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12. INCOME TAXES | 12 Months Ended
--- | ---
Dec. 31, 2016
Notes to Financial Statements |
Note 12. INCOME TAXES | The Company’s income tax expense consisted of:
|  |  | For the Year Ended |
|  |  | December 31, |  |  |  | December 31, |
|  |  | 2016 |  |  |  | 2015 |
Current: |  |  |  |  |  |  |  |
United States |  | $ | — |  |  | $ | — |
Foreign |  |  | — |  |  |  | — |
|  |  | — |  |  |  | — |
Deferred: |  |  |  |  |  |  |  |
United States |  |  | — |  |  |  | — |
Foreign |  |  | — |  |  |  | — |
|  |  | — |  |  |  | — |
Total |  | $ | — |  |  | $ | — |
The Company’s net income (loss) before income tax consisted of:
|  | For the Year Ended
|  | December 31, |  | December 31,
|  | 2016 |  | 2015
United States |  | $ | (3,157,259 | ) |  | $ | (12,176,319 | )
Foreign |  |  | — |  |  |  | — |
Total |  | $ | (3,157,259 | ) |  | $ | (12,176,319 | )
Our income tax expense differed from the amounts computed by applying the United States statutory corporate income tax rate for the following reasons:
|  | For the Year Ended
|  | December 31, |  | December 31,
|  | 2016 |  | 2015
Loss before income tax |  | $ | (3,157,259 | ) |  | $ | (12,176,319 | )
US statutory corporate income tax rate |  |  | 39.45 | % |  |  | 39.45 | %
Income tax expense computed at US statutory corporate income tax rate |  |  |  |  |  |  |  |
Income tax expense computed at US statutory corporate income tax rate |  |  | (1,245,539 | ) |  |  | (4,803,558 | )
Reconciling items: |  |  |  |  |  |  |  |
Change in valuation allowance on deferred tax assets |  |  | 1,258,389 |  |  |  | 592,550 |
Provision to prior year tax return |  |  | (250,994 | ) |  |  | — |
Incentive stock options and warrants |  |  | 242,498 |  |  |  | 673,172 |
Finance charges related to convertible notes |  |  | — |  |  |  | 1,776,059 |
Amortized debt discount |  |  | — |  |  |  | 269,787 |
Meals and Entertainment |  |  | 8,595 |  |  |  | 5,527 |
Change in fair value of derivative liability |  |  | — |  |  |  | 1,503,422 |
Other |  |  | (12,949 | ) |  |  | (16,958 | )
Income tax expense |  | $ | 0.00 |  |  | $ | 0.00 |
Components of our deferred income tax assets (liabilities) are as follows:
|  | December 31, |  | December 31,
|  | 2016 |  | 2015
Deferred tax assets: |  |  |  |  |  |  |  |
Reserve for Bad Debt |  | $ | 118,000 |  |  | $ | 17,750 |
Inventory Capitalization |  |  | 152,000 |  |  |  | 51,000 |
Accrued Vacation |  |  | 8,700 |  |  |  | — |
Deferred Rent |  |  | 3,400 |  |  |  | 5,800 |
Intangible Assets |  |  | 237,000 |  |  |  | 229,000 |
Net operating losses |  |  | 4,380,000 |  |  |  | 3,392,000 |
Valuation Allowance |  |  | (4,893,700 | ) |  |  | (3,634,550 | )
Deferred Tax Assets |  |  | 5,400 |  |  |  | 61,000 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Property Plant and Equipment |  | $ | (5,400 | ) |  | $ | (61,000 | )
Net Deferred Tax Assets and Liabilities |  | $ | — |  |  | $ | — |
Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are, on a more likely than not basis, not expected to be realized; in accordance with ASC guidance for income taxes. As of December 31, 2016, we recorded a valuation allowance of $4,893,700 for the portion of the deferred tax assets that we do not expect to be realized. The valuation allowance on our net deferred taxes increased by $1,259,150 during the year ended December 31, 2016, primarily due to additional U.S. deferred tax assets incurred in the current year that cannot be realized. Management believes that based on the available information, it is more likely than not that the U.S. deferred tax assets will not be realized, such that a valuation allowance is required against U.S. deferred tax assets. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. For income tax purposes in the United States, we had available federal net operating loss carryforwards ("NOL") as of December 31, 2016 and 2015 of approximately $11,395,000 and $9,355,000 respectively to reduce future federal taxable income. For income tax purposes in the United States, we had available state NOL carryforwards as of December 31, 2016 and 2015 of approximately $9,284,000 and $7,243,000 respectively to reduce future state taxable income. If any of the NOL's are not utilized, they will expire at various dates through 2036. There may be certain limitations as to the future annual use of the NOLs due to certain changes in our ownership. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. As of December 31, 2016 and 2015, the management of the Company determined there were no reportable uncertain tax positions.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32559-109319 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32718-109319 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32537-109319 + Details
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