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Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Taxes  
Income Taxes

7. Income Taxes.

 

Income tax expense (benefit) consists of the following:

 

Year ended December 31

 

2022

 

 

2021

 

Current taxes - Federal

 

$361,000

 

 

$-

 

Current taxes - State

 

 

(579,000)

 

 

42,000

 

Income tax expense

 

$(218,000)

 

$42,000

 

 

The actual tax (expense) benefit attributable to income (loss) before taxes differs from the expected tax benefit (expense) computed by applying the U.S. federal corporate income tax rate of 21% as follows:

 

Year Ended December 31

 

2022

 

 

2021

 

Federal statutory rate

 

 

21.0%

 

 

21.0%

Stock-based awards

 

 

0.2

 

 

 

2.0

 

State taxes

 

 

3.6

 

 

 

3.6

 

Impact of uncertain tax positions

 

 

(6.7)

 

 

(1.0)

Valuation allowance

 

 

(20.0)

 

 

(34.3)

Other

 

 

(0.3)

 

 

7.5

 

 

 

 

 

 

 

 

 

 

Effective federal income tax rate

 

 

(2.2)%

 

 

(1.2)%

Components of resulting noncurrent deferred tax assets (liabilities) are as follows:

 

As of December 31

 

2022

 

 

2021

 

Deferred tax assets

 

 

 

 

 

 

Accrued expenses

 

$231,000

 

 

$507,000

 

Inventory reserve

 

 

23,000

 

 

 

23,000

 

Stock-based awards

 

 

24,000

 

 

 

31,000

 

Reserve for bad debts

 

 

26,000

 

 

 

88,000

 

Net operating loss and credit carryforwards

 

 

824,000

 

 

 

2,507,000

 

Other

 

 

23,000

 

 

 

33,000

 

Depreciation

 

 

43,000

 

 

 

33,000

 

Valuation allowance

 

 

(1,175,000)

 

 

(3,146,000)

 

 

 

 

 

 

 

 

 

Total deferred tax assets

 

$19,000

 

 

$76,000

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

(19,000)

 

 

(76,000)

 

 

 

 

 

 

 

 

 

Total deferred tax liabilities

 

 

(19,000)

 

 

(76,000)

 

 

 

 

 

 

 

 

 

Net deferred income tax liabilities

 

$-

 

 

$-

 

 

As of December 31, 2022, the Company had a Federal pre-tax net operating loss (NOL) to carry forward of approximately $2,900,000 and state NOLs of approximately $3,500,000 to carry forward. The Federal NOLs can be carried forward indefinitely. The expiration of state NOLs carried forward varies by taxing jurisdiction. Future utilization of NOLs carried forward may be subject to certain limitations under Section 382 of the Internal Revenue Code.

 

The Company evaluates all significant available positive and negative evidence, including the existence of losses in prior years and its forecast of future taxable income, in assessing the need for a valuation allowance. The underlying assumptions the Company uses in forecasting future taxable income require significant judgment and take into consideration the Company’s recent performance. The change in the valuation allowance for the years ended December 31, 2022 and 2021 was a decrease of $1,971,000 and an increase of $1,200,000, respectively. The valuation allowance decrease in 2022 was primarily related to the utilization of the Company’s net operating loss carryforward against the Company’s taxable income. Such utilization was limited to 80% of the Company’s taxable income for the year.

 

The Company has recorded a liability of $53,000 and $711,000 for uncertain tax positions taken in tax returns in previous years as of December 31, 2022 and 2021, respectively. This liability is reflected as accrued income taxes on the Company’s balance sheets. The Company files income tax returns in the United States and numerous state and local tax jurisdictions. Tax years 2019 and forward are open for examination and assessment by the Internal Revenue Service. With limited exceptions, tax years prior to 2019 are no longer open in major state and local tax jurisdictions. The Company has recorded a decrease of approximately $678,000 in unrecognized tax benefits related to state exposure in the third quarter of 2022, which reduced accrued income taxes and increased the current income tax benefit. The Company has determined it is no longer more likely than not that the Company will realize the tax expense.

A reconciliation of the beginning and ending amount of the liability for uncertain tax positions is as follows:

 

Balance at January 1, 2021

 

$677,000

 

Increases due to interest and state tax

 

 

34,000

 

Balance at December 31, 2021

 

 

711,000

 

Decrease due to state tax expense

 

 

(678,000)

Increases due to interest and state tax

 

 

20,000

 

Balance at December 31, 2022

 

$53,000