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14. INCOME TAXES

12 Months Ended

Sep. 30, 2018

Income Taxes

INCOME TAXES

The Company generated operating losses for the years ended September 30, 2018 and 2017 on which it has recognized a full valuation allowance. The Company accounts for its state franchise and minimum taxes as a component of its general and administrative expenses.

The following table presents the components of the provision for income taxes for the periods presented:

		Years Ended September 30,
		2018				2017
Current
Federal		$	—			$	—
State			—				—
Total current			—				—
Deferred
Federal			15,000				24,000
State			1,000				1,000
Total deferred			16,000				25,000
Total provision		$	16,000			$	25,000

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

		Years Ended September 30,
		2018				2017
Federal statutory income tax rate			24.3	%			34.0	%
State income taxes, net of federal benefit			49.0				3.2
Permanent differences			(384.5	)			-
Tax impact of federal tax rate change			1,708.1				-
Limitation on net operating losses			1,065.8				(2.3	)
Tax impact of non-controlling interest			(246.4	)			21.1
Change in valuation allowance			(2,250.5	)			(57.8	)

Provision for income taxes			(34.2	)%			(1.8	)%

Significant components of the Company's deferred income taxes are shown below:

		Years Ended September 30,
		2018				2017
Deferred tax assets:
Net operating loss carryforwards		$	1,396,000			$	2,304,000
Stock compensation			139,000				87,000
Investments			0				32,000
Accrued expenses			0				2,000
Intangibles			42,000				0
Capitalized expenses			7,000				-
Charitable contributions			26,000				10,000

Total deferred tax assets			1,610,000				2,435,000

Deferred tax liabilities:
Prepaid expenses			(177,000	)			(31,000	)
Management fees			(169,000	)			(73,000	)
Intangibles			(21,000	)			(33,000	)
Fixed assets			(1,000	)			(18,000	)
Total deferred tax liabilities			(368,000	)			(155,000	)
Net deferred tax assets			1,242.000				2,280,000
Valuation allowance			(1,263,000	)			(2,317,000	)

Net deferred tax liability		$	(21,000	)		$	(37,000	)

The Company has established a valuation allowance against net deferred tax assets due to the uncertainty that such assets will be realized. The deferred tax liabilities that result from indefinite life intangibles cannot be offset by deferred tax assets. The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred tax assets will be realizable, the valuation allowance will be reduced.

Under Internal Revenue Code (IRC) Section 382, the use of net operating loss (“NOL”) carryforwards may be limited if a change in ownership of a company occurs. During the year ending September 30, 2018, the company determined that a change of ownership under IRC Section 382 had occurred during the years ending September 30, 2017 and 2015. As a result of these ownership changes, the pre-ownership change NOL carryforwards would be limited and approximately $2.1 million of such NOLs will expire before being utilized. Therefore, at September 30, 2018 the Company reduced the deferred tax asset and related valuation allowance associated with these NOLs by approximately $0.5 million due to IRC Section 382.

The total valuation allowance decreased by $1,054,000 and increased by $788,000 as of September 30, 2018 and 2017, respectively.

At September 30, 2018, the Company has utilizable NOL carryforwards of approximately $6.0 million. The federal NOL carryforwards begin to expire in 2035.

The Company accounts for its state franchise and minimum taxes as a component of its general and administrative expenses.

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted. As a result of the enactment, the U.S. corporate tax rate was changed from a progressive bracketed tax rate with the highest marginal rate of 35% to a flat corporate tax rate of 21%. As the Company has a fiscal year ending September 30, the blended effective rate is 24.3% for the fiscal year ended September 30, 2018. The Company revalued its deferred tax assets and liabilities, as well as the valuation allowance, at the date of enactment and these repricings are reflected gross in the above presented rate reconciliation. Finally, as the Company does not own more than 10% of any foreign companies, there is no impact of IRC Section 965 to the Company as a result of the TCJA.

The Company files income tax returns in the United States, and various state jurisdictions. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. At September 30, 2018 and 2017, there are no unrecognized tax benefits, and there are no significant accruals for interest related to unrecognized tax benefits or tax penalties.