Significant components of the Company’s deferred tax assets and liabilities for federal and state income taxes as of December 31, 2016 and 2015 are as follows:
| December 31, | |||||||
| 2016 | 2015 | ||||||
| Deferred tax assets: | |||||||
| Net operating loss | $ | 834,000 | $ | 640,000 | |||
| Provisions and accrued liabilities | 44,000 | 86,000 | |||||
| 878,000 | 726,000 | ||||||
| Deferred tax liabilities: | |||||||
| Embedded derivative | — | (9,000) | |||||
| Depreciation and amortization | — | (149,000) | |||||
| Total deferred tax asset | 878,000 | 568,000 | |||||
| Less valuation allowance | (878,000 | ) | (568,000) | ||||
| Net deferred tax asset | $ | — | $ | — | |||
Provision for income tax provision (benefit) as of December 31, 2016 and 2015 consist of the following:
| December 31, | |||||||
| 2016 | 2015 | ||||||
| Deferred: | |||||||
| Federal | $ | 310,000 | $ | 568,000 | |||
| State | — | — | |||||
| Total deferred tax asset | 310,000 | 568,000 | |||||
| Less valuation allowance | (310,000 | ) | (568,000) | ||||
| Net deferred tax asset | $ | — | $ | — | |||
The income tax provision (benefit) differs from the amount of income tax determined by applying the U.S. federal tax rate to pretax income as of December 31, 2016 and 2015 as follows:
| December 31, | ||||||
| 2016 | 2015 | |||||
| Effective tax rate (benefit): | ||||||
| Federal | (34.0)% | (34.0)% | ||||
| State | — | — | ||||
| Permanent differences | — | 18.8 | ||||
| Other | — | 38.1 | ||||
| Change in valuation allowance | 34.0% | (22.9) | ||||
| — % | — % | |||||
The Tax Reform Act of 1986 contains provisions that limit the federal net operating loss carryforwards that may be used in any given year in the event of specified occurrences, including significant ownership changes. As a result of these provisions, utilization of net operating losses would be limited in the event of any future significant ownership change. Such a limitation could result in the expiration of the net operating loss carryforwards before utilization. The Company had such an ownership change related to the reverse merger transaction.
As of December 31, 2016 and 2015, the Company had gross federal net operating loss carryforwards of approximately $2,454,000 and $1,939,000, respectively. The Company expects the limitation placed on the federal net operating loss carryforwards prior to the ownership change will likely expire unused. As of December 31, 2016, all tax years are open for examination by the taxing authorities.