Provision for Income Taxes

9 Months Ended

Sep. 30, 2018

7.	Provision for Income Taxes

Income taxes consist of the following:

	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018
Current income taxes
Federal	$	300,000		$	847,000
State		58,000			61,000
		358,000			908,000

Deferred tax benefit
Federal		(423,000	)		(423,000	)
State		(970,000	)		(970,000	)
		(1,393,000	)		(1,393,000	)

Total (Benefit) from income taxes	$	(1,035,000	)	$	(485,000	)

For interim financial reporting, we estimate the effective tax rate for tax jurisdictions which is applied to the year to date income before taxes. For the three months and nine months ended September 30, 2018, our effective tax rate was -50% and -8%, respectively, due to the reversal of the valuation allowance for the deferred tax asset.

As of September 30, 2018, we adjusted a portion of our valuation allowance against our deferred tax asset arising in U.S. federal and state jurisdictions as the realization of such asset is considered to be more likely than not realizable at this time. As a result, we recognized a net deferred tax asset amounting to approximately $1,393,000 as of September 30, 2018, and our income tax expense decreased $1,393,000 for the three months and nine months ended September 30, 2018. A deferred tax asset of approximately $6,619,000 is reported net of a valuation allowance of $5,226,000.

In a future period, the Company’s assessment of the realizability of deferred tax assets and therefore the appropriateness of the valuation allowance could change based on an assessment of all available evidence, both positive and negative, in that future period. If the Company’s conclusion about the realizability of its deferred tax assets and therefore the appropriateness of the valuation allowance changes in a future period, the Company could record an additional substantial tax benefit or expense when that occurs.

As of September 30, 2018, the Company had federal and state net operating loss carryforwards of $22,657,000 and $15,834,000, respectively, which expire between 2029 and 2036. Utilization of the Company’s net operating loss carryforwards for federal tax purposes and certain state jurisdictions are subject to annual limitations of approximately $900,000 per year under Internal Revenue Code Section 382 due to a previous change in ownership.

In regard to the effect of the Tax Cuts and Jobs Act, we determined that the primary change applicable to us will result in lower income tax expense in 2018 as well as subsequent years. The statutory federal income rates in effect of 34% as of December 31, 2017 and 21% in subsequent periods were utilized to calculate the income tax provision and this provision will result in lower income tax expense in 2018 as well as subsequent years. In addition, the change in federal income tax rates affected the valuation of our gross deferred tax asset; however, there was no material impact to the financials as of December 31, 2017 through June 30, 2018 as there was a full valuation allowance during those periods."

The reconciliation between the income tax provision and income taxes computed by applying the statutory federal income tax rate to income before income taxes for the three months and nine months ended September 30, 2018 is as follows:

	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018
Expected income tax at statutory federal tax rate (21%)	$	438,000		$	1,286,000
Tax amortization of intangible assets		(70,000	)		(210,000	)
Depreciation		8,000			19,000
Net operating loss		(47,000	)		(141,000	)
Temporary differences - charitable contributions		4,000			(57,000	)
State taxes		25,000			11,000
Reversal of valuation allowance		(1,393,000	)		(1,393,000	)
Total (Benefit) from income taxes	$	(1,035,000	)	$	(485,000	)

The primary item giving rise to the deferred tax asset is as follows:

Net operating loss carryforwards	$	6,619,000
Valuation allowance		(5,226,000	)
Net deferred tax asset	$	1,393,000

As of December 31, 2017, March 31, 2018 and June 30, 2018, the Company’s deferred tax asset was primarily the result of U.S. and state net operating loss carryforwards. A full valuation allowance was recorded against the gross deferred tax asset as of December 31, 2017, March 31, 2018 and June 30, 2018. For the three months and nine months ended September 30, 2018, the Company recorded a net valuation allowance reversal of $1,393,000 related to net operating losses, on the basis of management’s reassessment of the amount of its deferred tax asset that is more likely than not to be realized.

As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. As of September 30, 2018, the Company had achieved a full year of positive earnings in 2017 as well as three consecutive quarters of positive earnings in 2018. In addition, the 2018 results included almost a full year of the results post-acquisition of the retail assets from StockCross. Based on our analysis of the positive and negative evidence, management determined that sufficient positive evidence existed as of September 30, 2018 to conclude that a portion of deferred tax asset was realizable. Therefore, we reduced the valuation allowance and income tax expense accordingly.