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Income Taxes
3 Months Ended
Mar. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes

Note 10. Income Taxes

The Company is subject to U.S. federal income taxes, in addition to state and local income taxes.

The components of income tax expense (benefit) are as follows:

 

 

For the

Three Months Ended March 31, 2021

 

 

For the

Three Months Ended March 31, 2020

 

Current:

 

 

 

 

 

 

 

 

Federal

 

$

-

 

 

$

-

 

State

 

 

4,360

 

 

 

4,734

 

Income tax expense

 

 

4,360

 

 

 

4,734

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

 

-

 

 

 

-

 

State

 

 

-

 

 

 

-

 

Income tax benefit

 

 

-

 

 

 

-

 

Total income tax expense (benefit), net

 

$

4,360

 

 

$

4,734

 

Significant components of the Company's deferred income tax assets and liabilities are as follows:

 

 

March 31, 2021

 

 

December 31, 2020

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss carryover

 

$

881,171

 

 

$

786,751

 

Accounts receivable

 

 

129,942

 

 

 

165,431

 

Compensation

 

 

505,124

 

 

 

480,774

 

Inventory

 

 

583,241

 

 

 

588,966

 

Other

 

 

19,871

 

 

 

5,083

 

Total deferred tax assets

 

 

2,119,349

 

 

 

2,027,005

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Intangibles

 

 

(204,742

)

 

 

(206,723

)

Property and equipment

 

 

(2,862

)

 

 

(3,736

)

Total deferred tax liabilities

 

 

(207,604

)

 

 

(210,459

)

Deferred tax assets, net

 

 

1,911,745

 

 

 

1,816,546

 

Valuation allowance:

 

 

 

 

 

 

 

 

    Beginning of year

 

 

(1,816,546

)

 

 

(1,529,584

)

   Increase during the year

 

 

(95,199

)

 

 

(286,962

)

      Ending balance

 

 

(1,911,745

)

 

 

(1,816,546

)

 

 

 

 

 

 

 

 

 

Net deferred tax asset

 

$

-

 

 

$

-

 

 

A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized.  The Company recorded a valuation allowance totaling $95,199 for the three months ended March 31, 2021 due to the uncertainty of realization.  Management believes that based upon the history of losses that the Company has incurred to date and its projection of future taxable operating income for the foreseeable future, it is more likely than not that the Company will not be able to realize the tax benefit associated with deferred tax assets. The valuation allowance established as of March 31, 2021 was $1,911,745.

At March 31, 2021, the Company estimates it has approximately $7,160,019 of net operating loss carryforwards, of which $3,863,299 will expire in 2021 through 2037. Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”), a corporation that undergoes an “ownership change”, as defined therein, is subject to limitation on its use of pre-change tax attributes carryforward to offset future taxable income. The Company completed a 382 study and determined that there were changes in ownership in prior years which limited the NOL from 2013 and earlier, and 2014 through 2016. The 382 limitation mathematically precludes the use of approximately $2,963,968 of net operating loss carryforwards. Therefore, the deferred net operating loss carryover asset excludes the portion of net operating losses that are mathematically excluded from future use by the Company.

The Company’s management believes its tax positions will more likely than not be upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax positions. As of March 31, 2021, all the tax years remained open to examination for three years from the tax year in which net operating losses are utilized. The Company was not subject to examination by any income taxing authority as of March 31, 2021.

A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

Expected U.S. federal incomes as statutory rate

 

21.0%

 

 

21.0%

 

Permanent differences

 

0.0%

 

 

0.0%

 

Other

 

0.0%

 

 

0.0%

 

State and local income taxes, net of federal benefit

 

-0.8%

 

 

-0.3%

 

Change in deferred tax asset valuation allowance

 

-21.2%

 

 

-21.1%

 

Effective tax rate

 

-1.0%

 

 

-0.4%

 

Our effective income tax rates for the three months ended March 31, 2021 and 2020 were (1.0%) and (0.4%), respectively.   The decrease from the prior period is driven by the valuation allowance allocated to the deferred tax asset for the current period.