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Income Taxes
 12 Months Ended
Dec. 31, 2011
Income Tax Disclosure [Abstract]  
Income Tax Disclosure [Text Block]
9. Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740, “Income Taxes” (formerly known as SFAS No. 109, “Accounting for Income Taxes”). Under ASC 740, deferred tax assets and liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. ASC 740 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized.

 

The Company has further adopted the provisions of ASC 740-10-15 (formerly known as Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”). The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company’s assessments of its tax positions in accordance with ASC 740 did result in changes that had a material impact on results of operations, financial condition or liquidity with the reversal of the valuation allowance of approximately $5.3 million as of December 31, 2010. As of December 31, 2011, the Company had no unrecognized tax benefits. While the Company does not have any material interest and penalties in the periods presented, the Company’s policy is to recognize such expenses as tax expense.

 

The Company files U.S. federal income tax returns with the Internal Revenue Service (“IRS”) as well as income tax returns in various states. The Company may be subject to examination by the IRS for tax years 2003 through 2011. Additionally, the Company may be subject to examinations by various state taxing jurisdictions for tax years 2003 through 2011. The Company is currently not under examination by the IRS or any state tax jurisdiction with the exception that we have been notified that the State of Illinois will examine our filings in the second quarter of 2011.

 

As of December 31, 2011, the Company had net operating loss (NOL) carry forwards of approximately $19,029,000 to offset future taxable income for federal income tax purposes, net of the potential limitation discussed below. There are also up to approximately $11,334,000 in state income tax NOL carryforwards. These carry forwards expire between 2012 and 2030. In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will 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. Based upon the realization of our recent historical profitability and our outlook for the continued positive prospects for these profits to continue in the future, management believes these net deferred tax assets will be utilized in future periods.

 

Under the provision of the Tax Reform Act of 1986, when there has been a change in an entity’s ownership of 50 percent or greater, utilization of net operating loss carry forwards may be limited. As a result of WidePoint’s equity transactions, the Company’s net operating losses will be subject to such limitations and may not be available to offset future income for tax purposes. The Company has completed a “Section 382” analysis and we were subject to an examination by the IRS in 2010 which related to our 2008 tax year. Given this we have determined that some of the Company’s net operating losses may be limited as a result of expirations that may occur prior to the utilization of those net operating losses under the limitations from certain changes of control that had occurred. Utilization of the NOL carryforwards will be subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986 and similar state provisions due to ownership change limitations that have occurred. These ownership changes will limit the amount of NOL carryforwards that can be utilized to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. An analysis was performed which indicated that multiple ownership changes have occurred in previous years which created annual limitations on our ability to utilize NOL and tax credit carryovers. Such limitations will result in approximately $4.9 million.

 

No tax benefit has been associated with the exercise of stock options for the years ended December 31, 2011 and 2010, respectively, because of the existence of net operating loss carryforwards. There will be no credit to additional paid in capital for such until the associated benefit is realized through a reduction of income taxes payable. The tax benefit associated with the exercise of stock options included in NOL’s that will be credited to additional paid in capital when the NOL’s are used to reduce taxes currently payable is approximately $950,000.

   

Income taxes are as follows for the years ended December 31:

 

    DECEMBER 31,  
    2011     2010  
             
Current provision (benefit)                
Federal   $ (20,269 )   $ 21,250  
State     30,272       127,569  
Total     10,003       148,819  
                 
Deferred provision (benefit)                
Federal     (167,327 )     (3,767,180 )
State     (41,722 )     (29,785 )
Total     (209,049 )     (3,796,965 )
                 
Income tax provision (benefit)   $ (199,046 )   $ (3,648,146 )

 

The provision (benefit) for income taxes results in effective rates, which differs from the federal and state statutory rate as follows for the years ended December 31:

 

    DECEMBER 31,  
    2011     2010  
             
Statutory federal income tax rate     34.0 %     34.0 %
State income tax rate (net of federal benefit)     75.6 %     4.9 %
Non-deductible expenses     -38.3 %     0.7 %
Change in valuation allowance     -108.9 %     -173.4 %
Expiration of net operating losses     122.0 %     0.0 %
Adjustments to state net operating losses     -213.8 %     0.0 %
True up adjustments to prior year deferred tax assets     -232.7 %     0.0 %
Return to accrual difference true-ups     -48.9 %     0.0 %
Other     -11.7 %     0.1 %
Combined effective tax rate     -422.7 %     -133.7 %

 

The deferred tax assets (liabilities) consisted of the following as of December 31:

 

    DECEMBER 31,  
    2011     2010  
Deferred tax assets:                
Net operating loss carryforwards   $ 4,430,285     $ 4,227,087  
Alternative  minimum tax credit     73,241       73,241  
Share-based compensation     579,352       543,824  
Advanced payments     18,738       1,617  
Intangibles     136,538       55,864  
Other assets     143,176       135,276  
                 
Total deferred tax assets     5,381,330       5,036,909  
Less: valuation allowance     (880,384 )     (931,666 )
Total deferred tax assets, net     4,500,946       4,105,243  
                 
Deferred tax liabilities:                
Goodwill amortization     748,291       514,362  
Depreciation and amortization     -       30,744  
Capitalized software costs     14,100       30,631  
                 
Total deferred tax liabilities     762,391       575,737  
                 
Net deferred tax asset (liability)   $ 3,738,555     $ 3,529,506  

 

Changes in the valuation allowance for the years ended December 31, are as follows:

 

    DECEMBER 31,  
    2011     2010  
             
Beginning balance   $ (931,666 )   $ (6,133,449 )
Decreases (Increases)     51,282       5,201,783  
                 
Ending balance   $ (880,384 )   $ (931,666 )