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9. Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
9. Income Taxes

9. Income Taxes

 

For the years ended December 31, 2022 and 2021, the Company’s income tax provision is zero due to a full valuation allowance against the deferred tax assets.

 

The differences between the tax provision (benefit) at the statutory federal tax rate and the tax provision (benefit) are as follows (in thousands):

 

   2022   2021 
   Years Ended December 31, 
   2022   2021 
Statutory federal income tax  $(2,077)  $(1,321)
Increase (decrease) resulting from:          
Change in valuation allowance   3,411    1,624 
Permanent items   26    134 
Prior year true ups   (17)   70 
Tax credits   (421)   (176)
State   (922)   (331)
Other   -    - 
Income tax provision  $-   $- 

 

 

 

The components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

 

   2022   2021 
   Years Ended December 31, 
   2022   2021 
Deferred tax assets:          
Net operating loss carryforwards  $6,492   $4,453 
Tax credits carryforwards   1,297    887 
Stock-based compensation   56    29 
Fixed assets/intangible assets   111    99 
Charitable contributions   2    1 
Capitalized research   813    - 
Accruals and other   133    6 
Gross deferred tax assets   8,904    5,475 
Valuation allowance   (8,886)   (5,475)
Deferred tax assets   18    - 
Deferred tax liabilities:          
Unrealized gain   18    - 
Deferred tax liabilities   18    - 
Net deferred tax asset  $-   $- 

 

At December 31, 2022, the Company had federal and state net operating loss (“NOL”) carryforward amounts of $23.8 million and $17.4 million, respectively. The federal NOL carryforwards consists of $4.6 million generated before January 1, 2018, which will begin to expire in 2030 but are able to offset 100% of taxable income and $19.2 million generated after December 31, 2017 which can be carried forward indefinitely and may be able to be used against 100% of taxable income through the tax year ending December 31, 2020, as updated by the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136), otherwise known as the CARES Act. Federal NOLs will then be subject to 80% limitation for tax years beginning on or after January 1, 2021.The state NOL carryforward will begin to expire in 2033.

 

As of December 31, 2022, the Company had federal and state tax credit carryforwards of $1.5 million which will begin to expire in 2033, and California tax credit carryforwards of $0.3 million which do not expire.

 

The Company follows Financial Accounting Standards Board No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109, as codified in FASB ASC 740-10, Income Taxes. At December 31, 2022, unrecognized tax benefits related to federal and state tax credits was $0.4 million. The Company did not have tax-related interest and penalties at December 31, 2022. The Company does not expect significant changes to its unrecognized tax benefits in the next twelve months. If recognized, none of the unrecognized tax benefits would affect the effective tax rate.

 

The utilization of NOLs and tax credit carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that have occurred previously or that may occur in the future. Under Sections 382 and 383 of the Internal Revenue Code (“IRC”) a corporation that undergoes an ownership change may be subject to limitations on its ability to utilize its pre-change NOLs and other tax attributes otherwise available to offset future taxable income and/or tax liability. An ownership change is defined as a cumulative change of 50% or more in the ownership positions of certain stockholders during a rolling three-year period. The Company has not completed a formal study to determine if any ownership changes within the meaning of IRC Section 382 and 383 have occurred. If an ownership change has occurred, the Company’s ability to use its NOLs or tax credit carryforwards may be restricted, which could require the Company to pay federal or state income taxes earlier than would be required if such limitations were not in effect.

 

On March 27, 2020, the CARES Act was enacted and signed into law in response to the COVID-19 pandemic. GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date. The CARES Act includes changes to the tax provisions that benefits business entities and makes certain technical corrections to the 2017 Tax Cuts and Jobs Act. The tax relief measures for businesses include a five-year net operating loss carryback, suspension of the annual deduction limitation of 80% of taxable income from net operating losses generated in a tax year beginning after December 31, 2017, changes in the deductibility of interest, acceleration of alternative minimum tax credit refunds, payroll tax relief, technical corrections on net operating loss carryforwards for fiscal year taxpayers and allows accelerated deduction qualified improvement property. The CARES Act also provides other non-tax benefits to assist those impacted by the pandemic. The Company filed for and received a PPP loan. We evaluated the impact of the CARES Act and determined that there was no material impact for the year ended December 31, 2022.

 

On June 29, 2020, California Assembly Bill 85 was signed into law. The legislation suspended the California net operating loss deductions for 2020 and 2021 for certain taxpayers. The legislation disallowed the use of California net operating loss deductions if the taxpayer recognizes business income and its adjusted gross income is greater than $1.0 million. The carryover periods for net operating loss deductions disallowed by this provision will be extended. The new legislation did not impact the current year provision or our financial statements for the year ended December 31, 2022.

 

 

 

On December 27, 2020, the Consolidated Appropriations Act, 2021 was enacted and signed into law to further COVID-19 economic relief and extend certain expiring tax provisions. The relief package includes a tax provision clarifying that businesses with forgiven PPP loans can deduct regular business expenses that are paid for with the loan proceeds. Additional pandemic relief tax measures include an expansion of the employee retention credit, enhanced charitable contribution deductions, and a temporary full deduction for business expenses for food and beverages provided by a restaurant. The provisions did not have a material impact on our financial statements for the year ended December 31, 2022.

 

Uncertain Income Tax Positions

 

The total amount of unrecognized tax benefits as of December 31, 2022 is $0.4 million which relates to federal and state tax credits.

 

The following summarizes the activity related to the Company’s unrecognized tax benefits for the years ended December 31, 2021 and December 31, 2022 (in thousands):

 

Balance at December 31, 2020  $212 
Tax positions related to the current year:     
Additions   97 
Balance at December 31, 2021   309 
Tax positions related to the current year:     
Additions   140 
Balance at December 31, 2022  $449 

 

The Company’s policy is to account for interest and penalties as income tax expense. As of December 31, 2022, the Company had no interest related to unrecognized tax benefits. No amounts of penalties related to unrecognized tax benefits were recognized in the provision for income taxes. We do not anticipate any significant change within twelve months of this reporting date.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal and state income tax examination for calendar tax years beginning in 2010 due to net operating losses that are being carried forward for tax purposes.