The provision for income taxes is reconciled with the federal statutory rate for the years ended December 31 is as follows:
| 2017 | 2016 | |||||||
| Provision computed at federal statutory rate | $ | (367,000 | ) | $ | (1,638,000 | ) | ||
| State income taxes, net of federal tax effect | 5,000 | 30,000 | ||||||
| Other permanent differences | 5,000 | 6,000 | ||||||
| Change in valuation allowance | (5,163,000 | ) | 1,645,000 | |||||
| TCJA income tax rate change | 6,528,000 | – | ||||||
| Change in current year estimate and other | 21,000 | (1,000 | ) | |||||
| Income tax provision | $ | 1,029,000 | $ | 42,000 | ||||
Significant components of the net deferred tax assets at December 31 are as follows:
| 2017 | 2016 | |||||||
| Current deferred income tax assets: | ||||||||
| Allowance for doubtful accounts | $ | 7,000 | $ | 10,000 | ||||
| Inventory reserves | 7,000 | 11,000 | ||||||
| Income from Pass-through | 155,000 | 32,000 | ||||||
| UNICAP - Sec 263A | 18,000 | 30,000 | ||||||
| Accrued liabilities | 28,000 | 25,000 | ||||||
| Net current deferred income tax assets | 215,000 | 108,000 | ||||||
| Valuation allowance | (215,000 | ) | (108,000 | ) | ||||
| $ | – | $ | – | |||||
| 2017 | 2016 | |||||||
| Non-current deferred income tax assets: | ||||||||
| Net operating loss carryforward | $ | 10,135,000 | $ | 16,348,000 | ||||
| Alternative minimum tax credit | 223,000 | 223,000 | ||||||
| Other | 195,000 | 252,000 | ||||||
| Non-current deferred income tax assets | 10,553,000 | 16,823,000 | ||||||
| Valuation allowance | (8,553,000 | ) | (13,823,000 | ) | ||||
| $ | 2,000,000 | $ | 3,000,000 | |||||
As of Dougherty’s, the Company had approximately $223,000 of alternative minimum tax credits available to offset future federal income taxes. The credits have no expiration date. The Company also has unused net operating loss carryforwards of $48,260,000, which expire between 2020 and 2035.
The realization of the deferred tax assets, including net operating loss carryforwards, is subject to the Company’s ability to generate sufficient taxable income during the periods in which the temporary differences become realizable. In evaluating whether a valuation allowance is required, management considered all available positive and negative evidence, including prior operating results, the nature and reason of any losses, the forecast of future taxable income and the dates on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. The estimates are based on management’s best judgment at the time made based on current and projected circumstances and conditions. The estimate of the realizability of the net deferred tax asset is a significant estimate that is subject to change in the near term. Management’s estimate of the use of net operating losses includes the estimated gain or loss resulting from the ultimate sale of the pharmacy businesses.
Management believes that the issuance of shares of common stock pursuant to the initial public offering on November 15, 1999, caused an “ownership change” for purposes of Section 382 of the Code on such date. Consequently, the Company believes that utilization of the portion of the Company’s federal net operating loss carryforwards attributable to the period prior to November 16, 1999, is limited by Section 382 of the Code. If an “ownership change” is determined to have occurred at a date after November 15, 1999, additional federal net operating loss carryforwards would be limited by Section 382 of the Code.
In addition, an “ownership change” may occur in the future as a result of future changes in the ownership of the Company’s stock, including the issuance by the Company of stock in connection with the acquisition of a business by the Company. A future “ownership change” would result in Code Section 382 limiting the Company’s deduction of federal operating loss carryforwards attributable to periods before the future ownership change.