Income Taxes

12 Months Ended

Dec. 31, 2014

Notes to Financial Statements

13. Income Taxes

The income tax provision (benefit) for the years ended December 31, 2014 and 2013 was as follows:

	For The Year Ended
	December 31,
	2014			2013
Federal:
Current	$	-		$	-
Deferred		(387,752	)		(625,702	)
State and local:
Current		-			-
Deferred		(161,244	)		(36,806	)
		(548,996	)		(662,508	)
Change in valuation allowance		548,996			662,508
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, 2014 and 2013 are as follows:

	December 31,
	2014			2013
Deferred tax assets:
Net operating loss carryforwards	$	5,315,823		$	4,966,018
Stock-based compensation		722,782			466,078
Inventory reserves		6,090			10,949
Allowance for bad debt		17,948			89,899
Deferred Rent		14,108			-
Contingent Liability		1,910			-
Charitable contribution carryforwards		5,772			5,630
Accruals		31,007			27,352
Total deferred tax assets		6,115,440			5,565,926
Valuation allowance		(6,088,174	)		(5,539,178	)
Deferred tax assets, net of valuation allowance		27,266			26,748
Deferred tax liabilities:
Property and equipment		(27,266	)		(26,748	)
Net deferred tax assets	$	-		$	-
Change in valuation allowance	$	548,996		$	666,508

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 and has established a full valuation allowance for the years ended December 31, 2014 and 2013.

The Company is in the process of filing its federal and state tax returns for the years ended December 31, 2014, 2013, and 2012.  The Net operating losses (“NOLs”) for these years will not be available to reduce future taxable income until the returns are filed.  Assuming these returns are filed, as of December 31, 2014 and 2013, the Company has approximately $14,736,276 and $13,770,000, respectively, of federal NOLs that may be available to offset future taxable income.  The federal net operating loss carryforwards, if not utilized, will expire from 2027 to 2034.  As of December 31, 2014 and 2013, the Company has approximately $7,637,237 and $3,585,000 of state net operating loss carryforwards available to offset future taxable income.  The state NOLs, if not utilized, will expire beginning in 2031.

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 $2,116,000 on the usage of the Company’s losses which are available through 2031.  A full Section 382 analysis has not been prepared since 2011 and any NOLs arising since 2011 could be subject to limitation under Section 382. 

For the years ended December 31, 2014 and 2013, the expected tax expense (benefit) based on the U.S. federal statutory rate is reconciled with the actual tax expense (benefit) as follows:

	For The Year Ended
	December 31,
	2014			2013
US federal statutory rate		(34.0	%)		(34.0	%)
State tax rate, net of federal benefit		(4.0	%)		(2.0	%)
Permanent differences
- Stock based compensation		4.8	%		3.2	%
- Debt extinquishment		0.0	%		18.3	%
- Other		2.4	%		2.5	%
Change in valuation allowance		30.8	%		12.0	%
Income tax provision (benefit)		0.0	%		0.0	%