The provision for income taxes is based on earnings before income taxes reported for financial statement purposes and consisted of the following:
| 2016 | 2015 | 2014 | ||||||||||
| Current income tax expense: | ||||||||||||
| Federal | $ | - | $ | 65,206 | $ | 69,367 | ||||||
| State | 10,238 | 23,728 | 20,923 | |||||||||
| Total current tax expense | $ | 10,238 | $ | 88,934 | $ | 90,290 | ||||||
| Deferred tax expense: | ||||||||||||
| Federal | $ | (162,337 | ) | $ | 99,403 | $ | 121,404 | |||||
| State | (23,867 | ) | 15,117 | 14,572 | ||||||||
| Total deferred tax expense | $ | (186,204 | ) | $ | 114,520 | $ | 135,976 | |||||
| Total provision (benefit) for income tax | ||||||||||||
| expense | $ | (175,966 | ) | $ | 203,454 | $ | 226,266 | |||||
Deferred taxes arise because of different tax treatment between financial statement accounting and tax accounting, known as “temporary differences.” The Company records the tax effect of these temporary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in future periods) and “deferred tax liabilities” (generally items for which the Company has received a tax deduction and has not yet been recorded in the consolidated statement of operations).
Deferred tax assets (liabilities) were comprised of the following:
| Deferred tax asset: | 2016 | 2015 | 2014 | |||||||||
| Capital loss carry forward | $ | - | $ | - | $ | 33,077 | ||||||
| Valuation on capital loss carry forward | - | (33,077 | ||||||||||
| Net operating loss carry forward | 135,209 | - | - | |||||||||
| Intangibles | 32,111 | - | - | |||||||||
| Stock option compensation | 211,523 | 293,908 | 357,386 | |||||||||
| Other assets | 74,517 | - | 57,866 | |||||||||
| Total deferred tax assets | $ | 453,360 | $ | 293,908 | $ | 415,252 | ||||||
| Deferred tax liabilities: | ||||||||||||
| Plant, property and equipment | $ | (35,818 | ) | $ | (52,332 | ) | $ | (49,825 | ) | |||
| Total deferred tax liabilities | $ | (35,818 | ) | $ | (52,332 | ) | $ | (49,825 | ) | |||
| Net deferred tax asset | $ | 417,542 | $ | 241,576 | $ | 365,427 | ||||||
| Net deferred tax asset - non-current | 417,542 | 241,576 | 365,427 | |||||||||
| Net deferred tax asset | $ | 417,542 | $ | 241,576 | $ | 365,427 | ||||||
Management reviews and adjusts those estimates annually based upon the most current information available. However, because the recoverability of deferred taxes is directly dependent upon the future operating results of the Company, actual recoverability of deferred taxes may differ materially from management’s estimates. The Company is aware of the risk that the recorded deferred tax assets may not be realizable. The capital loss generated on the sale of Omega shares is unlikely to be recognized and therefore has not been included in deferred assets. However, management believes that the Company will obtain the full benefit of any net operating loss and other deferred tax assets on the basis of its evaluation of the Company’s anticipated profitability over the period of years that the temporary differences are expected to become tax deductions. It believes that sufficient book and taxable income will be generated to realize the benefit of any net operating loss and other deferred tax assets.
ASC 740 guidance requires that the Company evaluate all monetary tax positions taken, and recognize a liability for any uncertain tax positions that are more likely than not to be sustained by the tax authorities. The Company has not recorded any liabilities, or interest and penalties, as of December 31, 2016 related to uncertain tax positions.
The Company files income tax returns in the U.S. and various state jurisdictions. There are currently no federal or state income tax examinations underway for these jurisdictions. The tax years 2013-2015 remain open to examination by taxing jurisdictions to which the Company is subject.
At December 31, 2016, the Company has approximately $398,000 in federal net operation loss carryforward which begins to expire in 2036.
A reconciliation of the difference between the expected federal tax rate computed at the U.S. statutory income tax rate of 35% and the Company’s effective tax rate for the years ended December 31, 2016, 2015 and 2014 is shown in the following table:
| 2016 |
2015 |
2014 |
||||||||||
| Expected federal tax rate | 35 | % | 35 | % | 35 | % | ||||||
| State income taxes | (1 | )% | 5 | % | 5 | % | ||||||
| Effect of permanent differences | 0 | % | 0 | % | (64 | )% | ||||||
| Change in tax rate and other | (5 | )% | 41 | % | 8 | % | ||||||
| Effective tax rate | 29 | % | 81 | % | (17 | )% | ||||||
The effect of permanent differences in the period ended December 31, 2015, was primarily due to the expiring stock option expense. The effect of permanent differences in the period ended December 31, 2014, was primarily due to the goodwill impairment that was offset by the settlement proceeds (See Note 21 – Litigation). Income tax payable for period ended December 31, 2016 was $10,187 compared to income tax payable of $61,667 during the same period in 2015.