NOTE 14 — INCOME TAXES
Deferred tax assets (liabilities) consist of the following at December 31:
| 2016 | 2015 | |||||||
| Current: | ||||||||
| Other temporary differences | $ | 75,000 | $ | 10,000 | ||||
| Non-current: | ||||||||
| Net operating loss carry forwards | 12,985,000 | 9,955,000 | ||||||
| Tax depreciation in excess of book depreciation | (230,000 | ) | (220,000 | ) | ||||
| Research and development credits | 560,000 | 490,000 | ||||||
| Net deferred tax asset | 13,390,000 | 10,235,000 | ||||||
| Deferred tax valuation allowance | (13,390,000 | ) | (10,235,000 | ) | ||||
| Net deferred tax asset | $ | — | $ | — | ||||
Net operating loss carry forwards of $38,200,000 and $33,180,000 exist at December 31, 2016 and 2015, respectively.
The primary difference between the net operating loss carry forwards and the accumulated deficit arises from certain stock option, warrants and other debt and equity transactions that are considered permanent differences. These losses were incurred in the years 2006 through 2016 and will expire between 2026 and 2036 and their utilization may be limited if we experience significant ownership changes. The Company has not conducted a full IRC Section 382 analysis to determine if a reduction in net operating loss carry forwards is required due to ownership changes. The analysis has not been undertaken due to the financial burden it would cause and changes, if any, resulting in a reduction to the deferred tax asset and related valuation would have no impact on the deferred tax asset or expense recognized. The research and development credits will expire between 2028 and 2036. A rate of 40% has been used to calculate the deferred tax assets and liabilities based on the expected effective tax rate, net of applicable credits, upon reversal of the differences above. A valuation allowance has been established against the entire deferred tax asset at December 31, 2016 and 2015. The valuation allowance is considered a significant estimate subject to material change in the near term.
Below is a reconciliation of the statutory federal income tax rate to our effective tax rate for the fiscal years ended December 31, 2016 and 2015:
| 2016 | 2015 | |||||||
| Federal tax provision | 34.0 | % | 34.0 | % | ||||
| State tax provision | 6.0 | % | 6.0 | % | ||||
| Valuation allowance | (40.0 | )% | (40.0 | )% | ||||
| 0.0 | % | 0.0 | % | |||||
We file income tax returns in the U.S. federal jurisdiction and in Michigan. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Beginning in 2017 we will begin filing under the corporate income tax (CIT) versus the Michigan Business Tax (MBT) structure. Net operating losses incurred in 2016 and prior will not carry forward to the CIT tax structure, accordingly all losses are considered a permanent timing difference for state deferred tax calculations.
For federal and state purposes, we have open tax years for all years in which we have filed tax returns. We are not currently subject to any ongoing income tax examinations.