Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.10.0.1
Income Taxes
12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
INCOME TAXES

10 — INCOME TAXES

 

The Company was reorganized as a C corporation on October 1, 2017. Prior to reorganization, for federal and state income tax purposes, the Company was a limited liability company treated as a partnership, in which income tax liabilities and/or benefits were passed through to the Company's unitholders. As such, the Company did not directly pay federal and state income taxes and recognition was not given to federal and state income taxes for the operations of the Company prior to reorganization. After reorganization, the Company became a taxable entity. Therefore, provision for taxes has been made for the fourth quarter of 2017, the period during which the Company was taxable. On reincorporation, the Company recapitalized $10,673,709 in retained deficits and 2017 losses prior to reincorporation to additional paid in capital, leaving a retained deficit $403,992 as the basis for a potential loss carryforward.

 

The Company's tax provision is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. The annual effective tax rate is estimated to be a combined 27% and 34% for the U.S. federal and state statutory tax rates for the years ended December 31, 2018 and 2017, respectively. We review tax uncertainties in light of changing facts and circumstances and adjust them accordingly. As of December 31, 2018 and 2017, there were no tax contingencies or unrecognized tax positions recorded.

  

Income tax expense attributable to pretax loss from continuing operations differed from the amounts computed by applying the combined U.S. federal and state income tax rate, 34% prior to changes in federal tax rate for the year ended December 31, 2017 and 27% in the year ended December 31, 2018, to pretax loss from continuing operations as a result of the following:

 

    Year ended December 31,  
    2018     2017  
Computed "expected" tax benefit   $ (2,442,589 )     (387,415 )
Increase (reduction) in income taxes resulting from:                
State Tax, net of federal     (697,883 )     (68,367 )
Change in Federal Tax Rate           52,519  
LLC income flow through           250,058  
Non-deductible finance charges and loss on debt extinguishment     1,255,918        
Change in the valuation allowance     1,884,554       153,205  
Total income tax expense/(benefit)   $        

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting, and the amounts recognized for income tax purposes. The significant components of deferred tax assets (at a 27% effective tax rate) as of December 31, 2018 and 2017, respectively, are as follows:

 

Deferred Tax Assets (rounded)

 

    Total     Total     Deferred Tax Asset  
    2018     2017     2018     2017  
Net operating loss carry-forward     7,132,000       404,000       1,926,000       109,000  
Stock based compensation     252,000             68,000        
Less: valuation allowance     (7,384,000 )     (404,000 )     (1,994,000 )     (109,000 )
Total   $     $     $     $  

 

the Company has a net operating loss carry-forward for federal and state tax purposes of approximately $7.1 million at December 31, 2018, that is potentially available to offset future taxable income. The 20-year limitation was eliminated for losses generated after January 1, 2018, giving the taxpayer the ability to carry forward losses indefinitely. However, NOL carry forward arising after January 1, 2018, will now be limited to 80 percent of taxable income. For financial reporting purposes, no deferred tax asset was recognized because at December 31, 2018, management estimates that it is more likely than not that substantially all of the net operating losses will expire unused. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. The timing and manner in which the Company can utilize its net operating loss carryforward and future income tax deductions in any year may be limited by provisions of the Internal Revenue Code regarding the change in ownership of corporations. Such limitation may have an impact on the ultimate realization of our carryforwards and future tax deductions.

 

Section 382 of the Internal Revenue Code ("Section 382") imposes limitations on a corporation's ability to utilize net operating losses if it experiences an "ownership change." In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. Any unused annual limitation may be carried over to later years, and the amount of the limitation may under certain circumstances be increased by the built-in gains in assets held by us at the time of the change that are recognized in the five-year period after the change.

 

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 34% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The Company measured its deferred tax assets and liabilities based on the rates at which they are anticipated to reverse in the future, which is generally 21%. However, the Company is still examining certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of the Company's deferred tax balance was a tax expense of approximately $53,000, which was fully offset with a valuation allowance against our deferred taxes. Since the Company was not a taxable entity prior to reincorporation, examination of returns for years prior to 2017 will not result in changes to tax liability or benefit.