NOTE 10.

INCOME TAXES

The significant components of the Company’s deferred tax assets and liabilities at December 31, 2014 and 2013 are as follows:


	2014			2013
Federal net operating losses	$	596,000		$	33,000
State net operating losses		91,000			5,000
Stock options		231,000			—
Litigation settlement		718,000			—

*Total gross deferred tax assets*		1,636,000			38,000


Less valuation allowance		(1,636,000	)		(38,000	)

*Net deferred tax assets*	$	—		$	—

At December 31, 2014 and 2013, the Company has recorded a full valuation allowance against its net deferred tax assets of approximately $1,636,000 and $38,000 respectively. The change in the valuation allowance during the year ended 2014 was approximately $1,598,000 and a full valuation allowance has been recorded since, in the judgement of management, these assets are not more likely than not to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences and carryforwards become deductible or are utilized.

As of December 31, 2014, the Company has approximately $1,754,000 and $1,547,000 of federal and state net operating loss carryforwards, respectively. The federal net operating loss carryforwards begin to expire in 2030. State net operating loss carryforwards begin to expire in 2034. Due to the change in ownership provisions of the Internal Revenue Code, the availability of the Company’s net operating loss carry forwards could be subject to annual limitations against taxable income in future periods, which could substantially limit the eventual utilization of such carry forwards. The Company has not analyzed the historical or potential impact of its equity financings on beneficial ownership and therefore no determination has been made whether the net operating loss carry forward is subject to any Internal Revenue Code Section 382 limitation. To the extent there is a limitation, there could be a substantial reduction in the deferred tax asset with an offsetting reduction in the valuation allowance.

The income tax benefit for the years ended December 31, 2014 and 2013 differed from the amounts computed by applying the U.S. federal income tax rate of 34% as follows:


	2014			2013

Federal statutory rate		34.00	%		34.00	%
Permanent differences		(0.42	)%		—	%
State taxes		5.78	%		5.00	%
Valuation allowance		(41.12	)%		(39.00	)%
Other - deferred only		1.77	%		—	%


Effective tax rate		—	%		—	%

The Company applies the elements of FASB ASC 740-10, Income Taxes – Overall, regarding accounting for uncertainty in income taxes. This clarifies the accounting for uncertainty in income taxes recognized in financial statements and required impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. As of December 31, 2014 the Company did not have any unrecognized tax benefits and has not accrued any interest or penalties through 2014. The Company does not expect to have any unrecognized tax benefits within the next twelve months. The Company’s policy is to recognize interest and penalties related to tax matters within the income tax provision. Tax years beginning in 2011 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.