Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 11. Income Taxes

Prior to the Company’s initial public offering in October 2015, the earnings of the Predecessor, which was a limited liability company taxed as a partnership, were taxable to its members. In connection with the contribution of membership interests to the Company (a C-Corporation formed in 2015), the net income or loss of the Company after the initial public offering is taxable to the Company and reflected in the accompanying consolidated financial statements.

The Company performs an evaluation of the realizability of its deferred tax assets on a quarterly basis. The Company considers all positive and negative evidence available in determining the potential of realizing deferred tax assets, including the scheduled reversal of temporary differences, recent and projected future taxable income and prudent and feasible tax planning strategies. The estimates and assumptions used by the Company in computing the income taxes reflected in the accompanying consolidated financial statements could differ from the actual results reflected in the income tax returns filed during the subsequent year. Adjustments are recorded based on filed returns when finalized or the related adjustments are identified.

Under ASC 740-10-30-5, Income Taxes, deferred tax assets should be reduced by a valuation allowance if, based on the weight of available evidence, it is more-likely-than-not (i.e., a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The Company considers all positive and negative evidence available in determining the potential realization of deferred tax assets including, primarily, the recent history of taxable earnings or losses. Based on operating losses reported by the Company during 2022, 2020 and 2019, the Company concluded there was not sufficient positive evidence to overcome this recent operating history. As a result, the Company believed that a valuation allowance was necessary based on the more-likely-than-not threshold noted above. The Company has recorded a valuation allowance of approximately $8.5 million as of December 31, 2022 and $3.2 million as of December 31, 2021.

Significant components of the tax expense (benefit) recognized in the accompanying Consolidated Statements of Operations for the years ended December 31, 2022 and December 31, 2021 are as follows:

	Year Ended December 31,
	2022			2021
Current tax benefit
Federal	$	1,196,415		$	290,238
State		241,651			35,940
Total current tax expense		1,438,066			326,178
Deferred tax expense - Federal		(4,181,816	)		1,126,450
Deferred tax expense - State		(1,041,813	)		-
Valuation allowance (expense)		5,223,628			(1,126,450	)
Income tax expense	$	1,438,066		$	326,178

The reconciliation of the income tax computed at the combined federal and state statutory rate of (5.4%) for the year ended December 31, 2022 and 6.1% for the year ended December 31, 2021 to the income tax benefit is as follows:

	Year Ended December 31,						Year Ended December 31,
	2022			2022			2021			2021
Benefit on net loss	$	(5,553,496	)		21.0	%	$	1,445,949			27.1	%
Stock based compensation		3,222,271			-12.2	%		-			0.0	%
Section 382 adjustment		(786,165	)		3.0	%		-
Nondeductible expenses		-			-			6,678			0.1	%
Valuation allowance (expense)		5,223,627			-19.8	%		(1,126,449	)		-21.1	%
State income taxes, net of federal benefit		(470,684	)		1.8	%		-			0.0	%
Change in tax rate		(197,487	)		0.7	%		-			-
Tax expense (benefit)/effective rate	$	1,438,066			-5.4	%	$	326,178			6.1	%

The significant components of the Company’s deferred tax liabilities and assets as of December 31, 2022 and December 31, 2021 are as follows:

	As of December 31,
	2022			2021
Deferred tax liabilities:
Depreciation	$	538,866		$	-
Right to use assets		67,052			-
Deferred vendor stock compensation		-			261,323
Total deferred tax liabilities		605,918			261,323
Deferred tax assets:
Loss carryforwards - Federal		5,922,644			2,101,401
Loss carryforwards - State		1,195,806			-
Stock option expense		490,892			669,959
Amortization		395,272			503,607
Allowance for credit losses		14,555			16,539
Right to use liability		68,203			-
Unrealized loss on securities		986,639			216,284
Charitable contributions		2,000			-
Total deferred tax asset		9,076,011			3,507,790
Valuation allowance		(8,470,093	)		(3,246,467	)
Net deferred tax asset	$	-		$	-

As a result of various equity transactions prior to the incorporation, the former members of the Predecessor recognized taxable gains associated with redemption consideration and/or deficit capital accounts totaling approximately $5.25 million. In accordance with ASC 740-20-45-11, the Company accounted for the tax effect of the step up in income tax basis related to these transactions with or among shareholders and recognized a deferred tax asset and corresponding increase in equity of approximately $1.91 million. Federal net operating loss carryforwards of approximately $512,000 related to 2015, $3,959,000 related to 2016, $2,977,000 related to 2017, $1,408,000 related to 2018, $1,950,000 related to 2019, and $5,070,000 related to 2020 will expire in 2035, 2036, 2037, 2038, respectively and net operating loss generated after January 1, 2018 will not expire. The Company's federal and state tax returns for the 2018 through 2021 tax years generally remain subject to examination by U.S. and various state authorities.

Pursuant to IRC §382 of the Internal Revenue Code, the utilization of net operating loss carryforwards and tax credits may be limited as a result of a cumulative change in stock ownership of more than 50% over a three year period. The Company underwent such a change and consequently, the utilization of a portion of the net operating loss carryforwards is subject to certain limitations.