Annual report pursuant to Section 13 and 15(d)

PROVISION FOR INCOME TAXES

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PROVISION FOR INCOME TAXES
12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
PROVISION FOR INCOME TAXES
13. PROVISION FOR INCOME TAXES

 

During the years ended December 31, 2018 and 2017, no provision for income taxes was recorded as the Company generated net operating losses.

 

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:

 

    2018     2017  
Net operating loss carryforwards     23.9 %     23.9 %
State taxes, net of federal benefit     5.0 %     5.0 %
Federal research and development tax credit     0.3 %     0.3 %
Other     4.5 %     4.5 %
Change in deferred tax asset valuation allowance     (33.7 )     (33.7 )%
Effective income tax rate     0.0 %     0.0 %

 

Net deferred tax assets as of December 31, 2018 and 2017 consisted of the following:

 

    2018     2017  
Net operating loss carryforwards   $ 4,964,400     $ 4,175,600  
Tax credit carryforwards     112,200       103,100  
Non-qualified stock options     832,000       790,100  
Gross deferred tax assets     5,908,600       5,068,800  
Valuation allowance     (5,908,600 )     (5,068,800 )
Net deferred tax assets   $     $  

 

As of December 31, 2018, the Company had net operating loss carryforwards for federal and state income tax purposes of $20.8 million, which begin to expire in years 2035 and 2019, respectively. The Company also has estimated available research and development tax credit carryforwards for federal income tax purposes of $112,200, which begin to expire in year 2032.

 

Pursuant to the Internal Revenue Code Section 382 (“Section 382”), certain ownership changes may subject the net operating loss carryforwards (“carryforwards”) and research and development tax credit carryforwards to annual limitations which could reduce or defer the carryforwards. Section 382 imposes limitations on a corporation’s ability to utilize carryforwards if it experiences an ownership change. An ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. In the event of an ownership change, utilization of the carryforwards would be subject to an annual limitation under Section 382 determined by multiplying the value of its stock at the time of the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years. The imposition of this limitation on its ability to use the carryforwards to offset future taxable income could cause the Company to pay U.S. federal income taxes earlier than if such limitation were not in effect and could cause such carryforwards to expire unused, reducing or eliminating the benefit of such carryforwards. The Company has not completed a Section 382 study to determine if there have been one or more ownership changes due to the costs associated with such a study. Until a study is completed and the extent of the limitations, if any, is able to be determined, no additional amounts have been written off or are being presented as an uncertain tax position.

 

The Company provided a full valuation allowance for deferred tax assets generated since, based on the weight of available evidence; it is more likely than not that these benefits will not be realized. During the year ended December 31, 2018, the Company increased its valuation allowance by $839,800 due to the continued likelihood that realization of any future benefit from deductible temporary differences and net operating loss carryforwards cannot be sufficiently assured at December 31, 2018. Management reevaluates the positive and negative evidence at each reporting period.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that affects 2018 and future years, including a reduction in the U.S. federal corporate income tax rate to 21%, effective January 1, 2018. For certain deferred tax assets and deferred tax liabilities, we have recorded a provisional decrease of $3,321,700, with a corresponding adjustment to valuation allowance of $3,321,700 as of December 31, 2017.

 

The Company applies the provisions of ASC 740-10, Income Taxes. The Company has not recognized any liability for unrecognized tax benefits and does not believe there is any uncertainty with respect to its tax position. The Company’s policy with respect to unrecognized tax benefits is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

 

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. The Company’s tax years are still open under statute from 2013 to the present. Earlier years may be examined to the extent that tax credit or net operating loss carryforwards are used in future periods. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision.