Note 10 - Income Taxes

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 10. INCOME TAXES

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

	2021			2020
U.S.	$	(1,143,578	)	$	(2,537,388	)
Foreign		653,075			427,042
	$	(490,503	)	$	(2,110,346	)

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

	2021			2020
Current:
Federal	$	-		$	-
State		456			500
Foreign		336,568			250,711
Total current		337,024			251,211
Deferred:
Federal		-			-
State		-			-
Foreign		(130,767	)		(129,004	)
Total deferred		(130,767	)		(129,004	)
Income tax provision	$	206,257		$	122,207

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

	2021			2020
U.S. federal statutory tax rate		21.00	%		21.00	%
State tax benefit, net		(7.61	)%		7.52	%
Stock compensation		(4.15	)%		(5.16	)%
Officers compensation		(69.84	)%		-	%
Attributes expiration		(148.01	)%		(38.04	)%
Other		0.87	%		(0.85	)%
Interest and penalties		(14.27	)%		-	%
Valuation allowance		180.11	%		9.75	%
Effective income tax rate		(41.90	)%		(5.78	)%

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:

	2021			2020
Deferred taxes:
NOLs	$	9,122,325		$	9,456,605
Inventory and other reserves		24,128			24,128
Stock based compensation expense		296,657			853,239
Lease liability		16,125			25,151
Accruals		7,597			1,892
Other		96			96
Total deferred tax assets		9,466,928			10,361,111
Depreciation and amortization		(784,611	)		(908,380	)
Right-of-use assets		(16,054	)		(24,767	)
Valuation allowance		(9,504,575	)		(10,388,911	)
Net deferred tax liabilities	$	(838,312	)	$	(960,947	)

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 $884,000 and $206,000 in 2021 and 2020, respectively.

As of December 31, 2021, the Company had net operating loss carryforwards for federal income tax purposes of approximately $39,069,000. Of the total amount approximately $1,931,000 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 $37,138,000 expire beginning in the year 2022. As of December 31, 2021, the Company had net operating loss carryforwards for state income tax purposes of approximately $13,995,000 which expire beginning in the year 2030.

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, 2021 and 2020.

The income tax provision at December 31, 2021 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 2018. Generally, the tax years remain open for examination by the Federal authority under three-year statute of limitation; however, states generally keep their statute open for four years. In addition, the Company's tax years from inception are subject to limited examination by the United States and Massachusetts authorities due to the carry forward of unutilized net operating losses. ShipTime is subject to taxation in Canada and Ontario. 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, 2021, and 2020 the Company accrued $70,060 and $0 of interest and penalties related to foreign income taxes. 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. Due to the Company's history of net operating losses, the CARES Act is not expected to have a material impact on the Company's financial statements.

On December 27, 2020, the United States enacted the Consolidated Appropriations Act of 2021 (“CAA”). The CAA includes provisions extending certain CARES Act provisions and adds coronavirus relief, tax and health extenders. The Company will continue to evaluate the impact of the CAA and its impact on our financial statements in 2022 and beyond.