Quarterly report pursuant to Section 13 or 15(d)

DEFERRED TAX EXPENSE

v3.3.0.814
DEFERRED TAX EXPENSE
9 Months Ended
Sep. 30, 2015
Notes to Financial Statements  
Note 11. DEFERRED TAX EXPENSE

The Company incurred no current or deferred tax expense for period ended September 30, 2015 and the year ended December 31, 2014.

  

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

 

    September 30,
2015
    December 31,
2014
 
Deferred income tax assets:            
Allowance for bad debt   $ 81,000     $ 21,000  
Warrants expense     3,256,000       2,216,000  
Derivatives expense     738,000       1,274,000  
Net operating losses     4,454,000       3,227,000  
      8,529,000       6,738,000  
Deferred income tax liabilities:                
Depreciation      (105,000      -  
                 
Total      8,424,000        6,738,000  
Valuation allowance     (8,424,000 )     (6,738,000 )
                 
Net deferred tax assets   $ -     $ -  

 

Permanent differences include ordinary and necessary business expenses deemed by the Company as a non-allowable deduction under IRC § 280E, and tax deductions related to equity compensation that are less than the compensation recognized for financial reporting.

 

As of September 30, 2015, and December 31, 2014, the Company has net operating loss carryforwards of approximately $12,276,000 and $8,900,000, respectively, which, if unused, will expire beginning in years 2034. These tax attributes are subject to an annual limitation from equity shifts, which constitute a change of ownership as defined under Internal Revenue Code Section 382, which will limit their utilization. The Company has yet to assess the effect of these limitations and accordingly has placed a reserve against any assets associated with these losses.

 

Pursuant to IRC § 280E, the Company is allowed to only to deduct expenses directly related to sales of product. The Company has allocated accelerated depreciation related to production equipment, which results in a difference in the cost of sales for financial reporting and tax reporting taxable income. As a result the Company had no taxable income for the period ended September 30, 2015.

 

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred through the period ended September 30, 2015. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth. On the basis of this evaluation, as of September 30, a valuation allowance of approximately $8,529,000 has been recorded to against all deferred tax assets as these assets are more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for grow.