11. INCOME TAXES
Deferred taxes are provided on a liability method, whereby deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax liabilities consist of the following components as of March 31 ,2017 and 2016:
| | | 2017 | | | 2016 | |
Deferred tax assets: | | | | | | |
NOL Carryover | | $ | 712,800 | | | $ | 4,700 | |
Inventory Allowance | | | 48,900 | | | | 49,100 | |
Accrued Payroll | | | 256,000 | | | | 70,000 | |
Deferred tax liabilities | | | - | | | | - | |
Valuation allowance | | | (1,017,700 | ) | | | (203,800 | ) |
Net deferred tax asset | | $ | - | | | $ | - | |
The income tax provision differs from the amount of income tax determined by applying the US federal income tax rate to pretax income from continuing operations for the years ended March 31, 2017 and 2016 due to the following:
| | | 2017 | | | 2016 | |
Book Income | | $ | (2,333,700 | ) | | $ | (4,338,000 | ) |
Interest Expense (for derivative) | | | 485,700 | | | | 569,800 | |
Gain/Loss on Derivative | | | 1,541,400 | | | | 2,346,800 | |
Gain/Loss on Settlement of Debt | | | (507,900 | ) | | | 95,800 | |
Inventory Allowance | | | (200 | ) | | | 4,800 | |
Accrued Payroll | | | 186,000 | | | | (127,000 | ) |
Meals & Entertainment | | | 600 | | | | - | |
Valuation allowance | | | 628,100 | | | | 1,447,800 | |
| | $ | - | | | $ | - | |
At March 31, 2017, the Company had net operating loss carryforwards of approximately $1,828,000 that may be offset against future taxable income from the year 2018 through 2037. No tax benefit has been reported in the March 31, 2017 financial statements since the potential benefit is offset by a valuation of allowance of the same amount.
Due to the change in ownership provision of the Tax Reform Act of 1986, net operating loss carryforwards for federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
As of the date of this filing, the Company is delinquent in filing their tax returns, and there is uncertainty regarding potential penalties and interest. The last return filed by the Company was March 31, 2012, and the Company has not accrued for any potential penalties or interest from that period forward. The Company will need to file returns for the years ending March 31, 2013, 2014, 2015 and 2016, which are still open for examination.