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Income Taxes
 12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes
12. Income Taxes

 

For each of the years ended December 31, 2019 and 2018, current tax provisions and current deferred tax provisions were recorded as follows:

 

    As of December 31,
    2019     2018  
Current Tax Provision                
Federal   $ -     $ 21,000  
State     (25,000 )     (21,000 )
Foreign     2,000       (5,000 )
      (23,000 )     (5,000 )
Deferred Tax Provision                
Federal     -       -  
State     2,000       6,000  
Foreign     (6,000 )     63,000  
      (4,000 )     69,000  
Total Tax Provision                
Federal     -       21,000  
State     (23,000 )     (15,000 )
Foreign     (4,000 )     58,000  
    $ (27,000 )   $ 64,000  

 

The net deferred tax assets and liabilities have been reported in other liabilities in the consolidated balance sheets at December 31, 2019 and 2018 as follows:

 

    As of December 31,  
    2019     2018  
Deferred Tax Assets:                
NOL carryforwards   $ 14,730,000     $ 15,756,000  
UK NOL carryforwards     552,000       534,000  
Allowance for doubtful accounts     92,000       97,000  
Compensation and vacation accrual     57,000       58,000  
Operating accruals     6,000       285,000  
Research and experimentation, AMT and foreign tax credits     126,000       126,000  
Texas margin tax credit     106,000       120,000  
Lease liabilities     854,000       -  
Other     846,000       850,000  
Total gross deferred tax assets     17,369,000       17,826,000  
Valuation allowance     (16,218,000 )     (17,149,000 )
Net deferred tax assets     1,151,000       677,000  
Deferred Tax Liabilities:                
Capitalized software     497,000       523,000  
Right of use assets     544,000       -  
Fixed assets and intangibles     45,000       86,000  
Foreign     47,000       45,000  
Total gross deferred liabilities     1,133,000       654,000  
Net deferred taxes   $ 18,000     $ 23,000  

 

The reconciliation of computed expected income taxes to effective income taxes by applying the federal statutory rate of 21% is as follows:

 

    As of December 31,  
    2019     2018  
Tax at federal income tax rate   $ 424,000     $ 68,000  
State provision     (23,000 )     (15,000 )
Foreign tax differential     (2,000 )     13,000  
Change in valuation allowance     (429,000 )     (20,000 )
Permanent items     3,000       (3,000 )
Other     -       21,000  
Total Provision   $ (27,000 )   $ 64,000  

 

The net change in the total valuation allowance for the year ended December 31, 2019 was an increase of $429,000. The net change in the total valuation allowance for the year ended December 31, 2018 was an increase of $20,000. In assessing the realizability of deferred tax assets, the Company 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 periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and planning strategies in making this assessment. Based on the level of historical operating results and projections for the taxable income for the future, the Company has determined that it is more likely than not that the portion of deferred taxes not utilized through the reversal of deferred tax liabilities will not be realized. Accordingly, the Company has recorded a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.

 

At December 31, 2019, the Company had NOL carryforwards of approximately $63,354,000 for federal income tax purposes, which will continue expiring in 2020, and approximately $29,195,000 for state income tax purposes, which will continue expiring in 2020. There can be no assurance that the Company will ever be able to realize the benefit of some or all of the federal and state NOL carryforwards due to continued operating losses. Under Internal Revenue Code (“IRC”) Section 382 and similar state provisions, ownership changes may limit the annual utilization of NOL carryforwards existing prior to a change in control that are available to offset future taxable income. Such limitations would reduce, potentially significantly, the gross deferred tax assets disclosed in the table above related to the NOL carryforwards. The Company performed a Section 382 analysis as of December 31, 2018 to determine the impact of any changes in ownership. Based on this analysis, no ownership change occurred that would limit the use of the NOLs. The Company does not believe there has been a material change in its ownership between the Section 382 analysis completed through December 31, 2018 and the year ended December 31, 2019 that would indicate a limit on the use of the NOLs. The Company continues to disclose the NOL carryforwards at their original amount in the table above as no potential limitation has been quantified. The Company also established a full valuation allowance for substantially all deferred tax assets, including the NOL carryforwards, since the Company could not conclude that it was more likely than not able to generate future taxable income to realize these assets. In addition, the Company has approximately $133,000 of state tax credit tax carryforwards that expire in the years 2020 through 2026.

 

The deferred tax assets as of December 31, 2019 include a deferred tax asset of $442,000 representing NOLs arising from the exercise of stock options by Company employees for 2005 and prior years. To the extent the Company realizes any tax benefit for the NOLs attributable to the stock option exercises, such amount would be credited directly to stockholders’ equity.

 

United States income taxes were not provided on unremitted earnings from non-United States subsidiaries. Such unremitted earnings are considered to be indefinitely reinvested and determination of the amount of taxes that might be paid on these undistributed earnings is not practicable.

 

The Company and its subsidiaries are subject to federal income tax as well as income tax of multiple state jurisdictions. With few exceptions, the Company is no longer subject to income tax examination by tax authorities in major jurisdictions for years prior to 2015. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where NOLs were generated and carried forward, and make adjustments up to the amount of the carryforwards. The Company is not currently under examination by the IRS or state taxing authorities.