INCOME TAXES

12 Months Ended

Sep. 30, 2021

INCOME TAXES

NOTE 17 - INCOME TAXES

NOTE 17 – INCOME TAXES

The Company generated operating losses for the years ended September 30, 2021 and 2020 on which it has recognized a full valuation allowance. The Company accounts for is state franchise and minimum taxes as a component of its general and administrative expenses.

The following table presents the components of the provision for income taxes from continuing operations for the fiscal years ended September 30, 2021 and 2020:

	Years Ended September 30,
	2021			2020
Current
Federal	$	-		$	-
State		-			-
Total current		-			-
Deferred
Federal		(895,000	)		(1,345,300	)
State		-			-
Total deferred		(895,000	)		(1,345,300	)
Total provision	$	(895,000	)	$	(1,345,300	)

A reconciliation for the federal statutory income tax rate to the Company’s effective income tax rate is as follows:

	Years Ended September 30,
	2021			2020
Federal statutory income tax rate		21.0	%		21.0	%
State income taxes, net of federal benefit		0.8			(1.1	)
Permanent differences		1.5			3.1
Contingent derivative expense		(5.8	)		55.3
Limitation on net operating losses		-			21.3
Change in valuation allowance		(13.8	)		(0.9	)
Benefit from (provision for) income taxes		3.7	%		(11.9	)%

Significant components of the Company’s deferred income taxes are shown below:

	Years Ended September 30,
	2021			2020
Deferred tax assets:
Net operating loss carryforwards	$	9,160,000		$	5,914,000
ROU - Liability		1,342,000			1,594,000
Capital loss carryforward		716,000			616,000
Allowance for doubtful accounts		1,000			5,000
Stock compensation		1,107,000			691,000
Investments		444,000			685,000
Accrued expenses		165,000			370,000
Inventory reserve		16,000			20,000
Capitalized expenses		52,000			60,000
Charitable contributions		43,000			42,000
Total deferred tax assets		13,046,000			9,997,000
Deferred tax liabilities:
Prepaid Expenses		(219,000	)		(434,000	)
Management fees		-			-
ROU - Assets		(1,254,000	)		(1,520,000	)
Intangibles		(4,481,000	)		(4,650,000	)
Fixed assets		(162,000	)		(709,000	)
Total deferred tax liabilities		(6,116,000	)		(7,313,000	)
Net deferred tax assets		6,930,000			2,684,000
Valuation allowance		(6,930,000	)		(3,579,000	)
Net deferred tax liability	$	-		$	(895,000	)

Net deferred tax liability

The Company has established a valuation allowance against net deferred tax assets due to the uncertainty that such assets will be realized. The deferred tax liabilities that result from indefinite life intangibles cannot be offset by deferred tax assets. The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred tax assets will be realizable, the valuation allowance will be reduced. Under Internal Revenue Code (IRC) Section 382, the use of net operating loss (“NOL”) carryforwards may be limited if a change in ownership of a company occurs. During the year ending September 30, 2018, the company determined that a change of ownership under IRC Section 382 had occurred during the years ending September 30, 2017 and 2015. As a result of these ownership changes, the pre-ownership change NOL carryforwards would be limited and approximately $2.1 million of such NOLs will expire before being utilized. Therefore, at September 30, 2018 the Company reduced the deferred tax asset and related valuation allowance associated with these NOLs by approximately $0.5 million due to IRC Section 382.

During the year ended September 30, 2020, the Company determined that a change in ownership under IRC had occurred during the year ending September 30, 2019. As a result of these ownership changes, the pre-ownership change NOL carryforwards would be limited and approximately $11.4 million of such NOLs will expire before being utilized. Therefore, at September 30, 2020 the Company reduced the deferred tax asset and related valuation allowance associated with these NOLs by approximately $2.7 million due to IRC Section 382.

The total valuation allowance increased by $3,351,000 and decreased by $97,000 as of September 30, 2021 and 2020, respectively.

At September 30, 2021, the Company has utilizable NOL carryforwards of approximately $40.7 million which for federal purposes will carryforward indefinitely.

The Company accounts for its state franchise and minimum taxes as a component of its general and administrative expenses.

The Company files income tax returns in the United States, and various state jurisdictions. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. At September 30, 2020 and 2019, there are no unrecognized tax benefits, and there are no significant accruals for interest related to unrecognized tax benefits or tax penalties.

The CARES Act, which was enacted on March 27, 2020, includes several significant provisions for corporations, including the usage of net operating losses and payroll benefits. The Company analyzed the provisions of the CARES Act and determined there was no effect on its provision for the year ended September 30, 2020 and will continue to evaluate the impact, if any, the CARES Act may have on the Company’s consolidated financial statements and disclosures.

On December 20, 2018, the Company completed a two-step merger with Cure Based Development (see Note 2). As a result of the Mergers the Company established as part of the purchase price allocation a net deferred tax liability related to the book-tax basis of certain assets and liabilities of approximately $4.6 million.

The Company has had a valuation allowance against the net deferred tax assets, with the exception of the deferred tax liabilities that result from indefinite-life intangibles ("naked credits"). At September 30, 2020, the company had recorded $895,000 of deferred liabilities related to the naked credits. During the year ended September 30, 2021, the Company generated enough indefinite life deferred tax assets from post-merger NOLs to reduce the naked credits to zero during the year and continue to record a valuation allowance on remaining DTAs. As a result, the Company decreased the deferred tax liability from $895,000 to $0 and a recorded a deferred tax benefit of $130,000 for the quarter and $895,000 for the year ended September 30, 2021 related to the reduction of the naked credits.