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Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes

NOTE 10. INCOME TAXES

 

The components of income tax provision (benefit) for the years ended December 31, 2020 and 2019 are as follows:

 

      2020       2019  
Current taxes:                
Federal   $ —     $ —  
State     —       —  
                 
Total current taxes     —       —  
Deferred tax provision (benefit)     —       —  
                 
Income tax provision (benefit)   $ —     $ —  

 

A reconciliation of the income tax (provision) benefit at the statutory rate of 21% for the years ended December 31, 2020 and 2019 to the Company’s effective tax rate is as follows:

 

    2020     2019  
U.S. Statutory tax rate     21.0 %     21.0 %
State taxes, net of Federal benefit     5.1 %     5.1 %
Stock based compensation     (1.9 )%     (2.6 )%
Change in valuation reserve on deferred tax assets     (32.6 )%     (22.4 )%
Forgiveness of Payroll Protection Plan loan     11.3 %     — %
Other, net     (2.9 )%     (1.1 )%
                 
Income tax (provision) benefit     — %     — %

 

Significant components of the Company’s deferred tax assets (liabilities) as of December 31, 2020 and 2019 are as follows:

 

    2020     2019  
Deferred tax assets:                
Stock-based compensation   $ 765,000     $ 605,000  
Start-up costs     115,000       115,000  
Inventory reserves     510,000       1,080,000  
Uniform capitalization of inventory costs     85,000       85,000  
Allowance for doubtful accounts receivable     35,000       90,000  
Equipment depreciation     255,000       240,000  
Deferred revenue     915,000       915,000  
Debt and PIA obligations carried at fair value     —       1,045,000  
Accrued expenses     120,000       110,000  
Net operating loss carryforward     19,855,000       17,515,000  
Research and development tax credit carryforward     1,795,000       1,795,000  
State jobs credit carryforward     230,000       230,000  
Charitable contributions carryforward     60,000       55,000  
                 
Total deferred tax assets     24,740,000       23,880,000  
Valuation reserve     (24,595,000 )     (23,740,000 )
                 
Total deferred tax assets     145,000       140,000  
Domestic international sales company     (145,000 )     (140,000 )
Total deferred tax liabilities     (145,000 )     (140,000 )
                 
Net deferred tax assets (liability)   $ —     $ —  

 

The valuation allowance on deferred tax assets totaled $24,595,000 and $23,740,000 as of December 31, 2020 and 2019, respectively. The Company records the benefit it will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred tax assets.” In accordance with ASC 740, “Income Taxes,” the Company records a valuation allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

The Company has incurred operating losses in 2020 and 2019 and it continues to be in a three-year cumulative loss position at December 31, 2020 and 2019. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it determined to increase our valuation allowance by $855,000 to continue to fully reserve its deferred tax assets at December 31, 2020. The Company expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity.

 

At December 31, 2020, the Company had available approximately $76,070,000 of Federal net operating loss carryforwards available to offset future taxable income generated. Such tax net operating loss carryforwards expire between 2026 and 2040. In addition, the Company had research and development tax credit carryforwards totaling $1,795,000 available as of December 31, 2020, which expire between 2023 and 2037.

 

The Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss carry-forwards in the event that it has experienced a more than 50% change in ownership over a three-year period. Current estimates prepared by the Company indicate that due to ownership changes which have occurred, approximately $765,000 of its net operating loss and $175,000 of its research and development tax credit carryforwards are currently subject to an annual limitation of approximately $1,151,000, and may be further limited by additional ownership changes which may occur in the future. As stated above, the net operating loss and research and development credit carryforwards expire between 2023 and 2037, allowing the Company to potentially utilize all of the limited net operating loss carry-forwards during the carryforward period.

 

As discussed in Note 1, “Summary of Significant Accounting Policies,” tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Management has identified no tax positions taken that would meet or exceed these thresholds and therefore there are no gross interest, penalties and unrecognized tax expense/benefits that are not expected to ultimately result in payment or receipt of cash in the consolidated financial statements.

 

The effective tax rate for the years ended December 31, 2020 and 2019 varied from the expected statutory rate due to the Company continuing to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of December 31, 2020 primarily because of the current year operating losses.

 

The Company’s federal and state income tax returns are closed for examination purposes by relevant statute and by examination for 2016 and all prior tax years.