12. Income Taxes

The components of the provision for income taxes for the years ended December 31, 2016 and 2015 are as follows:

 

		2016				2015
Current		$	—			$	—
Deferred			(2,587,731	)			(4,271,483	)
Valuation Allowance			2,587,731				4,271,483
Total provision for income taxes		$	—			$	—

At December 31, 2016 and 2015, the Company had temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective income tax bases, as measured by enacted state and federal tax rates, as follows:

 

		2016				2015
Deferred tax assets (liabilities):
Net operating loss carryforward		$	33,186,710			$	30,701,734
Bad debt reserve			—				530
Inventory reserve			—				22,827
Sales return allowance			—				4,188
Accrued vacation			35,132				33,896
Deferrals of compensation to Directors & Officers			9,596				9,596
Uniform capitalization (UNICAP)			—				5,158
Non-qualified stock compensation			513,106				513,106
Restricted stock			42,590				42,590
Accrued Interest			—				(134,222	)
Total deferred tax assets, net			33,787,134				31,199,403
Less valuation allowance			(33,787,134	)			(31,199,403	)
Total net deferred taxes		$	—			$	—

The following is a reconciliation of tax computed at the statutory federal rate to the income tax benefit in the statements of operations for the years ended December 31, 2016 and 2015:

 

		2016				2015
Income tax benefit computed at statutory federal rate of 34%		$	(2,384,532	)		$	(3,981,853	)
State income tax benefits, net of federal expense/benefit			(254,584	)			(425,121	)
Change in valuation allowance			2,587,731				4,271,483
Non-deductible expenses			185,607				288,055
Other			(134,222	)			(152,564	)
Total		$	—			$	—

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the levels of historical taxable income and projections of future taxable income over which the deferred tax assets are deductible, the Company believes that it is more likely than not that it will not be able to realize the benefits of some of these deductible differences.

Accordingly, a valuation allowance of $33,787,134 and $31,199,403 has been provided in the accompanying financial statements as of December 31, 2016 and 2015, respectively. The 2016 net change in valuation allowance related to deferred tax assets was an increase of $2,587,731 primarily relating to net operating loss carryforwards. The 2015 net change in valuation allowance related to deferred tax assets was an increase of $4,271,483 primarily relating to net operating loss carryforwards.

At December 31, 2016, the Company has federal and state tax net operating loss carryforwards of approximately $87,663,000. The federal and state tax loss carryforward will expire through 2036, unless previously utilized. The Company also has federal research and development tax credit carryforwards of approximately $1,875,000. The federal tax credit carryforward will expire through 2026, unless previously utilized.

Pursuant to Internal Revenue Service Code Sections 382 and 383, use of the Company’s net operating losses and credit carryforwards are limited due to a cumulative change in ownership of more than 50% that occurred in 2009 and in 2013. As a result of these 50% changes in ownership, the annual amount of pre-change net operating losses that may be used in periods subsequent to the change in ownership is approximately $417,000 for losses incurred through June 2009, and $3,540,000 for losses incurred through December 2013. The impact of this limitation is factored into management’s valuation allowance placed against the Company’s deferred tax assets.

For the years ended December 31, 2016 and 2015, the Company incurred $166,871 and $353,814, respectively, of additional unrecognized tax benefits that related to research and development credits. The entire amount of this unrecognized tax benefit, if recognized, would result in an increase to the deferred tax asset valuation allowance, and would not have an impact on the effective tax rate.

The Company files its income tax returns in the U.S. federal jurisdiction and in Florida. With few exceptions, the Company is no longer subject to federal or state income tax examinations by tax authorities for years before 2012.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

Balance as of December 31, 2014		$	1,354,652
Additions based on tax positions related to the current year			353,814
Additions for the tax positions of prior years			—
Reductions for the tax positions of prior years			—
Balance as of December 31, 2015		$	1,708,466
Additions based on tax positions related to the current year			166,871
Additions for the tax positions of prior years			—
Reductions for the tax positions of prior years			—
Balance as of December 31, 2016		$	1,875,337

Included in the balance at December 31, 2016 and 2015, are $1,875,337 and $1,708,466, respectively, of tax positions for which there is uncertainty about the validity of certain credits. The disallowance of the credits would impact the amount of gross deferred tax assets reflected in the accompanying footnotes.

 

During the years 2016 and 2015 the Company did not recognize any interest and penalties. Due to the potential offset of the Company’s operating loss carryforward for any future activity, the amount attributed to interest and penalties would be immaterial.