INCOME TAXES

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 10. INCOME TAXES

The Company’s U.S. and foreign loss before income taxes are set forth below:

	December 31,
	2022			2021
United States	$	(7,251,228	)	$	(15,420,364	)
Foreign		(12,706,165	)		(41,011,337	)
Total	$	(19,957,393	)	$	(56,431,701	)

For the years ended December 31, 2022 and 2021, the Company recorded an income tax benefit of $1,486,060 and $7,454,805, respectively. The income tax benefit is as follows:

	December 31,
	2022		2021
Deferred tax benefit - United States	$	—	$	—
Deferred tax benefit - Foreign		1,486,060		7,454,805
Total income tax benefit	$	1,486,060	$	7,454,805

The Company’s deferred tax assets and deferred tax liabilities consist of the following:

	December 31,
	2022			2021
Deferred tax assets:
Net operating loss carryforwards	$	8,927,330		$	5,509,522
Stock-based compensation		1,348,928			858,791
Accrued bonus		—			121,051
Research and development capitalized expenses		614,041			—
Intangible amortization		54,141			23,204
Other		33,453			35,456
Less valuation allowances		(10,977,893	)		(6,548,024	)
Net deferred tax assets	$	—		$	—
Deferred tax liabilities:
Indefinite lived intangible assets		—			(1,607,122	)
Net deferred tax liabilities	$	—		$	(1,607,122	)

The Company had the following potentially utilizable net operating loss tax carryforwards:

	December 31,
	2022		2021
Federal	$	18,349,753	$	9,411,533
State	$	16,892,754	$	8,664,242
Foreign	$	16,377,435	$	11,911,845

The Tax Cuts and Jobs Act of 2017 (the “Act”) limits the net operating loss deduction to 80% of taxable income for losses arising in tax years beginning after December 31, 2017. As of December 31, 2022, the Company had federal net operating loss carryforwards and state net operating loss carryforwards of $18,349,753 of $16,892,754, respectively, which can be carried forward indefinitely. In addition, the Company has Canadian net operating loss carryforwards of $16,377,435 which will begin to expire in 2030.

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s effective tax rate varied from the statutory rate as follows:

	December 31,
	2022			2021
Federal income tax at the statutory rate		(21.0	)%		(21.0	)%
State income tax rate (net of federal)		(2.6	)%		(1.0	)%
Foreign tax rate differential		(3.1	)%		(4.0	)%
Intangible asset impairment		—	%		4.3	%
Non-deductive expenses		(4.0	)%		1.4	%
Change in valuation allowance		23.3	%		7.0	%
Effective income tax rate		(7.4	)%		(13.3	)%

On September 16, 2021, the Company acquired MagicMed. In connection with the acquisition, the Company recorded intangible assets from IPR&D valued at $35,500,000, which would be tested for impairment for book purposes, but without a tax basis, creating a deferred tax liability of $9,061,927. The deferred tax liability decreased to $1,607,122 due to an impairment on intangible asset of $29,048,164 and an impairment of goodwill of $8,225,862 for the year ended December 31, 2021. The deferred tax liability decreased to $— due to an impairment on goodwill and intangible assets of $7,453,662 for the year ended December 31, 2022.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The valuation allowance increased by $4,429,869 and $5,207,872 during the years ended December 31, 2022 and 2021, respectively.

The Company files U.S. federal and state returns. The Company’s foreign subsidiary also files a local tax return in their local jurisdiction. From a U.S. federal, state and Canadian perspective the years that remain open to examination are consistent with each jurisdiction’s statute of limitations. As of March 30, 2023, the Company has not filed tax returns for the fiscal years 2022 and 2021.

Section 382

The utilization of the Company’s net operating losses may be subject to a substantial limitation in the event of any significant future changes in its ownership structure under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation may result in the expiration of the net operating loss carryforwards before their utilization.

Section 174

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminated the option to deduct research and development expenditures in the current year and requires taxpayers to amortize US expenses over five years and foreign expense over fifteen years pursuant to IRC Section 174. The Company has estimated and capitalized gross $2,684,319 of research and development expenditures that will be amortized primarily over five years. This did not have a material impact on the Company’s tax liability for the year ended December 31, 2022. The Company will continue to evaluate the impact of these tax law changes on the current and future periods.

Inflation Reduction Act

On August 16, 2022, President Joe Biden signed the Inflation Reduction Act of 2022 (the “Act”) into law. The Act includes a new 15% corporate minimum tax and a 1% excise tax on the value of corporate stock repurchases, net of new share issuances, after December 31, 2022. The Company does not expect these provisions to have a material impact on the Company’s consolidated financial position; however, the Company will continue to evaluate their impact as further information becomes available.