Significant components of the income taxes were as follows for the years ended December 31, 2019 and 2018.

 

		2019				2018
Current
State and local		$	50,000			$	82,000
Federal			(197,000	)			2,226,000
Total Current Tax Expense		$	(147,000	)		$	2,308,000
Deferred
State and local			―				―
Federal			168,000				―
Total Deferred Tax Expense			168,000				―
Total Income Taxes		$	21,000			$	2,308,000

 

Significant components of deferred tax assets as of December 31, 2019 and 2018 consisted of the following:

 

		2019				2018
Deferred tax assets:Net operating loss carry forwards		$	490,000			$	―
Stock options and restricted stock unitsnot yet deducted for tax purposes			―				168,000
Valuation Allowance			(490,000	)			―
Total deferred tax assets		$	―			$	168,000

 

At December 31, 2019, the Company had net operating loss carryforwards (NOLs) totaling approximately $2,332,000 that under the Tax Act do not expire. As a result of the Company’s recent losses and uncertainty of future operating results, management determined that all of the NOL was not likely to be utilized at December 31, 2019. To the extent that the Company earns income in the future, it will report income tax expense and such expense attributable to federal income taxes will reduce the recorded income tax benefit asset reflected on the balance sheet. Management will continue to evaluate the recoverability of the NOL and adjust the deferred tax asset appropriately. Utilization of NOL credit carryforwards can be subject to a substantial annual limitation due to ownership change limitations that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions.

 

The reconciliation between the taxes as shown and the amount that would be computed by applying the statutory federal income tax rate to the net income before income taxes is as follows:

 

	Years Ended
	December 31,
	2019		2018
Income tax - statutory rate	21.0%		21.0%
State and local, net	(2.82)%		1.75%
Adjustment of tax liability	11.11%		―
Net deferred tax provision	(2.85)%		―
Other	0.01%		0.30%
Valuation allowance on deferred tax assets	(27.63)%		―
Total	(1.18)%		23.05%

 

While only the tax returns for the three years ended prior to December 31, 2019 are open for examination for taxes payable for those years, tax authorities could challenge returns (only under certain circumstances) for earlier years to the extent that they generated loss carry-forwards that are available for those future years. In July 2018 the Internal Revenue Service notified the Company that it was examining its 2016 federal tax return and the examination remains open.

 

In March 2020, the Company received notices of tax assessments for 2018 from the New York State Department of Taxation and Finance in the amounts of $638,745 and $57,784. The Company intends to contest the assessments. As of December 31, 2019, the Company has not recorded an accrual related to the assessments because it has insufficient information to determine that an unfavorable outcome is probable and it cannot reasonably estimate the amount of any potential tax that may be due. As additional information is obtained from the State of New York with respect to the assessments, management will continue to assess whether an unfavorable outcome is probable and whether it can reasonably estimate the amount of the tax due, if any, in order to determine whether an accrual related to the assessments is appropriate.

 

The Company re-evaluated certain deferred tax assets and liabilities based on the rates at which they are anticipated to reverse in the future, which is generally 21%, and determined that such items had no material impact on the Company’s financial statements.

 

The personal holding company (“PHC”) rules under the Internal Revenue Code impose a 20% tax on a PHC’s undistributed personal holding company income (“PHC Income”), which means, in general, taxable income subject to certain adjustments. For a corporation to be classified as a PHC, it must satisfy two tests: (i) that more than 50% in value of its outstanding shares must be owned directly or indirectly by five or fewer individuals at any time during the second half of the year (after applying constructive ownership rules to attribute stock owned by entities to their beneficial owners and among certain family members and other related parties) (the “Ownership Test”) and (ii) at least 60% of its adjusted ordinary gross income for a taxable year consists of dividends, interest, royalties, annuities and rents (the “Income Test”). In the second half of 2019 (as well as the second half of prior years), the Company did not meet the Ownership Test. Due to the significant number of shares held by the Company’s largest shareholders, the Company continually assesses its share ownership to determine whether it meets the Ownership Test. If the Ownership Test were met and the income generated by the Company were determined to constitute “royalties” within the meaning of the Income Test, the Company would constitute a PHC and the Company would be subject to a 20% tax on the amount of any PHC Income that it does not distribute to its shareholders.