6. Income Taxes

Income taxes consist of the following:

Current income tax (benefit) / expense, which represents the amount of federal tax and state and local tax currently payable or receivable, including interest and penalties and amounts accrued for unrecognized tax benefits, if any, and;

Deferred income tax (benefit) / expense, which represents the net change in the deferred tax assets or liability balance during the year, including any change in the valuation allowance.

	Year Ending December 31,
	2018			2017
Current
Federal	$	948,000		$	51,000
State and local		26,000			102,000
Total Current	$	974,000		$	153,000

Deferred
Federal	$	(3,248,000	)	$	—
State and local		(2,328,000	)		—
Total Deferred	$	(5,576,000	)	$	—

Total Income tax (benefit) / expense	$	(4,602,000	)	$	153,000

Effective Income Tax Rate Reconciliation

A reconciliation of the U.S. federal statutory income tax rate to the effective tax rate applicable to income before income taxes is as follows for the periods indicated:

	Year Ending December 31,
	2018			2017
Federal statutory income tax rate		21.0	%		34.0	%
Net effect of:
Non-deductible expenses		0.2	%		1.2	%
Depreciation		(0.9	%)		(4.5	%)
Tax amortization of intangible assets		(3.8	%)		(1.6	%)
Other temporary differences		(1.3	%)		(12.1	%)
Net operating loss		(2.6	%)		(13.2	%)
Increase due to state and local taxes, net of U.S. federal income tax effects		0.6	%		2.8	%
Total Current effective income tax rate		13.2	%		6.6	%
Reversal of deferred tax assets valuation allowance		(75.8	%)		—
Total Effective income tax rate		(62.6	%)		6.6	%

Tax Cuts and Jobs Act

In regard to the effect of the Tax Cuts and Jobs Act, which lowered U.S. federal corporate income tax rates from 34% to 21%, the Company determined that the primary impact was a reduction in income tax expense in 2018 as well the projected income tax expense subsequent years. The statutory federal income tax rate in effect of 21% as of January 1, 2018 was utilized to calculate the income tax provision and the deferred tax assets as of December 31, 2018. As such, the change in federal income tax rates affected the valuation of the gross deferred tax assets.

Net Operating Losses

The Company’s pre-tax federal and state and local NOLs for tax purposes as of December 31, 2018 were approximately $16.1 million and $27.1 million, respectively, which expire by 2036. The federal NOL carryforwards have been reduced by the impact of annual limitations of approximately $895,000 per year as described in the Internal Revenue Code Section 382 that arose as a result of an ownership change. Deferred tax assets are reported net of NOLs that have expired or are not expected to be utilized in the future.

Income Tax Examinations

The Company is subject to federal, state, and local tax examinations for a period typically between three and four years. The Company is currently under tax examination by the State of New York for tax years 2012 through 2014. As of December 31, 2018, the State of New York has not proposed any adjustment to the Company’s tax position. Except for the examination described above, the Company is not under any other tax examinations.

Unrecognized Tax Benefits

The Company applied the “more-likely-than not” recognition threshold to all tax positions taken or expected to be taken in a tax return which resulted in no unrecognized tax benefits reflected in the financial statements as of December 31, 2018. The Company classifies interest and penalties that would accrue according to the provisions of relevant tax law as income taxes.

Deferred Tax Assets

The evaluation of the recoverability of the deferred tax assets and the need for a valuation allowance requires the Company to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax assets will be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.

The Company’s framework for assessing the recoverability of the deferred tax assets requires a determination of whether or not there is sufficient taxable income of appropriate character within the carryback, carryforward period available under tax law. The Company considers of all available evidence, including:

•	Taxable income in carryback years if carryback is permitted;

•	Future reversals of existing taxable temporary differences;

•	Tax planning strategies; and

•	Projected future taxable income exclusive of reversing temporary difference.

In assessing projected future taxable income, the Company considers all evidence, including:

•	The nature, frequency, and amount of cumulative financial reporting income and losses in recent years;

•	The sustainability of recent operating profitability of the Company;

•	The predictability of future operating profitability of the character necessary to realize the net deferred tax assets;

•	The carryforward period for the net operating loss, including the effect of reversing taxable temporary differences; and

•	Prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax assets.

In performing the assessment of the recoverability of the deferred tax assets under this framework, the Company also considers tax laws governing the utilization of the net operating loss in each applicable jurisdiction.

For the year ended December 31, 2018, the Company achieved key financial milestones such as having three years of cumulative taxable income and generating four consecutive quarters of pre-tax profitability generally greater than $1 million which led to a re-evaluation of the deferred tax assets. As of December 31, 2018, the Company determined that sufficient positive evidence existed to conclude that it is more likely than not that deferred taxes of $5,576,000 were realizable, and therefore, a valuation allowance was not necessary for this portion of the deferred tax assets.

Below is a breakout of the deferred tax assets, net of valuation allowance as of the periods indicated. Prior period amounts were adjusted to reflect the impact from the Tax Cuts and Jobs Act:

	As of December 31,
	2018			2017
Deferred tax assets
Net operating loss carryforwards	$	5,811,000		$	6,596,000
	$	5,811,000		$	6,596,000

Deferred tax liabilities
Furniture, equipment and leasehold improvements	$	(193,000	)	$	(79,000	)
Contribution carryover		—			126,000
Intangible assets		—			(25,000	)
Other reconciling items		(42,000	)		—
	$	(235,000	)	$	22,000

Total	$	5,576,000		$	6,618,000

Valuation allowance		—			(6,618,000	)

Deferred tax assets, net of valuation allowance	$	5,576,000		$	—