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Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes
14. Income Taxes

 

For each of the years ended December 31, 2020 and 2019, current tax provisions and current deferred tax provisions were recorded as follows:

 

    Years ended December 31,  
    2020     2019  
Current Tax Provision                
Federal   $ -     $ -  
State     (14,000 )     (25,000 )
Foreign     5,000       2,000  
      (9,000 )     (23,000 )
Deferred Tax Provision                
Federal     -       -  
State     (12,000 )     2,000  
Foreign     27,000       (6,000 )
      15,000       (4,000 )
Total Tax Provision                
Federal     -       -  
State     (26,000 )     (23,000 )
Foreign     32,000       (4,000 )
    $ 6,000     $ (27,000 )

  

The net deferred tax assets and liabilities have been reported in other liabilities in the consolidated balance sheets at December 31, 2020 and 2019 as follows:

 

    As of December 31,  
    2020     2019  
Deferred Tax Assets:                
NOL carryforwards   $ 1,873,000     $ 14,730,000  
UK NOL carryforwards     572,000       552,000  
Allowance for doubtful accounts     193,000       92,000  
Compensation and vacation accrual     -       57,000  
Operating accruals     -       6,000  
Research and experimentation, AMT and foreign tax credits     126,000       126,000  
Texas margin tax credit     91,000       106,000  
Fixed assets and intangibles     397,000       -  
Lease liabilities     9,000       854,000  
Other     704,000       846,000  
Total gross deferred tax assets     3,965,000       17,369,000  
Valuation allowance     (3,516,000 )     (16,218,000 )
Net deferred tax assets     449,000       1,151,000  
                 
Deferred Tax Liabilities:                
Capitalized software     354,000       497,000  
Right of use assets     10,000       544,000  
Fixed assets and intangibles     -       45,000  
Foreign     47,000       47,000  
Other     4,000       -  
Total gross deferred liabilities     415,000       1,133,000  
Net deferred taxes   $ 34,000     $ 18,000  

 

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,  
    2020     2019  
Tax at federal income tax rate   $ 930,000     $ 424,000  
State provision     (26,000 )     (23,000 )
Foreign tax differential     35,000       (2,000 )
Change in valuation allowance     (939,000 )     (429,000 )
Permanent items     6,000       3,000  
Total Provision   $ 6,000     $ (27,000 )

 

The net change in the total valuation allowance for the year ended December 31, 2020 was an increase of approximately $939,000. The net change in the total valuation allowance for the year ended December 31, 2019 was an increase of approximately $429,000. 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 periods in which those temporary differences become deductible. Management 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, management 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, 2020, the Company has available net operating loss (“NOL”) carryforwards of approximately $5,310,000 for federal income tax purposes. The NOL carryforwards for state purposes are approximately $16,051,000. 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 loss carryforwards due to continued operating losses. Further, the Company performed an analysis as of December 31, 2020 to determine limitations on its ability to utilize NOL carryforwards under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC”) resulting from any changes in ownership. This analysis indicates that an ownership change occurred on June 9, 2020 that would limit the use of approximately $61,965,000 of NOLs. Under IRC Section 382 and similar state provisions, ownership changes will limit the annual utilization of net operating loss carryforwards existing prior to a change in control that are available to offset future taxable income. Such limitations have reduced the gross deferred tax assets disclosed in the table above related to the NOL carryforwards by an estimated $11,021,000. The Company discloses the NOL carryforwards at their 382 limitation amount in the table above as potential limitation has been quantified. The Company has 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 that it would be able to generate future taxable income to realize these assets.

  

The Merger described in Note 3 above will likely result in an ownership change for purposes of Section 382, but no formal analysis is expected to be undertaken in this regard.

 

In addition, the Company has approximately $114,000 of state tax credit tax carryforwards that expire in the years 2021 through 2027.

 

The deferred tax assets as of December 31, 2020 include a deferred tax asset of $439,000 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 2016. 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.