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Note 11 - Income Taxes
 12 Months Ended
Dec. 31, 2022
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

NOTE 11 - INCOME TAXES

 

The Company accounts for income taxes in accordance with FASB ASC Topic 740, Accounting for Income Taxes, which requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carryforwards. The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which cannot be determined. In accordance with prevailing accounting guidance, the Company is required to recognize and disclose any income tax uncertainties. The guidance provides a two-step approach to recognizing and measuring tax benefits and liabilities when realization of the tax position is uncertain. The first step is to determine whether the tax position meets the more-likely-than-not condition for recognition, and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. Actual results could differ from these estimates.

 

As of December 31, 2022, the Company had net operating loss carry-forwards of approximately $26,734,381 for U.S. federal tax purposes, expiring through 2041; approximately $20,352,624 for Danish tax purposes, which do not expire; approximately $444,303 for German tax purposes, which do not expire; approximately $577,266 for Singapore tax purposes, which do not expire; and approximately $1,950,649 for Chinese tax purposes, which expires in 2027.

 

As of December 31, 2022 and December 31, 2021, the Company established a valuation allowance of $6,510,000 and $5,364,000 for the tax components of LiqTech International Inc. and Liqtech NA, respectively; $5,226,000 and $3,506,000 for the tax components of LiqTech Holding, LiqTech Ceramics, LiqTech Water, LiqTech Plastics, LiqTech Emission Control, and LiqTech Water Projects, respectively; $124,000 and $132,000 for the tax components of LiqTech Germany, respectively; $98,000 and $104,000 for the tax components of LiqTech Singapore, respectively; and $488,000 and $193,000 for LiqTech China, respectively, as management could not determine that it was more than likely not that sufficient income could be generated by these components to realize the resulting net operating loss carry-forwards and other deferred tax assets of these components. The change in the valuation allowance for the year ended December 31, 2022 was $1,146,000, $1,720,000, $(8,000), $(6,000), and $295,000 for the US, Danish, German, Singaporean, and Chinese components, respectively. The change in the valuation allowance for the year ended December 31, 2021 was $(30,000), $1,824,000, $(11,000), $(9,000), and $193,000 for the US, Danish, German, Singaporean, and Chinese components, respectively.

 

The temporary differences, tax credits and carry forwards gave rise to the following deferred tax assets and liabilities at December 31, 2022 and December 31, 2021:

 

  

2022

  

2021

 

Excess of tax over financial accounting

 $973,859  $708,825 

Reserve for excess and obsolete inventory

  145,910   49,615 

Accrued expenses

  -   4,305 

Accrued interest

  -   13,125 

Discount amortization

  640,163   175,420 

Deferred compensation

  -   52,500 

Net operating loss carryover

  11,057,361   9,959,356 

Excess of book over tax depreciation

  (272,243

)

  (343,294

)

Excess of book over tax work in progress

  (253,930

)

  (587,469

)

Valuation allowance

  (12,445,765

)

  (10,257,162

)

  $(154,645

)

 $(224,779

)

Distributed as:

        

Long-term deferred tax asset

  -   - 

Long-term deferred tax liability

  (154,645

)

  (224,779

)

  $(154,645

)

 $(224,779

)

 

A reconciliation of income tax expense at the federal statutory rate to income tax expense at the Company’s effective rate is as follows for the years ended December 31, 2022 and 2021: 

 

  

2022

  

2021

 

Computed tax at expected statutory rate

 $(3,025,369

)

 $(2,349,899

)

State and local income taxes, net of federal benefit

  (1,532

)

  (1,387

)

Non-US income taxed at different rates

  (138,596

)

  (101,856

)

Deferred compensation

  52,500   (31,500

)

Non-deductible expenses

  2,749   1,565 

Non-taxable income

  (541

)

  - 

Change in valuation allowance

  3,035,205   2,209,294 

Other

  (161,826

)

  210,747 

Income tax expense (benefit)

 $(237,410

)

 $(63,036

)

 

The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2022 and 2021 consisted of the following:

 

  

2022

  

2021

 

Current income taxes:

        

Danish

 $(181,417

)

 $- 

Federal

  -   - 

State

  -   - 

Current tax (benefit)

 $-  $- 
         

Deferred income taxes:

        

Book in excess of tax depreciation

 $(346,154

)

 $(309,719

)

Work in progress

  (294,233

)

  (174,093

)

Net operating loss carryover

  (2,041,211

)

  (2,667,221

)

Valuation allowance

  2,319,705   2,811,619 

Deferred compensation

  (52,500

)

  31,500 

Accrued interest

  (13,125

)

  13,125 

Discount amortization

  464,744   175,420 

Accrued vacation

  (4,305

)

  4,305 

Reserve for obsolete inventory

  (88,915

)

  52,028 

Deferred tax expense (benefit)

 $(55,994

)

 $(63,036

)

Total tax expense (benefit)

 $(237,410

)

 $(63,036

)

 

Deferred income tax expense / (benefit) results primarily from the reversal of temporary timing differences between tax and financial statement income. 

 

The Company files Danish, Chinese, U.S. federal and Minnesota state income tax returns. LiqTech Holding, LiqTech Ceramics, LiqTech Water, LiqTech Plastics, LiqTech Emission Control, and LiqTech Water Projects are generally no longer subject to tax examinations for years prior to 2017 for their Danish tax returns. LiqTech NA is generally no longer subject to tax examinations for years prior to 2017 for U.S. federal and state tax returns.