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NOTE 9 — Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
NOTE 9 — Income Taxes

NOTE 9 — Income Taxes

 

The Company's entire pretax income / (loss) for the years ended December 31, 2021 and December 31, 2020 was from its U.S. domestic operations.

 

 

SOCKET MOBILE, INC.

NOTES TO FINANCIAL STATEMENTS

 

The components of income taxes for the periods ended December 31, 2021 and 2020 are as follows:

 

                             
   Years Ended December 31,
   2021  2020
  Current:      
  Federal  $—     $(55,676)
  State   —      4,918 
       Total Current   —      (50,758)
  Deferred:          
  Federal   (1,354,991)   —   
  State   (547,738)   —   
       Total Deferred   (1,902,729)   —   
Income tax (benefit) expense  $(1,902,729)  $—  

 

 

  

A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:

 

                 
   Years Ended December 31,
   2021  2020
  Income at US statutory rate   21.0%   21.0%
  State taxes, net of federal benefit   -11.2%   -1.9%
  Goodwill impairment   0.0%   -27.9%
  PPP loan forgiveness   0.0%   6.7%
  Valuation allowance   0.7%   2.4%
  Stock compensation   -50.2%   -1.8%
  NOL true up   -1.2%   0.0%
  Tax credits   -2.5%   1.0%
  Other   -2.2%   -0.5%
  Provision for taxes   45.6%   0%

 

The principal components of deferred tax assets and (liabilities) are as follows for the period ended:

 

                 
   December 31,
Deferred tax assets:  2021  2020
  Net operating loss carryforwards  $6,390,000   $4,330,000 
  Tax credits   1,032,000    948,000 
  Amortization   —      37,000 
  Accruals & reserves    786,000    560,000 
  Lease liabilities   70,000    200,000 
  Depreciation   167,000    140,000 
  Share-based compensation   154,000    —   
     Total deferred tax assets   8,599,000    6,215,000 
  Valuation allowance   (577,000)   (545,000)
     Net deferred tax assets   8,022,000    5,670,000 
Deferred tax liabilities:          
  Amortization   3,000   —   
  ROU assets   59,000   163,000
Net deferred tax asset (liability)  $7,960,000  $5,507,000

 

 

 

SOCKET MOBILE, INC.

NOTES TO FINANCIAL STATEMENTS

 

As of December 31, 2021, the Company had U.S. federal net operating loss carryforwards of $25.2 million which includes $19.8 million that expire at various dates from 2023 through 2033, and $5.4 million that have an unlimited carryforward period. As of December 31, 2021, the Company had state net operating loss carryforwards of $15.7 million that will expire at various dates from 2029 through 2041. 

 

As of December 31, 2021, the Company had U.S. federal research and development credit carryforwards of $1.2 million that begin to expire at various dates through 2041. As of December 31, 2021, the Company had state research and development credit carryforwards of $1.2 million that have an unlimited carryforward period.

 

As of December 31, 2021, the Company is in a net deferred tax asset position before valuation allowance. The deferred tax assets consist principally of net operating loss carryforwards. The future realization of the tax benefits from existing temporary differences and tax attributes ultimately depends on the existence of sufficient taxable income. In assessing the realization of the 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 Company also considers past operating results, projected future taxable income, and tax planning strategies in making this assessment. As of December 31, 2021, after consideration of all available evidence, both positive and negative, the Company continues to maintain a full valuation allowance against the Company’s deferred tax assets related to U.S. federal R&D tax credits because they are more likely than not to expire unused. The net change in the total valuation allowance for the years ended December 31, 2021 and 2020 was an increase of less than $0.1 million and a decrease of less than $0.1 million, respectively.

 

The future realization of the Company's net operating loss carryforwards and other tax attributes may also be limited by the change in ownership rules under the U.S. Internal Revenue Code Section 382 (“Section 382”). Under Section 382, if a corporation undergoes an ownership change (as defined in Section 382), the corporation’s ability to utilize its net operating loss carryforwards and other tax attributes to offset income may be limited. The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes.

 

The following table summarizes the activity related to the Company's unrecognized tax benefits:

  

     Amount  
Balance as of January 1, 2020  $1,019,000 
Increases (decreases) for current year tax provisions   77,000 
Increases (decreases) for prior year tax provisions   (32,000)
Decreases for expiration of statute of limitations   —   
Settlements   —   
Balance as of December 31, 2020   1,064,000
Increases (decreases) for current year tax provisions   115,000 
Increases (decreases) for prior year tax provisions   (26,000)
Decreases for expiration of statute of limitations   —   
Settlements   —   
Balance as of December 31, 2021  $1,153,000

 

 

  

 

 

SOCKET MOBILE, INC.

NOTES TO FINANCIAL STATEMENTS

 

The Company files income tax returns in the U.S. federal jurisdiction and in California, and is therefore subject to tax examination by two taxing authorities. The Company is not currently under examination and is not aware of any issues under review that could result in significant payments, accruals or material deviation from its tax positions. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state tax authorities to the extent utilized in a future period. As of December 31, 2021, the tax years from 2018 to present remain open to examination by relevant taxing jurisdictions to which the Company is subject. However, to the extent the Company utilizes net operating losses from years prior to 2018, the statute remains open to the extent of the net operating losses or other credits that are utilized.

 

The calculation and assessment of the Company's tax exposures generally involve the uncertainties in the application of complex tax laws and regulations for federal and state jurisdictions. A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation, on the basis of the technical merits. As of December 31, 2021 and 2020, the Company had 1,153,000 and $1,064,000, respectively, of unrecognized tax benefits. Of the $1.2 million as of December 31, 2021, $1.2 million if recognized would affect the effective tax rate. In addition, the Company believes it is reasonably possible that its unrecognized tax benefits will not change significantly within the next twelve months. As of December 31, 2021 and 2020, the Company has not accrued any interest and penalties related to uncertain tax positions. The Company has elected to recognize accrued interest and penalties, if any, related to uncertain tax positions in tax expense in its financial statements.