INCOME TAXES

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

INCOME TAXES

The Company follows ASC 740 “Income Taxes” (“ASC 740”) which prescribes the asset and liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted laws and tax rates that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are not expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. Under ASC 740, tax benefits are recorded only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

On December 22, 2017, the Tax Reform Act was signed into law. Among the provisions, the Tax Reform ACT reduces the U.S. federal corporate income tax rate from a maximum of 35% to a flat 21% effective January 1, 2018, requires companies to pay a one-time transition tax on deemed repatriated earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings.

 At December 31, 2018 we have completed our accounting for the tax effects of the Tax Reform Act. We have finalized the tax effects on our existing deferred tax balances and the one-time transition tax under Staff Accounting Bulletin No. 118 ("SAB 118"). We have also included current year impacts of the Tax Reform Act in our tax provision.

In Fiscal 2017, the Company 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 in Fiscal 2017 did not differ materially from the provisional amounts.

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

	Year Ended December 31, 2018			Year Ended December 31, 2017
Tax expense at federal statutory rate		(21	%)		(34	%)
State tax expense, net of federal tax effect		0	%		0	%
Permanent timing differences		0	%		0	%
Deferred income tax asset valuation allowance		21	%		(298	%)
Effective change in tax rate due to Tax Reform Act		0	%		332	%
Effective income tax rate		0	%		0	%

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

	December 31, 2018			December 31, 2017
Inventory capitalization	$	9,000		$	13,000
Inventory allowance		70,000			130,000
Allowance for doubtful accounts		9,000			13,000
Accrued compensation		22,000			18,000
Stock based compensation		168,000			165,000
Deferred wages payable		43,000			29,000
Depreciation – Property, Plant & Equipment		(6,000	)		(10,000	)
Sales tax reserve		0			0
Net operating loss carry-forward		3,569,000			3,261,000
Total gross deferred income tax assets		3,884,000			3,619,000
Less deferred income tax assets valuation allowance		(3,884,000	)		(3,619,000	)
Net deferred income tax assets	$	0		$	0

The valuation allowance for deferred income tax assets as of December 31, 2018 and December 31, 2017 was $3,884,000 and $3,619,000, respectively. The net change in the deferred income tax assets valuation allowance was $265,000 for Fiscal 2018. The net change in the deferred income tax assets valuation allowance was $1,583,000 for Fiscal 2017. The Company believes that it is more likely than not that the deferred tax assets will not be realized.

As of December 31, 2018, 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, 2018, the Company had Federal net operating loss carry-forwards for income tax purposes of approximately $3,569,000. 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.