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Note 9 - Income Taxes
 12 Months Ended
Dec. 31, 2020
Notes to Financial Statements  
Note 9 - Income Taxes

NOTE 9 — Income Taxes

 

The Company recorded a net income tax benefit of approximately $51,000 for 2020, compared to an income tax expenses of approximately $219,000 for 2019. 

 

The components of income taxes for the periods ended December 31, 2020 and 2019 are as follows:

   Years Ended December 31,
   2020  2019
  Current:      
  Federal  $(55,676)  $(54,876)
  State   4,918    —   
       Total Current   (50,758)   (54,876)
  Deferred:          
  Federal   —      199,634 
  State   —      74,370 
       Total Deferred   —      274,004 
Income tax (benefit) expense  $(50,758)  $219,128

 

 

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

 

   Years Ended December 31,
   2020  2019
  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   (27.98)%   27.51%
  Provision for taxes   0%   55.49%

 

As of December 31, 2020, the Company did not recognize deferred tax assets relating to an excess tax benefit for stock-based compensation deduction of $2,622,000. 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. Significant components of net deferred tax assets are valued approximately as follows: 

 

   December 31,
Deferred tax assets:  2020  2019
  Net operating loss carryforwards   $4,330,000   $4,546,000 
  Credits    948,000    1,014,000 
  Capitalized research and development costs    —      —   
  Other acquired intangibles    37,000    —   
  Accruals not currently deductible    597,000    685,000 
  Depreciation    140,000    58,000 
     Total deferred tax assets    6,052,000    6,303,000 
  Valuation allowance for deferred tax assets    (545,000)   (626,000)
     Net deferred tax assets    5,507,000    5,677,000 
Deferred tax liability:          
  Acquired intangibles    —      (170,000)
Net deferred tax assets   $5,507,000   $5,507,000 

  

As of December 31, 2020, the Company had net operating loss carryforwards for federal income tax purposes of approximately $20,081,000 which will expire at various dates beginning in 2023 and through 2040. Full valuation allowance is maintained for federal research and development tax credits of approximately $548,000. As of December 31, 2019, the Company had net operating loss carryforwards for California state income tax purposes of approximately $9,890,000, which will expire at various dates in 2032 and through 2038, and state research and development tax credits of approximately $406,000, 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, 2020   $1,019,000 
Decreases in UTBs in prior years    (32,000)
Increases in UTBs in current years    77,000 
Ending balance at December 31, 2020   $1,064,000

 

 

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, 2020. 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.