017 and 2016 are as follows:
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|
|
2017 |
|
|
2016 |
|
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|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Carrying value differences |
|
$ |
574,993 |
|
|
$ |
1,092,769 |
|
|
Net operating loss carryforward |
|
|
697,681 |
|
|
|
803,637 |
|
|
Tax credits |
|
|
6,250 |
|
|
|
— |
|
|
Other |
|
|
827 |
|
|
|
608 |
|
|
Subtotal |
|
|
1,279,751 |
|
|
|
1,897,014 |
|
|
Valuation allowance |
|
|
(948,917 |
) |
|
|
(1,897,014 |
) |
|
Net deferred tax assets |
|
|
330,834 |
|
|
|
— |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
|
(330,834 |
) |
|
|
— |
|
|
Net deferreds |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
ASC 740 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based on the weight of available evidence, which includes the Company’s historical operation performance and the reported cumulative losses in the three-year period preceding 2017, the Company has provided a full valuation allowance against its net deferred tax assets.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affects 2017, including, but not limited to, accelerated depreciation that will allow for full expensing of qualified property. The Tax Act also establishes new tax laws that will affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
As a result of the reduction of the federal corporate income tax rate, we have revalued our net deferred tax asset, excluding after tax credits, as of December 31, 2017. As of December 31, 2017, this revaluation continues to be offset by a full valuation allowance.
As of December 31, 2017, the Company had federal net operating loss carryforwards of approximately $2.8 million and state net operating loss carryforwards of approximately $2.2 million. These carryforwards will expire in various amounts beginning in 2032. Internal Revenue Code Section 382 limits the use of net operating loss carryforwards in certain situations where changes occur in the stock ownership of a company. The Company believes that an ownership change did occur in August 2016. Net operating losses that arose prior to that ownership change will have limited availability to offset taxable income arising in periods following the ownership change. The Company has analyzed this issue and management believes that the Company’s net operating loss carryforwards will not expire unutilized.
The Company is required to recognize in the financial statements the impact of a tax position, if that position is not more likely than not of being sustained on audit, based on the technical merits of the position. The Company’s policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. At December 31, 2017, there was no liability for unrecognized tax benefits. The Company does not expect that its uncertain tax positions will materially change in the next twelve months.
The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. Tax contingencies are based upon their technical merits, relative law, and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.