Note 11 - Income Taxes

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 11. INCOME TAXES

The Company’s income (loss) before income tax (benefit) provision includes the following components for the years ended December 31:

	2022			2021
U.S.	$	(77,704	)	$	(1,143,578	)
Foreign		273,359			653,075
	$	195,655		$	(490,503	)

The Company is subject to taxation in the U.S., Canada, and Massachusetts. The (benefit) provision for income taxes for the years ended December 31 are summarized below:

	2022			2021
Current:
Federal	$	-		$	-
State		1,356			456
Foreign		(364,879	)		336,568
Total current		(363,523	)		337,024
Deferred:
Federal		-			-
State		-			-
Foreign		(92,968	)		(130,767	)
Total deferred		(92,968	)		(130,767	)
Income tax (benefit) provision	$	(456,491	)	$	206,257

A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s income (loss) before income tax (benefit) provision to the income tax (benefit) provision is as follows for the years ended December 31:

	2022			2021
U.S. federal statutory tax rate		21.00	%		21.00	%
State tax benefit, net		5.62	%		(7.61	)%
Stock compensation		18.56	%		(4.15	)%
Officers compensation		-	%		(69.84	)%
Attributes expiration		17.06	%		(148.01	)%
Return to Provision		(257.75	)%		8.73	%
Other		30.65	%		(7.86	)%
NOL Adjustment		295.28	%		-	%
Unrecognized tax benefit		361.72	%		-	%
GILTI		156.50	%		-	%
Interest and penalties		-	%		(14.27	)%
Valuation allowance		(882.41	)%		180.11	%
Effective income tax rate		(233.77	)%		(41.90	)%

Deferred tax assets and liabilities 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 net deferred tax liabilities are as follows as of December 31:

	2022			2021
Deferred taxes:
NOLs	$	7,495,858		$	9,122,325
Inventory and other reserves		31,340			24,128
Stock based compensation expense		196,700			296,657
Lease liability		5,883			16,125
Accruals		14,695			7,597
Other		96			96
Total deferred tax assets		7,744,572			9,466,928
Depreciation and amortization		(668,359	)		(784,611	)
Right-of-use assets		(6,112	)		(16,054	)
Valuation allowance		(7,778,053	)		(9,504,575	)
Net deferred tax liabilities	$	(707,952	)	$	(838,312	)

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The reduction in the valuation allowance is approximately $1,727,000 and $884,000 in 2022 and 2021, respectively.

As of December 31, 2022, the Company had net operating loss carryforwards for federal income tax purposes of approximately $32,917,000.  Of the total amount approximately $902,000 were generated after January 1, 2018, and therefore will not expire but can only be used to offset 80 percent of future taxable income.  The remaining amount of approximately $32,015,000 expires beginning in the year 2023.  As of December 31, 2022, the Company had net operating loss carryforwards for state income tax purposes of approximately $9,229,000 which expire beginning in the year 2031. As of December 31, 2022, the Company also had Canada net operating loss carryforwards of $1,670,000 which expire beginning in the year 2039.

Utilization of the net operating losses may be subject to substantial annual limitation due to federal and state ownership change limitation provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating losses and credits before their utilization. The Company has not performed an analysis to determine the limitation of the net operating loss carryforwards.

A valuation allowance of 100% has been established in respect of the deferred income tax assets due to the uncertainty of the Company’s utilization of such deferred tax assets for the U.S. federal and state on each of the Company’s consolidated balance sheets at December 31, 2022 and 2021.

The income tax provision at December 31, 2022 reflects a full accounting of tax filings under ASC Subtopic 740-10. Paid, Inc. is subject to U.S. federal and Massachusetts state tax. With limited exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2019. Generally, the tax years remain open for examination by the federal and Massachusetts authorities under three-year statute of limitation. In addition, the Company's tax years starting 2003 and 2011 are subject to limited examination by the United States and Massachusetts authorities, respectively, due to the carry forward of unutilized net operating losses. ShipTime is subject to taxation in Canada and Ontario. The foreign subsidiary is generally subject to examination for four years following the later of: (1) the year in which the tax obligation originated or (2) the year the tax return is filed.  ShipTime is not currently under examination by the local tax authority.  The Company recognizes interest and penalties related with income taxes, as estimated or incurred, as a part of the income tax provision.  As of December 31, 2022, and 2021 the Company accrued $16,064 and $70,060 of interest and penalties related to foreign income taxes. 

The Tax Cuts and Jobs Act requires taxpayers to capitalize and amortize research and development (“R&D”) expenditures under Section 174 for tax years beginning after December 31, 2021.  This rule became effective for the Company during the year but did not result in the capitalization of R&D costs.  This rule is also in effect for its foreign subsidiary and the calculation of global intangible low-tax income (“GILTI”), of which approximately $900,000 of R&D costs related with internally developed software have been capitalized.  The Company will amortize these costs for tax purposes over five years if the R&D was performed in the U.S. and over 15 years if the R&D was performed outside the U.S.

The evaluation of uncertainty in a tax position is a two-step process. The first step involves recognition. The Company determines whether it's more likely than not that a tax position will be sustained upon tax examination including any resolution of any related appeals or litigation, based on only the technical merits of the position. The technical merits of a tax position are derived from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the consolidated financial statements. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the consolidated financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate resolution with a taxing authority. Uncertain tax positions are reviewed on an ongoing basis and are adjusted after considering facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitation.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits at the beginning and end of the years ended December 31, 2022 and 2021:

	2022		2021
Gross unrecognized tax benefits at the beginning of the year	$	-	$	-
Increases related to current year positions		-		-
Increases (decreases) related to prior year positions		691,675		-
Expiration of unrecognized tax benefits		-		-
Gross unrecognized tax benefits at the end of the year	$	691,675	$	-

The amount of unrecognized tax benefits that would impact the Company’s effective tax rate, if recognized, is $707,738 (including estimated penalties and interest).  The amount of the increase during 2022 is primarily related to transfer pricing policy changes applicable to prior years that were implemented during 2022. The Company does not believe its unrecognized tax benefits will change during the next twelve months.