Income Tax

12 Months Ended

Dec. 31, 2017

Income Tax Disclosure [Abstract]

Income Tax

Note 17 – Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. This U.S. tax reform contains several key provisions including the reduction of the U.S. federal corporate income tax rate to 21% effective January 1, 2018 as well as a variety of other changes including the limitation of the tax deductibility of interest expense, acceleration of expensing of certain business assets, and reductions in the amount of executive pay that could qualify as a tax deduction. As a result of the change in the corporate tax rate, the Company remeasured its deferred tax assets as of December 31, 2017 based on the rate at which they are expected to reverse in the future, and recorded a reduction in net deferred tax assets of $1,177,000 in the fourth quarter of 2017, which is fully offset by the corresponding reduction in the valuation allowance of the same amount. This remeasurement and interpretation of the new law is provisional subject to clarifications of the provisions of the new legislation and final calculations. Any future changes to the Company’s provisional estimated impact of the U.S. tax reform will be reflected as a change in estimate in the period in which the change in estimate is made in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the Tax Cuts and Jobs Act. SAB 118 allows for a measurement period of up to one year after the enactment date of the U.S. tax reform to finalize the recording of the related tax impacts.

For financial reporting purposes, the provision for income taxes consisted of the following components:

		2017		2016
Current taxes:
U.S. Federal	$	-	$	-
U.S. State		-		-
International		-		-
Current taxes		-		-
Deferred taxes:
U.S. Federal		-		-
U.S. State		-		-
International		-		-
Deferred taxes		-		-
Provision for income taxes, net	$	-	$	-

The differences between income taxes expected at the U.S. federal statutory income tax rate and the reported provision for income taxes are summarized as follows:

	2017			2016
Expected income tax (benefit) expense at the federal statutory rate	$	(1,535,000	)	$	(1,021,000	)
State taxes, net of federal benefits		(109,000	)		(92,000	)
Permanent differences		225,000			50,000
Other, net		(8,000	)		122,000
Change due to U.S. tax reform		1,177,000			-
Change in valuation allowance		250,000			941,000
Reported income tax (benefit) expense	$	-		$	-

The components of the net deferred tax assets as of December 31, 2017 and 2016 are as follows:

	2017			2016
Deferred tax assets:
Net operating losses	$	2,706,000		$	2,735,000
Equity compensation		274,000			-
Other deferred tax assets		263,000			297,000
Total deferred tax assets		3,243,000			3,032,000
Deferred tax liabilities:
Other deferred tax liabilities		-			(39,000	)
Total deferred tax liabilities		-			(39,000	)
Net deferred tax assets before valuation allowance		3,243,000			2,993,000
Less valuation allowance		(3,243,000	)		(2,993,000	)
Net deferred tax assets	$	-		$	-

The Company went through a determination of its 2016 deferred tax assets and has modified certain components of the 2016 deferred tax assets which are offset by a full valuation allowance. There was no material effect on the Company’s net deferred tax assets, liabilities or income tax expense as a result of these modifications.

As of December 31, 2017, the Company has U.S. federal and state NOLs of approximately $10,848,000, which will expire, if not utilized, in the years 2034 through 2037. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, use of the Company’s NOLs carryforwards may be limited in the event of cumulative changes in ownership of more than 50% within a three-year period.

The Company must assess the likelihood that its net deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not likely, the Company establishes a valuation allowance. Management’s judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. The Company recorded a full valuation allowance as of December 31, 2017 and 2016. Based on the available evidence, the Company believes it is more likely than not that it will not be able to utilize its net deferred tax assets in the foreseeable future. The Company intends to maintain valuation allowances until sufficient evidence exists to support the reversal of such valuation allowances. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s plans. Should the actual amounts differ from the Company’s estimates, the carrying value of the Company’s deferred tax assets could be materially impacted.

The Company is under examination, or may be subject to examination, by the IRS for the calendar year 2009 and thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to the Company’s taxes or the Company’s net operating losses with respect to years under examination as well as subsequent periods. The Company has filed its U.S. federal corporate income tax returns from 2009 through 2016, although the returns for the years 2009 through 2015 were not timely filed. Accordingly, the Company may be subject to penalties, including those described below, for non-compliance; however, the Company believes that it had no taxable income in the U.S. or in any foreign jurisdiction for the years 2009 through 2016. The Company has filed Colorado state tax returns for years 2014 through 2016. The Company intends to amend its U.S. and Colorado income tax returns for the years 2014 through 2016.

The Company recognizes in its consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of operating expense. The Company does not believe there are any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date. There were no penalties or interest liabilities accrued as of December 31, 2017 or 2016, nor were any penalties or interest costs included in expense for the years ended December 31, 2017 and 2016.

The Company has been penalized by the IRS for failure to file its Foreign Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, for the years 2011, 2012 and 2014 on a timely basis. The penalties and interest approximate $115,000. The Company’s request that the penalties be abated for reasonable cause was denied by the IRS. The Company has appealed the IRS’s denial based on statutory grounds under Revenue Procedure 92-70, which provides a summary filing procedure for filing Form 5471 with respect to dormant foreign corporations. Persons complying with this revenue procedure are deemed to satisfy their Form 5471 filing obligations with respect to dormant foreign corporations and are not subject to penalties related to the failure to timely file a complete Form 5471 and to timely furnish information requested thereon. The IRS has notified the Company that it needs additional time to respond to the Company’s appeal, which response is not expected until April 2018. The Company believes it has complied with the summary filing procedures for filing Form 5471 under Revenue Procedure 92-70 and the likelihood of abatement is high. However, there can be no assurance of any abatement until the IRS acts upon the appeal.