The provision for income taxes consists of the following for the years ended December 31 (in thousands).
| 2016 | 2015 | |||||||
| Federal | $ | — | $ | — | ||||
| State and local | — | — | ||||||
| Foreign | — | 1 | ||||||
| Total current income tax expense | $ | — | $ | 1 | ||||
| Summary of Expense | 2016 | 2015 | ||||||
| Current | — | 1 | ||||||
| Deferred | (132 | ) | 77 | |||||
| Total Income Tax Expense (Benefit) | $ | (132 | ) | $ | 78 | |||
For the years ended December 31, 2016 and 2015, the provision for income taxes differs from the expected tax provision computed by applying the U.S. federal statutory rate to loss before taxes as a result of the following:
| 2016 | 2015 | |||||||
| Statutory U.S. federal rate | (34.0 | )% | (34.0 | )% | ||||
| Permanent differences | 0.00 | 0.03 | ||||||
| Impact of differences related to foreign earnings | 1.05 | % | (0.01 | )% | ||||
| Application of valuation allowance to US deferred tax assets upon merger | — | % | — | % | ||||
| Valuation allowance | 27.16 | % | 43.87 | % | ||||
| Provision for income tax expense | (5.79 | )% | 9.89 | % | ||||
The significant components of the Company’s deferred tax assets and liabilities are as follows:
| 2016 | 2015 | |||||||
| (in thousands) | ||||||||
| Deferred Tax Assets: | ||||||||
| Net operating loss carryforwards | $ | 4,535 | $ | 3,548 | ||||
| Accrued expenses | 1,160 | 1,152 | ||||||
| Accounts receivable timing differences | - | 29 | ||||||
| Property and equipment | 79 | 79 | ||||||
| Total Deferred Tax Assets | 5,774 | 4,808 | ||||||
| Valuation Allowance | (5,548 | ) | (4,732 | ) | ||||
| Net Deferred Tax Asset | 226 | 76 | ||||||
| Deferred Tax Liability: | ||||||||
| In-process research and development and trademarks | (2,205 | ) | (2,205 | ) | ||||
| Net Deferred Tax Liability | $ | (1,979 | ) | $ | (2,129 | ) | ||
The Company files a consolidated federal return for MEDITE Cancer Diagnostics, Inc and MEDITE Enterprises and a stand-alone federal tax return for MEDITE Lab Solutions. Each Company files a separate Florida Corporate return. Corporate returns are also filed in Germany, Austria and Poland for the entities doing business in these respective countries.
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets for the U.S. federal and state, Austria and Poland have been fully offset by a valuation allowance. In 2013 and 2014 MEDITE Cancer Diagnostics, Inc had a change in ownership of greater than 50%. The result of these changes is that the net operating loss carryovers derived prior to the ownership changes have become subject to the limitation requirements of Section 382 of the Internal Revenue Code in the United States. Section 382 requires the Company to apply a limitation rate to the value of the Company immediately prior to the change to determine the annual limitation for the utilization of the pre-change net operating losses. Based on these limitations, the Company has reduced the deferred tax asset and related valuation allowance to reflect the impact of these limitations at December 31, 2016. The net impact to the valuation allowance for the reduction of attributes and current year activity is a decrease of $19.8 million in 2015.
At December 31, 2016, the Company had net operating loss carry forwards for U.S. federal income tax of approximately $12.4 million, which will begin to expire in 2018. At December 31, 2016, the Company had net operating loss carry forwards for state income tax of approximately $3.8 million, which will begin to expire in 2027. At December 31, 2016, the Company had net operating loss carry forwards for foreign income tax of approximately $0.4 million, which will begin to expire in 2019 for Poland and will carry forward indefinitely for Germany and Austria.
The Company has not recognized U.S. deferred income taxes on any undistributed earnings for the foreign subsidiaries. The Company intends to indefinitely reinvest those earnings in operations outside the U.S.
Tax Uncertainties
In June 2006, the Financial Accounting Standards Board (FASB) issued interpretation ASC 740-10-50, "Accounting for Uncertainty in Income Tax". This pronouncement clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with Statement of Financial Accounting Standards ASC 740-10-50, "Accounting for Income Taxes". This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in the tax return. ASC 740 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transaction. In accordance with ASC 740-10-50, the Company is classifying interest and penalties as a component of tax expense.
The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. The periods subject to examination for the Company’s tax returns are for the years 2012, 2012 and 2013. The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded.
The Company had unrecognized tax benefits of $0 as of December 31, 2016 and 2015. These unrecognized tax benefits, if recognized, would not affect the effective tax rate. There was no interest or penalties accrued at the adoption date and at December 31, 2016.
The Company is subject to U.S. federal income tax including state and local jurisdictions. Currently, no federal or state income tax returns are under examination by the respective taxing jurisdictions.