INCOME TAXES

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

12.     INCOME TAXES

The income tax (benefit) provision on the statements of operations was comprised of the following for the years ended December 31:

	2023			2022
Current:
Federal	$	60,864		$	30,200
State		143,955			77,277
Current income tax provision		204,819			107,477
Deferred:
Federal		(4,002,660	)		–
State		(297,070	)		–
Deferred income tax (benefit) provision		(4,299,730	)		–
Income tax (benefit) provision	$	(4,094,911	)	$	107,477

For the years ended December 31, 2023 and 2022, the reconciliation of the federal statutory tax rate to the benefit rate for income taxes is as follows:

	2023			2022
Federal taxes at U.S. statutory rate		21.0	%		21.0	%
Stock-based compensation		4.9			10.8
IRC Section 162(m) limitation		4.4			2.9
Tax credits		(9.2)			(10.7)
Other permanent differences		0.8			1.4
State taxes		2.5			2.6
Change in state rate		(0.1)			(1.4)
Foreign taxes		(0.5)			–
Return-to-provision adjustments		(5.9)			(1.1)
Valuation allowance release		(194.1)			–
Change in valuation allowance		0.5			(6.1)
Change in carryovers and tax attributes		2.5			(9.9)
Effective tax rate		(173.2)	%		9.5	%

Deferred tax assets and liabilities are comprised of the following at December 31:

	2023			2022
Deferred tax assets:
Net operating loss carryforward	$	2,581,783		$	3,704,696
Operating lease obligation		783,978			861,800
Stock-based compensation		928,455			784,212
Tax credits		506,285			460,271
Intangible assets		361,210			–
Other		112,847			27,112
		5,274,558			5,838,091
Deferred tax liabilities:
Intangible assets		–			(196,871	)
Fixed assets		(104,609	)		(101,300	)
Right-of-use assets		(761,073	)		(852,961	)
		(865,682	)		(1,151,132	)
Less valuation allowance		(109,146	)		(4,686,959	)
Deferred tax asset, net	$	4,299,730		$	–

As of December 31, 2023, the Company has gross federal net operating loss carryforwards of $12.2 million, gross state net operating loss carryforwards of $4.0 million, and gross Mexico net operating loss carryforwards of $37 thousand. The Company’s federal net operating losses can be carried forward indefinitely. The Company’s state net operating losses have 15 year to indefinite carryforward periods and begin to expire in 2035. The Company’s Mexico net operating losses have 10 year carryforward periods and begin to expire in 2032.

Pursuant to Sections 382 and 383 of the Internal Revenue Code ("IRC"), federal and state tax laws impose significant restrictions on the utilization of net operating loss and other tax carryforwards in the event of a change in ownership of the Company. The Company does not expect IRC Sections 382 and 383 to significantly impact the utilization of its net operating losses and other tax carryforwards.

Deferred taxes arise from temporary differences in the recognition of certain expenses for tax and financial reporting purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2020, management determined that it’s more-likely-than-not that the Company’s net deferred tax assets would not be realized in the near future and placed a full valuation allowance (“VA”) on the deferred tax assets. During the year the Company reevaluated its VA position and determined that as a result of its three-year cumulative income position, utilization of its tax attributes for the previous two years, and forecasts of net profit in future years, a full release of its federal valuation allowance, and state valuation allowance, except for the valuation allowance related to its Connecticut net operating losses, is appropriate. In addition, to its federal and state valuation allowances, the Company established a valuation allowance against its Mexico net operating losses. The Company’s valuation allowance represents the amount of tax benefits that are likely to not be realized. The net change in the valuation allowance from December 31, 2022 was $4.6 million.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance as of December 31, 2021	$	365,365
Additions for current year		24,270
Additions for prior year		–
Subtractions for current year		(10,821	)
Balance as of December 31, 2022		378,814
Additions for current year		43,587
Additions for prior year		19,785
Subtractions for current year		–
Balance as of December 31, 2023	$	442,186

As of December 31, 2023 and 2022, the Company has no accrual for interest and penalties related to its unrecognized tax benefits. The balance of the unrecognized tax benefits as of December 31, 2023 are included in the deferred tax asset, net. Included in the balance of unrecognized tax benefits at December 31, 2023 is $442,000 of tax benefits that, if recognized would impact the effective tax rate. There are no positions for which it is reasonably possible that the uncertain tax benefit will significantly increase or decrease within 12 months. The Company files income tax returns in the United States and various state jurisdictions. Beginning in 2022, the Company also files income tax returns in Mexico. With the exception of tax attributes created in prior years that may potentially be adjusted, the federal statute of limitations remains open for the 2020 tax year to present, the state statutes of limitations remain open for the 2020 tax year to present, and the foreign statute of limitations remains open for the 2022 tax year to present.

Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law in 2020 and the subsequent extension of the CARES Act through September 30, 2021, the Company was eligible for a refundable employee retention credit subject to certain criteria. The Company has elected an accounting policy to recognize the government assistance when it is probable that the Company is eligible to receive the assistance and present the credit as a reduction of the related expense. During the years ended December 31, 2023 and 2022, the Company recorded $292,430 and $459,755, respectively, related to the employee retention credit included as a reduction of payroll expense within selling, general and administrative expenses in the consolidated statements of operations. As of December 31, 2023 and 2022 the Company has filed for refunds and recorded $1,129,164 and $1,296,489, respectively, in other receivables on the consolidated balance sheet.