6. Income Taxes
|12 Months Ended|
Dec. 31, 2020
|Income Tax Disclosure [Abstract]|
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. The valuation allowance increased by approximately $2,652,000 and $877,000 during the years ended December 31, 2020 and 2019, respectively.
The provision for income taxes for December 31, 2020 and 2019 consists of the following:
*Total provision of foreign taxes is recorded in general and administrative expenses on the Company’s consolidated statements of operations and comprehensive loss.
The difference between the effective tax rate and the U.S. federal tax rate is as follows:
Deferred tax assets and liabilities consist of the following:
As of December 31, 2020, Company had total federal net operating loss carryforwards of approximately $6,835,000, which will begin to expire in 2035. Losses generated after 2017 will be carried forward indefinitely. At December 31, 2020, the Company had state net operating loss carryforwards of approximately $6,879,000 which will begin to expire in 2027.
As of December 31, 2020, the Company had federal and state R&D credits of $138,000 and $116,000, respectively. The federal credits expire beginning after the year 2035 and the state credits expire beginning after the year 2020. Federal R&D credits from 2016 to 2019 were used to offset future payroll taxes.
The Tax Reform Act of 1986 limits the use of net operating carryforwards and R&D credits 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 and R&D credits could be limited. The Company has not performed a net operating loss or R&D credit utilization study to date.
On January 1, 2015, the Company adopted the provisions of 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 are 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, 2020. It is Company's policy to include penalties and interest expense related to income taxes as an income tax expense.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Included in the balance of uncertain tax benefits at December 31, 2020 are $63,282 of tax benefits that, if recognized, would not impact the effective tax rate as it would be offset by the reversal of related deferred tax assets which are subject to a full valuation allowance. The Company anticipates that no material amounts of unrecognized tax benefits will be settled within 12 months of the reporting date. As of December 31, 2020, the Company had no accrued interest or penalties recorded related to uncertain tax positions.
The 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. In addition, due to the operations in certain foreign countries, the Company became subject to local tax laws of such countries. Nonetheless, as of December 31, 2020, due to the insignificant expenditures in such countries, there was no material tax effect to the Company’s 2020 consolidated financial statements.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law and GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date. The CARES Act includes changes to the tax provisions that benefits business entities, and makes certain technical corrections to the 2017 Tax Cuts and Jobs Act. The tax relief measures for businesses in the CARES Act include a five-year net operating loss carryback for certain net operating losses, suspension of the annual deduction limitation of 80% of taxable income for certain net operating losses, changes in the deductibility of interest, acceleration of alternative minimum tax credit refunds, payroll tax relief, and a technical correction to allow accelerated deductions for qualified improvement property. The CARES Act also provides other non-tax benefits to assist those impacted by the pandemic. The Company evaluated the impact of the CARES Act and determined that there is no material impact to the income tax provision for the year ended December 31, 2020.
The Consolidated Appropriation Act (“CAA”) of 2021 was signed into law by the President on December 27, 2020, containing the most recent COVID-19 relief provisions as well as many tax provisions including renewals of several popular tax extenders. The Company evaluated the impact of the CAA and determined that there is no material impact to the income tax provision for the year ended December 31, 2020.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef