Annual report pursuant to Section 13 and 15(d)

8. Income Taxes

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8. Income Taxes
12 Months Ended
Dec. 31, 2017
Income Tax Disclosure [Abstract]  
Income Taxes

ASC 740 requires that the tax benefit of net operating losses, temporary differences, and credit carryforwards be recorded as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. The Company has reviewed the positive and negative evidence relating to the realizability of the deferred tax assets and has concluded that the deferred tax assets are not more likely than not to be realized with the exception of $4,358 of U.S. Federal R&D tax credits. These tax credits will be utilized to reduce payroll taxes in 2018. Accordingly, the valuation allowance has not been released related to these assets with the exception of $4,000 in U.S. Federal R&D tax credits. The valuation allowance increased by approximately $470,000 and $460,000 during the years ended December 31, 2017 and 2016, respectively.

 

The provision for income taxes for December 31, 2017 and 2016 consists of the following:

 

    As of December 31,
    2017   2016
Current:        
Federal   $ —       $ —    
State     800       800  
Total current     800       800  
Deferred:                
Federal     980,176       463,520  
State     25,169       71,734  
Total deferred     1,005,345       535,254  
Full valuation allowance     (1,000,987 )     (535,254 )
Total provision (1)   $ (3,558 )   $ 800  

   

(1) Total provision consists of U.S. Federal R&D credits, net of California minimum tax.

  

The difference between the effective tax rate and the U.S. federal tax rate is as follows:

 

    %
Federal income tax     34.00 %
State income taxes, less federal benefit     0.07 %
Tax credits     0.09 %
Permanent differences     -27.38 %
Tax basis intangibles     -4.90 %
Change in valuation allowance     -1.88 %
Other (Release of VA)     0.03 %
Effective tax rate benefit (expense)     0.03 %

 

Deferred tax assets and liabilities consist of the following:

 

    As of December 31,
    2017   2016
Deferred tax assets:                
Net operating loss carryforwards   $ 186,019     $ 111,245  
Tax credit carryforwards     30,143       4,470  
Stock compensation     58,536       —    
Intangible asset basis differences     730,647       419,539  
Gross deferred tax assets     1,005,345       535,254  
Valuation allowance     (1,000,987 )     (535,254 )
Total deferred tax assets, net of valuation allowance     4,358       0  
Deferred tax liabilities:                
Net deferred tax liability     —         —    
Net deferred taxes   $ 4,358     $ 0  

 

As of December 31, 2017, Company had federal net operating loss carryforwards of approximately $820,000 which will begin to expire in 2035 for federal tax purposes. At December 31, 2017, the Company had state net operating loss carryforwards of approximately $260,000 which will begin to expire in 2027. The net operating loss related deferred tax assets do not include excess tax benefits from employee stock option exercises.

 

As of December 31, 2017, Company had R&D credit carryforwards of approximately $19,000 and $14,000 available to reduce future taxable income, if any, for both federal and state income tax purposes, respectively. In addition, Company had $4,358 available to reduce future payroll taxes, if any, for Federal tax purposes. The federal R&D credit carryforwards expire beginning 2035 and Illinois R&D credit carryforwards expire beginning 2020.

 

The Tax Reform Act of 1986 limits the use of net operating carryforwards in certain situations where changes occur in the stock ownership of a company. In the event the Company has had a change in ownership, utilization of the carryforwards could be limited. The Company has not performed such a study.

 

On January 1, 2015, the Company adopted the provisions of FASB Accounting Standards Codification (ASC 740-10), "Accounting for Uncertainty in Income Taxes." ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. The cumulative effect of adopting ASC 740-10 resulted in no adjustment to retained earnings as of December 31, 2017. It is Company's policy to include penalties and interest expense related to income taxes as a component of other expense and interest expense, respectively, as necessary.

 

No liability related to uncertain tax positions is recorded on the financial statements related to uncertain tax positions. There are no unrecognized tax benefits as of December 31, 2017. The Company does not expect that uncertain tax benefits will materially change in the next 12 months.

 

Company files U.S. federal, California and Illinois State tax returns. Company is subject to California State minimum franchise taxes. All tax returns will remain open for examination by the federal and state taxing authorities for three and four years, respectively, from the date of utilization of any net operating loss carryforwards or R&D credits.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was enacted by the U.S. President. The Tax Cuts and Jobs Act of 2017 is effective as of January 1, 2018. In accordance with ASC guidance, deferred tax assets/liabilities in the Company’s financial statements are to be reflected at the tax rate in which the deferred tax assets/liabilities are anticipated to be realized. As a result, the Company changed the tax rate for tax provision purposes at December 31, 2017 from 34% to 21%. This resulted in a reduction of the value of the Company’s deferred tax asset balances in the amount of approximately $176,000.