NOTE

—INCOME TAXES

There was

provision for federal or state taxes as at

December 31, 2017

and

2016.

December 22, 2017,

the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the

“

Tax Act”

). The Tax Act significantly impacts the future ongoing U.S. corporate income tax by, among things, lowering the U.S. corporate income tax rates from

34%

21%,

providing for unlimited net operating loss carry-forward periods, and implementing a territorial tax system. The reduction of the U.S. corporate tax rate required the Company to revalue its U.S. deferred tax assets and liabilities and valuation allowances to the recently enacted federal rate of

21%.

This transitional impact resulted in a provisional reduction of certain of the Company’

s US deferred tax assets which are offset by a full valuation allowance.

The Company has deferred taxes due to income tax credits, net operating loss carryforwards, and the effect of temporary differences between the carrying values of certain assets and liabilities for financial reporting and income tax purposes. Significant components of deferred taxes are as follows at

December

31:

	2017			2016


Current asset:
Accrued compensation	$	118,000		$	67,000
Accounts receivable allowance		277,000			202,000
Non-current asset (liability):
Stock-based compensation		387,000			360,000
Basis differences in fixed assets		(18,000	)		(8,000	)
Basis differences in intangible assets		46,000			60,000
Net operating loss and credit carryforwards		12,052,000			18,597,000
Valuation allowances		(12,862,000	)		(19,278,000	)

	$	—		$	—

The Company has a valuation allowance against the full amount of its net deferred taxes due to the uncertainty of realization of the deferred tax assets due to operating loss history of the Company. The Company currently provides a valuation allowance against deferred taxes when it is more likely than

not

that some portion, or all of its deferred tax assets will

not

be realized. The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable income. Similarly, income tax benefits related to stock options exercised have

not

been recognized in the financial statements.

As of

December

31,

2017,

the Company has federal net operating loss carryforwards of approximately

$57,064,000

subject to expiration between

2021

and

2037.

These net operating loss carryforwards are subject to the limitations under Section

382

of the Internal Revenue Code due to changes in the equity ownership of the Company.

A reconciliation of the effective income tax rate on operations reflected in the Statements of Operations to the US Federal statutory income tax rate is presented below.

	2017			2016

Federal statutory income tax rate		34	%		34	%
Permanent differences		—			—
Change in tax laws/tax rate		(13	)		-
Effect of net operating loss		(21	)		(34	)

Effective tax rate		—	%		—	%

The Company has

not

been audited by the Internal Revenue Service (“IRS”) or any states in connection with income taxes. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The periods from

201

through

2017

remain open to examination by the IRS and state jurisdictions. The Company believes it is

not

subject to any tax audit risk beyond those periods. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does

not

have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any significant interest expense recognized during the years ended

December

31,

2017

and

2016.