INCOME TAXES

12 Months Ended

Dec. 31, 2017

Income Tax Disclosure [Abstract]

INCOME TAXES

On December 22, 2017, the Tax Reform Act was signed into law. This legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.

On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. Although the Company is unable to make a reasonable estimate on the full effect on our income taxes as of the date of this report, the Company has recognized the provisional tax impact related to the revaluation of deferred tax assets and liabilities and included these amounts in its financial statements for Fiscal 2017. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its net U.S. deferred income tax assets and liabilities at December 31, 2017 from $5,400,000 to $3,600,000, a decrease of $1,800,000. In addition, the deferred income tax asset valuation allowance increased by $1,800,000 as a result of the reduction in the corporate income tax rate.

The ultimate impact may differ from the provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when the Company’s 2017 U.S. corporate income tax return is filed in 2018. 

A reconciliation of the U.S. Federal statutory income tax rate to the effective income tax rate is as follows:

	Year Ended December 31, 2017			Year Ended  December 31, 2016
Tax expense at federal statutory rate		34	%	34	%
State tax expense, net of federal tax effect		0	%	(1	)%
Permanent timing differences		0	%	0	%
Deferred income tax asset valuation allowance		298	%	(34	)%
Effective change in tax rate due to Tax Reform Act		(332	%)	0	%
Effective income tax rate		0	%	(1	%)

Significant components of the Company’s deferred income tax assets are as follows:

	December 31, 2017		December 31, 2016
Inventory	$	13,000	$	21,000
Inventory allowance		130,000		175,000
Allowance for doubtful accounts		13,000		19,000
Accrued compensation		18,000		32,000
Stock based compensation		165,000		230,000
Deferred wages payable		29,000		28,000
Depreciation – Property, Plant & Equipment		(10,000)		(12,000	)
Sales tax reserve		0		5,000
Net operating loss carry-forward		3,261,000		4,704,000
Total gross deferred income tax assets		3,619,000		5,202,000
Less deferred income tax assets valuation allowance		(3,619,000)		(5,202,000	)
Net deferred income tax assets	$	0	$	0

The valuation allowance for deferred income tax assets as of December 31, 2017 and December 31, 2016 was $3,619,000 and $5,202,000, respectively. The net change in the deferred income tax assets valuation allowance was $1,583,000 for Fiscal 2017. The net change in the deferred income tax assets valuation allowance was $136,000 for Fiscal 2016. The Company believes that it is more likely than not that the deferred tax assets will not be realized.

As of December 31, 2017, the prior three years remain open for examination by the federal or state regulatory agencies for purposes of an audit for tax purposes.

At December 31, 2017, the Company had Federal net operating loss carry-forwards for income tax purposes of approximately $3,261,000. The Company’s net operating loss carry-forwards begin to expire in 2019 and continue to expire through 2035. In assessing the realizability of deferred income tax assets, management considers whether or not it is more likely than not that some portion or all deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment.

The Company’s ability to utilize the operating loss carry-forwards may be subject to an annual limitation in future periods pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, if future changes in ownership occur.

The Company recognizes potential interest and penalties related to income tax positions as a component of the provision for income taxes on operations. The Company does not anticipate that total unrecognized tax benefits will materially change in the next twelve months.