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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.