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

(7) Income Taxes

 

  (a) Income Tax Expense

 

Income tax expense consists of:

 

         
   December 31, 
   2021   2020 
         
U.S. federal  $-   $- 
State and local   200    200 
Deferred   -    - 
Total  $200   $200 

 

  (b) Tax Rate Reconciliation

 

Income tax expense was $200 and $200, respectively, for the years ended December 31, 2021 and 2020 and differed from the amounts computed by applying the U.S. federal income tax rate of 21% for 2021 and 2020, respectively, to pretax income from continuing operations as a result of the following:

 Schedule of Pretax Income from Continuing Operations

         
   December 31, 
   2021   2020 
         
Computed “expected” tax benefit  $(133,182)  $(4,402,570)
Increase (reduction) in income taxes resulting from:          
Change in valuation allowance   476,431    4,248,002 
State and local income taxes, net of federal income tax benefit   158    158 
Stock expense   97,697    86,209 
Research and development tax credits   (352,163)   (485,254)
Orphan drug tax credit   (14,025)   (4,797)
Warrant liability   (74,737)   607,360 
Other, net   21    (48,908)
Total  $200   $200 

 

 

LIPOCINE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 and 2020

 

(7) Income Taxes – (continued)

 

  (c) Significant Components of Deferred Taxes

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 are presented below.

         
   December 31, 
   2021   2020 
         
Deferred tax assets:          
Stock-based compensation  $1,687,480   $1,651,482 
Net operating loss carryforwards   34,759,890    35,102,326 
Employee benefits   56,009    54,108 
Research and development tax credits   4,935,609    4,472,003 
Orphan drug tax credits   1,186,582    1,168,828 
Plant and equipment   -    959 
Other deductible tempory differences   394,636    5,386 
Total gross deferred tax assets   43,020,206    42,455,092 
           
Deferred tax assets:          
Plant and equipment   (1,871)   - 
Total gross deferred tax liabilities   (1,871)   - 
Net deferred tax liabilities  $(1,871)  $- 
           
Deferred tax asset/deferred tax liability   43,018,335    42,455,092 
Less valuation allowance   (43,018,335)   (42,455,092)
Net deferred tax assets  $-   $- 

 

The valuation allowance for deferred tax assets as of December 31, 2021 and 2020 was $43.0 million and $42.5 million. The net change in the valuation allowance was an increase of $0.5 million in 2021 and an increase of $5.2 million in 2020. A valuation allowance has been provided for the full amount of the Company’s net deferred tax assets as the Company believes it is more likely than not that these benefits will not be realized. In assessing the realizability of deferred tax assets, management considers 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 (including the impact of available carryback and carryforward periods), projected future taxable income, and tax planning strategies in making this assessment.

 

 

LIPOCINE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 and 2020

 

(7) Income Taxes – (continued)

 

During the year ended December 31, 2013, the Company experienced a change in ownership, as defined by the Internal Revenue Code, as amended (the “Code”) under Section 382. A change of ownership occurs when ownership of a company increases by more than 50 percentage points over a three-year testing period of certain stockholders. As a result of this ownership change, we determined that our annual limitation on the utilization of our federal net operating loss (“NOL”) and credit carryforwards is approximately $1.1 million per year. We will only be able to utilize $20.2 million of our pre-ownership change NOL carryforwards and will forgo utilizing $5.5 million of our pre-ownership change NOL carryforwards and $1.2 million of our pre-change credit carryforwards as a result of this ownership change. We do not account for forgone NOL and credit carryovers in our deferred tax assets and only account for the NOL and credit carryforwards that will not expire unutilized as a result of the restrictions of Code Section 382.

 

As of December 31, 2021, we had NOL and research and development credit carryforwards for U.S. federal income tax reporting purposes of approximately $135.6 million and $3.5 million, respectively. Approximately $24.6 million of the NOL will expire between 2023 and 2033 and $70.8 million of the NOL will expire 2034 through 2037. Pursuant to the Tax Cuts and Jobs Act of 2017, NOL’s generated in 2018 and subsequent years have an unlimited carryforward therefore the 2020, 2019 and 2018 NOL of $40.2 million can be carried forward indefinitely. The research and development credits will begin to expire in 2033 through 2041. We have orphan drug credit carry forwards of approximately $1.2 million which will expire if unused through 2041.

 

We also have state NOL and research and development credit carry forwards of approximately $127.1 million and $1.4 million, respectively. None of the Company’s state NOL expires in 2022, $34.8 million expires between 2022 and 2029, and $92.3 million will expire in 2030 through 2036. The state research and development credits expire in 2023 through 2035.

 

The Company’s federal and state income tax returns for December 31, 2018 through 2021 are open tax years.

 

A reconciliation of the beginning and ending amount of total unrecognized tax contingencies, excluding interest and penalties, for the years ended December 31, 2021 and 2020 are as follows:

   December 31, 
   2021   2020 
         
Balance, beginning of year   $-  $-
                                      
Balance, end of year   $-  $-