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Note 7 - Income Taxes

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Note 7 - Income Taxes

NOTE 7 — Income Taxes

The Company recorded a net income tax expense $219,000 for 2019, compared to an income tax benefit of $143,000 for 2018.

The components of income taxes for the periods ended December 31, 2019 and 2018 are as follows:

		Years Ended December 31,
		2019				2018
Current:
Federal		$	(54,876	)		$	—
State			—				—
Total Current			(54,876	)			—
Deferred:
Federal			199,634				(50,858	)
State			74,370				(92,601	)
Total Deferred			274,004				(143,459	)
Income tax (benefit) expense		$	219,128			$	(143,459	)

Reconciliation of the statutory federal income tax rate to the Company's effective tax rate:

		Years Ended December 31,
		2019				2018
Federal tax at statutory rate			21.00	%			21.00	%
State income tax rate			6.98	%			6.98	%
Remeasurement of deferred taxes			—				—
Expenses and credits not benefited			27.51	%			(7.90	%)
Provision for taxes			55.49	%			20.08	%

As of December 31, 2019, the Company did not recognize deferred tax assets relating to an excess tax benefit for stock-based compensation deduction of $2,539,000. Unrecognized deferred tax benefits will be accounted for as a credit to additional paid-in capital when realized through a reduction in income taxes payable.

Deferred income tax reflects the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. At December 31, 2019, the Company released valuation allowance against substantially all deferred tax assets. Significant components of net deferred tax assets are valued approximately as follows:

		December 31,
Deferred tax assets:		2019				2018
Net operating loss carryforwards		$	4,546,000			$	4,849,000
Credits			1,014,000				942,000
Capitalized research and development costs			—				—
Other acquired intangibles			—				6,000
Accruals not currently deductible			685,000				648,000
Depreciation			58,000				75,000
Total deferred tax assets			6,303,000				6,520,000
Valuation allowance for deferred tax assets			(626,000	)			(569,000	)
Net deferred tax assets			5,677,000				5,951,000
Deferred tax liability:
Acquired intangibles			(170,000	)			(170,000	)
Net deferred tax assets		$	5,507,000			$	5,781,000

As of December 31, 2019, the Company had net operating loss carryforwards for federal income tax purposes of approximately $20,623,000 which will expire at various dates beginning in 2023 and through 2038. Full valuation allowance is maintained for federal research and development tax credits of approximately $626,000. As of December 31, 2019, the Company had net operating loss carryforwards for California state income tax purposes of approximately $10,713,000, which will expire at various dates in 2029 and through 2038, and state research and development tax credits of approximately $388,000, which can be carried forward indefinitely.

The Company has determined that utilization of existing net operating losses against future taxable income is not limited by Section 382 of the Internal Revenue Code. Future ownership changes, however, may limit the Company’s ability to fully utilize its existing net operating loss carryforwards against any future taxable income.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (“UTBs”), excluding interest and penalties, is as follows:

		Amount
Beginning balance at January 1, 2019		$	942,000
Decreases in UTBs taken in prior years			—
Increases in UTBs taken in current years			77,000
Ending balance at December 31, 2019		$	1,019,000

It is the Company's policy to include interest and penalties related to tax positions as a component of income tax expense. No interest was accrued for the period ended December 31, 2018. The Company estimates that the unrecognized tax benefit will not change significantly within the next twelve months.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company is not currently under audit in any of its jurisdictions where income tax returns are filed.