Income Taxes

12 Months Ended

Dec. 31, 2013

Notes to Financial Statements

13. Income Taxes

As of December 31, 2013 and 2012, the Company had approximately $13,770,000 and $12,600,000, respectively, of federal net operating loss carryforwards (“NOL’s”) that may be available to offset future taxable income.  The federal net operating loss carryforwards, if not utilized, will expire from 2027 to 2033.  As of December 31, 2013 and 2012, the Company had approximately $3,585,000 and $3,000,000 of state net operating loss carryforwards available to offset future taxable income.  The state NOLs, if not utilized, will expire beginning in 2031.

The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions and is subject to examination by the various taxing authorities.  The Company’s federal, state and local income tax returns beginning in 2010 remain subject to examination.

In accordance with Section 382 of the Internal Revenue code, the usage of the Company’s net operating loss carryforwards could be limited in the event of a change in ownership.  Based upon a study that analyzed the Company’s stock ownership, a change of ownership was deemed to have occurred in 2011.  This change of ownership created an annual limitation of approximately $1,000,000 on the usage of the Company’s losses which are available through 2031.  No study has been conducted in 2013 or 2012.

The income tax provision (benefit) for the years ended December 31, 2013 and 2012 was as follows:

	For The Years Ended
	December 31,
	2013			2012
Federal:
Current	$	-		$	-
Deferred		(625,702	)		(1,299,493	)
State and local:
Current		-			-
Deferred		(36,806	)		(191,102	)
		(662,508	)		(1,490,595	)
Change in valuation allowance		662,508			1,490,595
Income tax provision (benefit)	$	-		$	-

The effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:

	December 31,
	2013			2012
Deferred tax assets:
Net operating loss carryforwards	$	4,966,018		$	4,465,161
Stock-based compensation		466,078			258,742
Inventory reserves		10,949			54,000
Allowance for bad debt		89,899			87,405
Charitable contribution carryforwards		5,630			5,630
Accruals		27,352			24,775
Total deferred tax assets		5,565,926			4,895,713
Valuation allowance		(5,539,178	)		(4,876,670	)
Deferred tax assets, net of valuation allowance		26,748			19,043
Deferred tax liabilities:
Property and equipment		(26,748	)		(19,043	)
Net deferred tax assets	$	-		$	-
Change in valuation allowance	$	662,508		$	1,490,595

The Company assesses the likelihood that deferred tax assets will be realized.  To the extent that realization is not likely, a valuation allowance is established.  Based upon the history of losses, management believes that it is more likely than not that future benefits of deferred tax assets will not be realized.

For the years ended December 31, 2013 and 2012, the expected tax expense (benefit) based on the statutory rate is reconciled with the actual tax expense (benefit) as follows:

	For The Years Ended
	December 31,
	2013			2012
US federal statutory rate		(34.0	%)		(34.0	%)
State tax rate, net of federal benefit		(2.0	%)		(2.0	%)
Permanent differences
- Stock based compensation		3.2	%		2.9	%
- Write-off and amortization of intangible asset		0.0	%		3.9	%
- Debt extinquishment		18.3	%		0.0	%
- Other		2.5	%		2.4	%
Change in valuation allowance		12.0	%		26.8	%
Income tax provision (benefit)		0.0	%		0.0	%