Note 7 – Income Taxes
Prior to the transaction described in Note 1, the Company was taxed as an S corporation for income tax purposes with all income tax liabilities and/or benefits of the Company being passed through to its stockholders in accordance with their respective percentage ownership. As such, no recognition of federal or state income taxes for the Company has been provided for the year ended December 31, 2015 or from January 1, 2016 to June 29, 2016.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A full valuation allowance is established against all net deferred tax assets as of December 31, 2016 based on estimates of recoverability. While the Company has optimistic plans for its business strategy, it determined that such a valuation allowance was necessary given the current and expected near term losses and the uncertainty with respect to its ability to generate sufficient profits from its new business model. Because of the impacts of the valuation allowance, there was no income tax expense or benefit for the years ended December 31, 2016.
A reconciliation of the differences between the effective and statutory income tax rates for year ended December 31, 2016:
|
|
|
Amount |
|
|
Percent |
|
||
|
|
|
|
|
|
|
|
||
|
Federal statutory rates |
|
$ | (2,442,125 | ) |
|
|
34.0 | % |
|
State income taxes |
|
|
(359,136 | ) |
|
|
5.0 | % |
|
Pass through loss to LLC members |
|
|
(31,722 | ) |
|
|
0.4 | % |
|
Loss on settlement of debt |
|
|
2,685,009 |
|
|
|
-37.4 |
% |
|
Valuation allowance against net deferred tax assets |
|
|
147,974 |
|
|
|
-2.0 |
% |
|
Effective rate |
|
$ | - |
|
|
|
0.0 | % |
At December 31, 2016, the significant components of the deferred tax assets are summarized below:
|
Deferred income tax asset |
|
|
|
|
|
Net operating loss carryforwards |
|
|
147,974 |
|
|
Total deferred income tax asset |
|
|
147,974 |
|
|
Less: valuation allowance |
|
|
(147,974 | ) |
|
Total deferred income tax asset |
|
$ | - |
|
The valuation allowance increased by $147,974 in 2016 as a result of the Company generating additional net operating losses.
The Company has recorded as of December 31, 2016 a valuation allowance of $147,974, as it believes that it is more likely than not that the deferred tax assets will not be realized in future years. Management has based its assessment on the Company’s lack of profitable operating history.
The Company annually conducts an analysis of its tax positions and has concluded that it has no uncertain tax positions as of December 31, 2016 and 2015.
The Company has net operating loss carry-forwards of approximately $379,000. Such amounts are subject to IRS code section 382 limitations and expire in 2030. The 2014 to 2016 tax years are still subject to audit. As an S corporation, through June 29, 2016, in the event of an examination of the Company’s tax return for the periods prior to June 30, 2016, the tax liability of the members could be changed if an adjustment in the Company’s income (loss) is ultimately sustained by the taxing authorities.