Significant components of the income taxes were as follows for the years ended December 31, 2020 and 2019.

		2020				2019
Current
State and local		$	(34,000	)		$	50,000
Federal			(430,000	)			(197,000	)
Total Current Tax Expense		$	(464,000	)		$	(147,000	)
Deferred
State and local			(32,000	)			―
Federal			(458,000	)			168,000
Total Deferred Tax Expense (Benefit)			(490,000	)			168,000
Total Income Taxes		$	(954,000	)		$	21,000

 

            Significant components of deferred tax assets as of December 31, 2020 and 2019 consisted of the following:

 

		2020				2019
Deferred tax assets: Net operating loss carry forwards		$	1,665,000			$	490,000
Deferred Tax Liability			(711,000	)			―
Valuation Allowance			―				(490,000	)
Total deferred tax assets		$	954,000			$	―

At December 31, 2020, the Company had net operating loss carryforwards (NOLs) totaling approximately $7,761,000 that under the Tax Act do not expire. As of December 31, 2019, the Company recorded a full valuation allowance against its deferred tax assets due to uncertainty concerning its ability to generate future net income. As of December 31, 2020, the Company relieved the valuation allowance against its deferred tax assets as a result of Cisco’s agreement to pay the Company $18,691,890 to resolve a dispute (see Note O[5] hereof). 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,
		2020				2019
Income tax - statutory rate			21.0%				21.0%
Permanent difference			(5.05)%				―
State and other			1.48%				(2.82)%
Adjustment of tax liability			―				8.27%
Valuation allowance on deferred tax assets			18.4%				(27.63)%
Total			35.83%				(1.18)%

 

While only the tax returns for the three years ended prior to December 31, 2020 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. In March 2020, the Company was advised by Internal Revenue Service that the examination was concluded with no change to the Company’s 2016 federal tax return.

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 (“UPHCI”), 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”). Beginning in July 2020, based upon available shareholder information and certain assumptions as to the attribution of stock ownership, the Company may have satisfied the Ownership Test. In addition, the Company may have satisfied the Income Test. In any event, the Company did not have UPHCI for 2020 because the Company did not have taxable income as adjusted for purposes of computing UPHCI for 2020. If the Company satisfies both the Ownership Test and Income Test and has UPHCI for the year ending December 31, 2021 (or for any subsequent year in which such tests are also satisfied), the Company would be subject to a 20% tax on the amount of UPHCI that it does not distribute to its shareholders.