• Filing Date: 2021-03-31
  • Form Type: 10-K
  • Description: Annual report
v3.21.1
Income Taxes
12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes

NOTE 13 - INCOME TAXES

 

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for the amount of tax benefits which are not expected to be realized.

 

The following is a summary of the components giving rise to the income tax provision (benefit) for the years ended December 31:

 

The provision (benefit) for income taxes consists of the following:

 

    2020     2019  
Currently payable:                
Federal   $ -     $ -  
State     5,000       -  
Total currently payable     5,000       -  
Deferred:                
Federal     582,000       (367,000 )
State     (22,000     (125,000 )
Foreign     (125,000 )     (117,000 )
Total deferred     435,000       (609,000 )
Less: (decrease) increase in allowance     (2,214,000 )     484,000  
Net deferred     (1,779,000 )     (125,000 )
Total income tax benefit   $ (1,774,000 )   $ (125,000 )

 

Individual components of deferred tax assets and liabilities are as follows:

 

    2020     2019  
Deferred tax assets:            
Net operating loss carry forwards   $ 13,852,000     $ 11,189,000  
Equity issued for services     192,000       169,000  
Goodwill and other intangibles     0       676,000  
Investment in pass-through entity     12,000       12,000  
Deferred revenue     183,000       182,000  
Operating Lease Liability     47,000       284,000  
Other     605,000       376,000  
Gross deferred tax assets     14,891,000       12,888,000  
                 
Deferred tax liabilities:                
Goodwill and other intangibles     4,668,000       29,000  
Unrealized gains     2,599,000       -  
Right -of-use asset     47,000       284,000  
Gross deferred tax liabilities     7,314,000       313,000  
                 
Less: valuation allowance     (11,076,000 )     (12,619,000 )
                 
Net deferred tax liabilities   $ (3,499,000 )   $ (44,000 )

 

The 2017 Tax Cuts and Jobs Act repeals the corporate alternative minimum tax (AMT) and permits existing minimum tax credits carryovers to offset the regular tax liability for any tax year. Further, the credit is refundable for any tax year beginning after December 31, 2017 and before December 31, 2020 in an amount equal to 50 percent of the excess of the minimum tax credit over regular liability. Any remaining credit will be fully refundable for the year ended December 31, 2021. As of December 31, 2020 and 2019, the Company had $0 and $46,000 respectively of minimum tax credit included in prepaids and other current assets in the accompanying consolidated balance sheet.

 

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Act permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a 21% rate, effective January 1, 2018

 

Pretax losses from the Company’s foreign subsidiaries amounted to $.4 million and $1.5 million for 2020 and 2019, respectively. The balance of pretax earnings or loss for each of those years were domestic.

 

While the Tax Cuts and Jobs Act provides for a territorial tax system, beginning in 2018, it includes the foreign-derived intangible income (“FDII”) and global intangible low-taxed income (“GILTI”) provisions. The Company elected to account for GILTI tax in the period in which it is incurred. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings from its Controlled Foreign Corporations (“CFCs”) in excess of an allowable return on the foreign subsidiary’s tangible assets. The FDII provisions allow for a deduction equal to a percentage of the foreign-derived intangible income of a domestic corporation. As a result of these provisions, the Company did not have any additional tax expense or benefit from either GILTI or FDII.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the economic uncertainty resulting from the COVID-19 pandemic. The CARES Act includes many measures to assist companies, including temporary changes to income and non-income based laws, some of which were enacted as part of the Tax Cuts and Jobs Act of 2017 (“TCJA”). Some of the key changes include eliminating the 80% of taxable income limitation by allowing corporate entities to fully utilize NOLs to offset taxable income in 2018, 2019 and 2020, allowing NOLs originating in 2018, 2019 and 2020 to be carried back five years, enhanced interest deductibility, and retroactively clarifying the immediate recovery of qualified improvement property costs rather than over a 39-year recovery period. During the year ended December 31, 2020, the Company was not able to benefit from these provisions. The Company will continue to monitor additional guidance issued and assess the impact that various provisions will have on its business. 

 

At December 31, 2020 and 2019, the Company has approximately $56.7 million and $50.0 million in federal net operating loss carryforwards (“NOLs”), respectively, available to reduce future taxable income. Under the provisions of the Internal Revenue Code, the net operating losses are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Certain tax attributes are subject to an annual limitation as a result of certain cumulative changes in ownership interest of significant shareholders which could constitute a change of ownership as defined under Internal Revenue Code Section 382. The Company has completed a full analysis of historical ownership changes and determined that a portion of the net operating losses have a limitation on future deductibility. Approximately $43.8 million of net operating losses incurred prior to 2020 will be unable to offset future taxable income and have been reserved via a valuation allowance to reduce the deferred tax asset to the expected realizable amount, leaving $2.9M available for use which expire at various dates through 2038 and the residual which never expire. Additionally, at December 31, 2020 and 2019, the Company had approximately $6.9 million and $5.5 million, and $2.2 million and $1.4 million, of California and Illinois NOL carry-forwards, respectively, which expire through 2039. The NOL carry-forwards may be limited in certain circumstances, including ownership change and have been fully reserved via a valuation allowance.

 

The valuation allowance for deferred tax assets decreased approximately $1,543,000 (net of $671,000 acquired with Impact BioMedical) in the year ended December 31, 2020 and increased by approximately $484,000 in the year ended December 31, 2019. The decrease in the current year valuation allowance and subsequent increase in the deferred tax liability is driven by several factors and is represented in the below table:

 

Balance at December 31, 2019   $ 44,000  
Add: Acquisition of Impact BioMedical     5,234,000  
  Current year activity     435,000  
           
Less:          
  Release of valuation allowance     2,214,000  
           
Balance at December 31, 2020   $ 3,499,000  

 

The differences between the United States statutory federal income tax rate and the effective income tax rate in the accompanying consolidated statements of operations are as follows:

 

    2020     2019  
Statutory United States federal rate     21.0 %     21.00 %
State income taxes net of federal benefit     (9.3 )%     3.3 %
Permanent differences     2.0 %     (1.6 )%
Other     (8.3 )%     (1.3 )%
Non-controlling interest     (70.5 )%     - %
Foreign taxes     7.3 %     (1.1 )%
PPP loan forgiveness     (142.2 )%     - %
Stock based compensation     22.4 %     -%  
Executive compensation     485.2 %        
Change in valuation allowance     (1547.5 )%     (16.3 )%
                 
Effective rate     (1,239.9 )%     4.00 %

 

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2020 and 2019, the Company recognized no interest and penalties.

 

The Company files income tax returns in the U.S. federal jurisdiction and various states. The tax years 2017-2020 generally remain open to examination by major taxing jurisdictions to which the Company is subject.