The tax effects of temporary differences that give rise to deferred tax assets as of December 31, 2016 and 2015 are presented below:
The income tax provision (benefit) consists of the following:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Federal | ||||||||
| Current | – | – | ||||||
| Deferred | (377,200 | ) | (492,800 | ) | ||||
| State and local | ||||||||
| Current | – | – | ||||||
| Deferred | (104,600 | ) | (146,500 | ) | ||||
| Change in valuation allowance | 481,800 | 639,300 | ||||||
| Income tax provision (benefit) | – | – | ||||||
The reconciliation between the statutory federal income tax rate and the Company’s effective rate for the years ended December 31, 2016 and 2015 is as follows:
| 2016 | 2015 | |||||||
| U.S. Federal statutory rate | (34.0% | ) | (34.0% | ) | ||||
| State tax benefit, net of federal tax | (9.42 | ) | (10.11 | ) | ||||
| Stock based compensation | 10.33 | – | ||||||
| Non-deductible interest expense | 6.46 | – | ||||||
| Other permanent differences | 0.56 | 2.07 | ||||||
| Change in valuation allowance | 26.07 | 42.04 | ||||||
| Income tax provision (Benefit) | 0.0% | 0.0% | ||||||
As of December 31, 2016 and 2015 the deferred tax asset consisted of the following:
| 2016 | 2015 | |||||||
| Deferred Tax Asset | ||||||||
| Net operating loss carryovers | $ | 1,131,900 | $ | 650,100 | ||||
| Total deferred tax asset | 1,131,900 | 650,100 | ||||||
| Valuation allowance | (1,131,900 | ) | (650,100 | ) | ||||
| Net Deferred Tax Asset, net of valuation allowance | $ | – | $ | – | ||||
The Company is required to file its income tax returns in the U.S. federal jurisdiction and the state of New York and such returns are subject to examination by tax authorities. Tax returns for the year ended December 31, 2014, 2015 and 2016 remain open to Internal Revenue Service and State audits.
The Company is in the process of filing its federal and state tax returns for the years ended December 31, 2016 and 2015. The Net operating losses (“NOLs”) for these years will not be available to reduce future taxable income until the returns are filed. Assuming these returns are filed, as of December 31, 2016, the Company had approximately $2.6 million of federal and state net operating losses that may be available to offset future taxable income. The net operating loss carryforwards will begin to expire in 2034 unless utilized. In accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s U.S. net operating carryovers may be subject to an annual limitation in the event of a change of control as defined the regulations. A full Section 382 analysis has not been prepared and the Company’s NOLs could be subject to limitation under Section 382.
The Company assesses the likelihood that deferred tax assets will be realized. To the extent that realization is not likely, a valuation allowance is established. Based upon the Company’s losses since inception, management believes that it is more likely than not that the future benefits of its deferred tax assets will not be realized and has therefore established a full valuation allowance.