NOTE 8 — INCOME TAXES:

The components of (loss) before income taxes consisted of the following:

	Year Ending December 31,
	2019			2018
United States operations	$	(12,504,780	)	$	(7,137,428	)
International operations		(1,670,641	)		(795,742	)
(Loss) before taxes	$	(14,175,421	)	$	(7,933,170	)

The (benefit from) provision for income taxes for the years ended December 31, 2019 and 2018 is comprised of the following:

	Year Ending December 31,
	2019			2018
Current
Federal	$	–		$	–
State		9,790			10,911
Foreign		3,633			–
Total current (benefit) provision		13,423			10,911

Deferred
Federal		–			–
State		–			–
Foreign		(513,715	)		(78,432	)
Total deferred (benefit) provision		(513,715	)		(78,432	)

Total (benefit) provision	$	(500,292	)	$	(67,521	)

A reconciliation of the Federal statutory rate to the effective rate applicable to loss before income taxes is as follows:

	Year Ending December 31,
	2019			2018
Federal income tax at statutory rates		21.00	%		21.00	%
State income taxes, net of federal benefit		(0.05	)%		(0.10	)%
Nondeductible expenses		(1.00	)%		(1.58	)%
Foreign rate differential		0.45	%		0.36	%
Change in valuation allowance		(17.51	)%		(18.44	)%
Other		.64	%		(0.39	)%
Income tax benefit		3.53	%		0.85	%

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance allows companies to make an accounting policy election to either (1) account for GILTI as a component of tax expense in the period in which they are subject to the rules (the period cost method), or (ii) account for GILTI in the Company’s measurement of deferred taxes (the deferred method). After completing the analysis of the GILTI provisions, the Company elected to account for GILTI using the period cost method.

The Company had an ownership change as described in Internal Revenue Code Sec. 382 during 2004 (“2004 change”). As a result, the Company’s net operating losses prior to the 2004 change of $5,832,516 were subject to an annual limitation of $150,608 and for the first five (5) years are entitled to a BIG (Built-In-Gains) of $488,207 per year. These net operating losses expire in 2020 through 2024.

The Company had a second ownership change during 2006 (“2006 change”). The net operating losses incurred between the 2004 change and the 2006 change of $8,586,861 were subject to an annual limitation of $1,111,831 and for the first five (5) years are entitled to a BIG of $1,756,842 per year. These net operating losses expire in 2024 through 2026.

After applying the above limitations, at December 31, 2019, the Company has post-change net operating loss carry-forwards of approximately $27,235,494 which expire between 2020 and 2037 and $16,242,683 which do not expire. In addition the Company has research and development tax credit carryforwards of approximately $1,679,495 for the year ended December 31, 2019, which expire between 2020 and 2036.

The Company has state net operating loss carryforwards of approximately $1,912,798 which generally expire between 2035 and 2039. The Company has foreign net operating loss carryforwards of approximately $3,355,645 which generally expire between 2025 and 2026.

	2019			2018
Inventory reserves	$	196,193		$	204,206
Accrued expenses		105,323			175,168
Net operating loss carry-forwards		10,079,317			7,122,576
Research and development credit		1,679,495			1,696,870
Stock-based compensation		581,053			215,797
Lease obligations		1,646,584			–
Depreciation		44,993			139,362
Total deferred tax assets		14,332,958			9,553,979
Right-of-use assets		(1,538,129	)		–
Intangibles		(921,807	)		(968,849	)
Total deferred tax liabilities		(2,459,936	)		(968,849	)

Net deferred tax assets before valuation allowance		11,873,022			8,585,130
Less valuation allowances		(12,339,348	)		(9,477,438	)
Net noncurrent deferred tax liabilities	$	(466,326	)	$	(892,308	)

The Company does not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries as its present intention is to reinvest the unremitted earnings in the Company’s foreign operations. At December 31, 2019 there were no unremitted earnings of foreign subsidiaries.

Interest and penalties, if any, related to income tax liabilities are included in income tax expense. As of December 31, 2019, the Company does not have a liability for uncertain tax positions.

The Company files Federal and state income tax returns, Chembio Germany files in Germany, Chembio Brazil files in Brazil and Chembio Malaysia files in Malaysia and has been on tax holiday which expired on December 31, 2018. With few exceptions, tax years for fiscal 2016 through 2019 are open and potentially subject to examination by federal, state and foreign taxing authorities.