Income Taxes

3 Months Ended

Mar. 31, 2023

Income Taxes

Income Taxes

Note L- 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 March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. With regards to the use of net losses incurred for 2018 and later, such net operating losses have no expiration, while taxable income can only be offset up to 80% of taxable income. Net operating losses incurred prior to 2018 may be fully utilized to offset taxable income.

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

	Quarter Ended March 31, 2023			Quarter Ended March 31, 2022
Tax expense at federal statutory rate	(21%)			(21%)
State tax expense, net of federal tax effect		0	%		0	%
Increase in valuation allowance		21	%		21	%
Effective income tax rate	(0%)			(0%)

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

	March 31, 2023			December 31, 2022
					13,
Inventory allowance	$	0		$	61,000
Allowance for doubtful accounts		1,000			1,000
Stock based compensation		138,000			149,000
Deferred wages payable		30,000			21,000
Depreciation – Property, Plant & Equipment		0			(19,000	)
Research and development credits		26,000			24,000
Net operating loss carry-forward		2,482,000			2,972,000
Total gross deferred income tax assets		2,677,000			3,209,000
Less deferred income tax assets valuation allowance		(2,677,000	)		(3,209,000	)
Net deferred income tax assets	$	0			0

The valuation allowance for net deferred income tax assets as of March 31, 2023 and December 31, 2022 was $2,677,000 and $3,209,000, respectively. The net change in the valuation allowance was $532,000 at March 31, 2023 and $91,000 at March 31, 2022. The Company believes that it is more likely than not that the net deferred tax assets will not be realized.

As of March 31, 2023, the prior three years remain open for examination by the federal or state regulatory agencies for purposes of an audit for tax purposes.

At March 31, 2023, the Company had Federal net operating loss carry-forwards for income tax purposes of approximately $11,427,000 and research and development credits of $26,000. The Company’s net operating loss carry-forwards began to expire in 2022 and continue to expire through 2038. Net operating losses incurred from 2018 to date have no expiration. In assessing the reliability 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 and research and development credits may be subject to an annual limitation in future periods pursuant to Section 382 and Section 383 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.