Annual report pursuant to Section 13 and 15(d)

13. Tax

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13. Tax
12 Months Ended
Dec. 31, 2016
Notes to Financial Statements  
Note 13. Tax

The breakdown of the tax benefits and provisions is as follows for the years ended December 31:

 

    2016     2015  
Current:            
Federal   $ -     $ -  
State and local     27,331       41,149  
Total Current     27,331       41,149  
Deferred federal income tax benefit     (500,000 )     -  
                 
Net (Benefit) Provision   $ (472,669 )   $ 41,149  

 

A reconciliation of the provision (benefit) for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes is as follows for the years ended December 31:

 

    2016     2015  
Computed tax at the federal statutory rate of 34%   $ (5,901,000 )   $ (4,849,000 )
Debt discounts     6,279,000       3,399,000  
Stock based compensation     2,019,000          
Meals and entertainment     16,000       10,000  
Valuation allowance     (2,913,000 )     1,440,000  
Federal income tax benefit   $ (500,000 )   $ -  

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31:

 

    2016     2015  
Deferred tax assets:            
Stock based compensation   $ 1,211,000     $ 2,907,000  
Net operating loss carryforwards     5,927,000       8,303,000  
Total deferred tax assets     7,138,000       11,210,000  
Deferred tax liabilities:                
Property and equipment     (228,000 )     (3,000 )
Other     (33,000 )     62,000  
Total deferred tax liabilites     (261,000 )     59,000  
                 
Valuation Allowance     (6,377,000 )     (11,269,000 )
                 
Net deferred tax asset   $ 500,000     $ -  

 

For the year ended December 31, 2015, the Company incurred net operating loss and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes was recorded due to the uncertainty of the realization of any tax assets.

 

For the year ended December 31, 2016, the Company had net operating income, however, the use of net operating loss carryforwards eliminate the provision for income tax. The Company recorded a valuation allowance against all of our deferred tax assets as of December 31, 2015. As of December 31, 2016, we determined there is sufficient evidence to support the reversal of some portion of these allowances and recorded a deferred tax asset of $500,000. Given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, additional positive evidence will become available allowing us to reach a conclusion that a more of the valuation allowance will no longer be needed. Release of the valuation allowance results in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. The exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.

 

At December 31, 2016, the Company had approximately $17,432,000 of net operating losses. The net operating loss carryforwards, if not utilized, will begin to expire in 2030.

 

The Company’s effective income tax rates for the years ended December 31, 2016 and 2015, respectively are different than what would be expected if the statutory rate were applied to net income before income tax expense primarily because of non-deductible change in the fair value of the warrant liability, expense charges in connection with various non-cash financing transactions and the use of net operating loss carryforwards.