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INCOME TAXES
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
INCOME TAXES

 

  11. INCOME TAXES

 

We account for income taxes in accordance with ASC 740 Income Taxes. ASC 740 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected tax consequences or events that have been recognized in our consolidated financial statements or tax returns. ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in the consolidated financial statements. The interpretation prescribes a recognition threshold and measurement attribute for the consolidated financial statements recognition and measurement of a tax position taken, or expected to be taken, in a tax return.

 

The Company files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. The 2014 tax return was under audit by the IRS and the Company has received notification that the returns will be accepted as filed. The Company generally is no longer subject to U.S. or state examinations by tax authorities for taxable years prior to 2017. However, net operating losses utilized from prior years in subsequent years’ tax returns are subject to examination until three years after the filing of subsequent years’ tax returns. The statute of limitations expiration in foreign jurisdictions for corporate tax returns generally ranges between two and five years depending on the jurisdiction.

 

The provision (benefit) for income taxes consists of the following:

 

Year ended December 31,   2021   2020 
Current:           
Federal   $1,210   $(57,788)
State    13,399    4,374 
Deferred:           
Federal    —    — 
State    —    — 
Total   $14,609   $(53,414)

 

The difference between the income tax provision computed at the federal statutory rate and the actual tax provision (benefit) is accounted for as follows:

 

December 31,  2021   2020 
Taxes computed at the federal statutory rate  $1,435,346   $(778,715)
State income tax, net   10,585    3,454 
Research and development tax credit   (198,507)   (210,374)
Change in valuation allowance   (247,094)   943,047 
PPP Loan forgiveness   (1,006,950)   — 
Other   (22,879)   — 
Refund from IRS audit   —    (57,787)
Permanent differences   44,108    46,961 
Provision(benefit) for income taxes  $14,609   $(53,414)

 

The components of deferred income tax assets and liabilities are as follows:

 

Deferred Tax Assets:  2021   2020 
Allowance for doubtful accounts  $45,794   $56,884 
Credit carryforwards   2,005,909    1,758,809 
Inventory reserve   1,137,436    1,046,890 
Accrued Payroll   88,118    — 
Loss contracts reserve   185,329    260,780 
Restricted stock   191,076    189,072 
Other   20,244    18,654 
Acquisition costs   86,841    93,063 
Lease liability   1,751,168    950,141 
Accrued legal   33,438    — 
Disallowed interest expense   801,385    909,800 
Net operating loss carryforward   20,140,818    20,953,330 
Deferred tax assets   26,487,556    26,237,423 
           
Valuation allowance   (22,235,611)   (22,704,931)
           
Deferred Tax Liabilities:          
Prepaid expenses   136,381    115,437 
Revenue recognition   2,144,797    2,086,045 
Property and equipment   269,653    441,590 
ROU asset   1,701,114    889,420 
Deferred tax liabilities  $4,251,945   $3,532,492 
Net deferred tax liabilities  $—   $— 

 

 

 

As of December 31, 2021 the Company had approximately $88.6 million of gross net operating loss carryforwards (“NOLs”) for federal tax purposes and approximately $37.8 million of post apportionment NOLs for state tax purposes. The federal NOLs begin to expire in 2034, losses generated in 2018 and forward have an indefinite life. The state NOLs begin to expire in 2034.

 

As a result of the Tax Cuts and Jobs Act of 2017 and the Coronavirus Aid, Relief, and Economic Security Act of 2020, federal NOLs arising before January 1, 2018, and NOLs arising after January 1, 2018, are subject to different rules. Our pre-2018 NOLs totaled approximately $78.9 million; these NOLs will expire in varying amounts from 2034 through 2039, if not utilized, and can offset 100% of future taxable income for regular tax purposes. Our NOLs arising in 2018, 2019 and 2020 can generally be carried back five years, carried forward indefinitely and can offset 100% of taxable income for tax years before January 1, 2021 and up to 80% of taxable income for tax years after December 31, 2020. Any NOLs arising on or after January 1, 2021, cannot be carried back, can generally be carried forward indefinitely and can offset up to 80% of future taxable income. The state NOLs begin to expire in 2034.

 

Our ability to fully recognize the benefits from our NOLs is dependent upon our ability to generate sufficient income prior to their expiration. In addition, our NOL carryforwards may be limited if we experience an ownership change as defined by Section 382 of the Internal Revenue Code (“Section 382”). In general, an ownership change under Section 382 occurs if 5% shareholders increase their collective ownership of the aggregate amount of our outstanding shares by more than 50 percentage points over a relevant lookback period. The Company has not completed a Section 382 analysis for the year ended December 31, 2021; however, The Company believes that no ownership change occurred during the relevant lookback period that would limit our ability to use our NOLs. The sale of additional equity securities in the future may trigger an ownership change under IRC Section 382, which could significantly limit our ability to utilize our tax benefits. The Company will recognize a tax benefit in the consolidated financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (i.e., a likelihood greater than 50%) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes.

 

The provision for income tax for the year ended December 31, 2021 was $14,609, an effective tax rate of 0.21%. The tax provision was mostly the result of state franchise and minimum taxes.