Income Taxes

12 Months Ended

Dec. 31, 2019

The Tax Cuts and Jobs Act (“TCJA”) was enacted on December 22, 2017 and become effective January 1, 2018. The TCJA contains several key provisions, including a reduction in the U.S. Federal corporate income tax rate from 35% to 21% and a change to the corporate alternative minimum tax (“AMT”).

The TCJA eliminated the corporate AMT and permits existing AMT credit carryforwards to be used to reduce the regular tax obligation in 2018, 2019, and 2020. Any AMT credit carryforwards that do not reduce regular taxes are eligible for a 50% refund in 2018 through 2020, and a 100% refund in 2021. Accordingly, we reclassified the balance of the AMT credit from the deferred tax asset to an income tax receivable in 2018. The corresponding balance in the valuation allowance has been reversed into income tax benefit in the amount of $1,001,233. As of December 31, 2019, we have received 50% or approximately $0.5 million refund for tax year 2018 and expect to receive the remaining 50% over tax years 2019 through 2021.

The significant components of loss before income taxes are as follows:


	Years Ended December 31,
	2019		2018
U.S. operations	$	(8,274,712)	$	(6,622,695)
Foreign operations	(22,947)		(75,218)
Total loss before provision for income taxes	$	(8,297,659)	$	(6,697,913)

The significant components of our (benefit) provision for income tax for the years ended December 31, 2019 and 2018 are as follows:


	Years Ended December 31,
	2019		2018
Current and deferred tax (benefit) expense
Federal	$	—	$	(1,001,233)
State	—		—
Foreign	—		—
	$	—	$	(1,001,233)

The income tax provision differs from the expense amount that would result from applying the federal statutory rates to income before income taxes due to deferred income tax resulting to permanent differences, state taxes and a change in the deferred tax valuation allowance.

The reconciliation between the statutory tax rate and the Company’s actual effective tax rate is as follows:


	Years Ended December 31,
	2019		2018
Tax at U.S. statutory rate	(21.00)	%	(21.00)	%
State taxes, net of federal benefit	(4.61)		(4.25)
Non-deductible items	(6.49)		0.44
Change in valuation allowance	30.99		10.25
True-up adjustment	0.18		(0.17)
Foreign operations	(0.07)		(0.28)
Change in tax rates	1.00		—
AMT adjustment	—		0.06
Effective income tax rate	—	%	(14.95)	%

The significant components of the Company’s net deferred income tax assets are as follows:


	December 31,
	2019		2018
Stock option expense	$	275,000	$	242,700
NOL carryforward	5,214,200		2,668,000
Research and development credits	1,656,500		1,656,500
Other	4,400		11,200
Deferred tax asset, net of deferred tax liabilities	7,150,100		4,578,400
Valuation allowance	(7,150,100)		(4,578,400)
Net deferred tax asset	$	—	$	—

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management evaluates whether it is more likely than not that some portion or all of the deferred tax assets will not 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. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on management’s evaluation, the net deferred tax asset was offset by a full valuation allowance as of December 31, 2019 and 2018.

The Company had net operating loss (“NOL”) carryforwards available in 2019 that will begin to expire in 2037. As of December 31, 2019, and 2018, the Company had NOLs in the amount of approximately $19.7 million and $9.1 million, respectively.

As of December 31, 2019 and 2018, no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next year.

On June 20, 2019, the Company received a letter from the IRS informing the Company that its 2016 federal tax return was selected for examination. In August 2019, the Company had a meeting with the IRS agent and subsequently provided the IRS with all requested information under several Information Document Requests (IDRs). Thus far, the Company has not been informed of any issue. As the IRS audit is still in progress, we are unable to predict when the audit will be concluded or whether any assessment will be proposed.

Indian Tax Deducted/Collected at Source

Income generated in India is subject to Tax Deducted at Source (”TDS”), which is a means of collecting income tax at the source when income is generated rather than a later date by the Indian government. The TDS amount paid can be used as foreign tax credit for US tax purposes. However, we do not expect to use the credit due to our loss from operation. As a result,

the Company recorded a provision for income taxes of approximately $10,000 as a result of TDS for the year ended December 31, 2019.