INCOME TAXES

12 Months Ended

Dec. 31, 2020

INCOME TAXES [Abstract]

INCOME TAXES

NOTE 8 — INCOME TAXES:

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

	Year Ending December 31,
	2020			2019
United States operations	$	(23,384,133	)	$	(12,504,780	)
International operations		(2,593,989	)		(1,670,641	)
(Loss) before taxes	$	(25,978,122	)	$	(14,175,421	)

The (benefit from) provision for income taxes for the years ended December 31, 2020 and 2019 is comprised of the following:

	Year Ending December 31,
	2020			2019
Current
Federal	$	(66,906	)	$	-
State		6,497			9,790
Foreign		-			3,633
Total current (benefit) provision		(60,409	)		13,423
Deferred
Federal		-			-
State		-			-
Foreign		(396,385	)		(513,715	)
Total deferred (benefit) provision		(396,385	)		(513,715	)
Total (benefit) provision	$	(456,794	)	$	(500,292	)

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

	Year Ending December 31,
	2020			2019
Federal income tax at statutory rates		21.00	%		21.00	%
State income taxes, net of federal benefit		(0.02	)%		(0.05	)%
Nondeductible expenses		(0.19	)%		(1.00	)%
Foreign rate differential		0.47	%		0.45	%
Change in valuation allowance		(19.37	)%		(17.51	)%
Other		(0.13	)%		0.64	%
Income tax benefit		1.76	%		3.53	%

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, 2020, the Company has post-change net operating loss carry-forwards of approximately $27,001,828 which expire between 2021 and 2037 and $35,840,768 which do not expire. In addition, the Company has research and development tax credit carryforwards of approximately $1,696,870 for the year ended December 31, 2020, which expire between 2021 and 2036.

The Company has state net operating loss carryforwards of approximately $3,511,090 which generally expire between 2035 and 2039. The Company has foreign net operating loss carryforwards of approximately $5,598,852 which generally expire between 2025 and 2026.

	2020			2019
Inventory reserves	$	461,709		$	196,193
Accrued expenses		130,291			105,323
Net operating loss carry-forwards		14,844,798			10,079,317
Research and development credit		1,696,870			1,679,495
Stock-based compensation		398,900			581,053
		602,187			-
Lease obligations		1,583,814			1,646,584
Depreciation		-			44,993
Total deferred tax assets		19,718,569			14,332,958
Right-of-use assets		(1,340,914	)		(1,538,129	)
Depreciation		(254,366	)		-
Intangibles		(821,363	)		(921,807	)
Total deferred tax liabilities		(2,416,643	)		(2,459,936	)
Net deferred tax assets before valuation allowance		17,301,926			11,873,022
Less valuation allowances		(17,371,867	)		(12,339,348	)
Net noncurrent deferred tax liabilities	$	(69,941	)	$	(466,326	)

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, 2020 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, 2020, 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 2017 through 2020 are open and potentially subject to examination by federal, state and foreign taxing authorities.

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 tax years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years.  In addition to the NOL changes, the CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. This modification did not effect the Company’s interest expense limitation. Overall the CARES ACT did not have a significant impact on the Company since it maintains a full valuation allowance.