NOTE 7 – INCOME TAXES
There was no provision for federal or state taxes for both of the years ended May 31, 2017 and 2016.
The components of deferred taxes were as follows:
| May 31, | May 31, | |||||||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forward | $ | 7,832,000 | $ | 7,219,000 | ||||
| Changes in prior year estimates | 42,000 | 150,000 | ||||||
| Valuation allowance | (7,874,000 | ) | (7,369,000 | ) | ||||
| Net deferred tax asset | $ | — | $ | — | ||||
The Company has a valuation allowance against the full amount of its net deferred taxes due to the uncertainty of realization of the deferred tax assets due to operating loss history of the Company. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some portion, or all of its deferred tax assets will not be realized. The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable income.
A reconciliation of the statutory federal income tax benefit to actual tax benefit for the years ended May 31, 2017 and 2016 is as follows:
| 2017 | 2016 | |||||||
| Federal statutory income tax rates | (35 | )% | (35 | )% | ||||
| State statutory income tax rate, net of federal benefit | (5 | ) | (5 | ) | ||||
| Permanent differences – equity rights | 6 | 24 | ||||||
| Incentive stock options | 7 | — | ||||||
| Non-deductible amortization of debt discount | 8 | — | ||||||
| Goodwill amortization | (1 | ) | — | |||||
| Other | — | 3 | ||||||
| Change in valuation allowance | 20 | 13 | ||||||
| Effective tax rate | — | % | — | % | ||||
As of May 31, 2017, the Company has federal net operating loss carryforwards of approximately $20,000,000 subject to expiration between fiscal years 2027 and 2037. The Company may have had a greater than 50% change in ownership of certain stock holdings by shareholders of the Company pursuant to Section 382 of the Internal Revenue Code. The net operating losses may be limited as to its utilization on an annual basis. Currently, no such evaluation has been performed.
The Company has not been audited by the Internal Revenue Service (“IRS”) or any states in connection with income taxes. The periods from fiscal 2013 through 2017 remain open to examination by the IRS and state jurisdictions. The Company believes it is not subject to any tax audit risk beyond those periods. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of interest expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the years ended May 31, 2017 and 2016.