Entity information:

The provision for income taxes from continuing operations is as follows for the years ended May 31:

 

   2017   2016 
Current:          
Federal  $–   $– 
State  2,400    2,400 
Total current  $2,400   $2,400 

Deferred:          
Federal   (13,772)   (402,084)
State   278,714    (103,676)
Total deferred   264,942    (505,760)
Valuation allowance   (264,942)   505,760 
Total deferred   –    – 
Total provision  $2,400   $2,400 

 

The reconciliation of the effective income tax rate to the Federal statutory rate is as follows for the years ended May 31:

 

   2017   2016 
Statutory federal income tax rate   35.0%    35.0% 
State income tax rate, net of Federal effect   (3.7)%   (0.1)% 
Change in tax rate   (1.0)%    (1.0)% 
Stock option expense   (3.2)%    (1.4)% 
Other   (0.6)%    - % 
Change in valuation allowance   (32.1)%    (32.7)% 
Effective income tax rate   (5.6)%    (0.2)% 

 

Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of our deferred tax assets from continuing operations are as follows as of May 31:

 

   2017    2016 
Current deferred tax assets:          
State taxes  $815   $815 
Accrued expenses   13,065    14,215 
Less: valuation allowance   (13,880)   (15,030)
Total net current deferred tax asset   –    – 
           
Long-term deferred tax assets (liabilities):          
Investment in affiliated company   1,196,518    1,203,001 
Basis difference in property and equipment   542    643 
Stock based compensation expense   222,774    224,514 
Impairment of note receivable   331,896    331,896 
Capital loss carryover   225,603    225,603 
Net operating loss carryforwards    9,997,132     10,252,600 
Credit carryover   109,786    109,786 
Valuation allowance   (12,084,251)   (12,348,043)
Total net long-term deferred tax asset   –    – 
Net deferred tax asset  $–   $– 

 

We have federal and state net operating loss carryforwards available to offset future taxable income of approximately $24,057,955 and $20,559,146, respectively, at May 31, 2017. These carryforwards begin to expire in the years ending May 31, 2025 and 2017, respectively.

 

We follow authoritative guidance which defines criteria that an individual tax position must meet for any part of the benefit of that position to be recognized in a company’s financial statements and also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense. Interest and penalties relating to underpayment of income taxes are recorded in general and administrative expense. As of May 31, 2017, we are subject to U.S. Federal income tax examinations for the tax years May 31, 2005 through May 31, 2017, and we are subject to state and local income tax examinations for the tax years May 31, 2005 through May 31, 2017 due to the carryover of net operating losses related to PDSG from previous years.

 

We have no liability relating to unrecognized tax benefits under the authoritative guidance for the fiscal years ended May 31, 2017 and 2016.

 

Our continuing practice is to recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. We do not expect our unrecognized tax benefits to change significantly over the next twelve months.