Annual report pursuant to Section 13 and 15(d)

M. INCOME TAXES

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M. INCOME TAXES
12 Months Ended
Dec. 31, 2014
Income Tax Disclosure [Abstract]  
NOTE M - INCOME TAXES

The Company follows ASC 740-10 “Income Taxes” which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

 

A reconciliation of tax expense computed at the statutory federal tax rate on income (loss) from operations before income taxes to the actual income tax (benefit) / expense is as follows:

    2014     2013  
Tax provision (benefits) computed at the statutory rate   $ 83,192     $ (1,239,269 )
State taxes     (26,756 )     5,849  
Book expenses not deductible for tax purposes     20,846       19,572  
Expired capital losses     (176,627 )      
Other     (345 )     526  
      (99,690 )     (1,213,322 )
Change in valuation allowance for deferred tax assets     301,543       1,563,145  
Income tax expense   $ 201,853     $ 349,823  

   

During 2014, approximately $200,000 of state net operating loss carryforwards expired and the Company lowered its effective state tax rate. The aggregate effect of these items resulted in a reduction to the allowance of approximately $20,000.

 

Deferred income taxes include the net tax effects of net operating loss (NOL) carry forwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:

 

    2014     2013  
Deferred Tax Assets:                
Net operating loss carry forwards   $ 31,909,052     $ 31,686,463  
Intangibles     1,141,121       1,277,631  
Other     728,937       872,796  
Total deferred tax assets     33,779,110       33,836,890  
                 
Deferred Tax Liabilities:                
Intangibles     (534,661 )     (335,275 )
Total deferred tax liabilities     (534,661 )     (335,275 )
Valuation allowance     (33,779,110 )     (33,836,890 )
Net deferred tax assets   $ (534,661 )   $ (335,275 )

      

A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. As of December 31, 2014 and 2013, the Company’s valuation allowance, established for the tax benefit that may not be realized, totaled approximately $33,780,000 and $33,840,000, respectively. The overall decrease in the valuation allowance is related to federal and state loss carryforwards that expired as of December 31, 2014, less federal and state losses generated for the year ended December 31, 2014.

 

At December 31, 2014 the Company had net operating loss carryforwards of approximately $89,700,000 and $46,900,000 for federal and state income tax purposes which will expire at various dates from 2015 – 2034.

 

The Company’s NOL and tax credit carryovers may be significantly limited under Section 382 of the Internal Revenue Code (IRC). NOL and tax credit carryovers are limited under Section 382 when there is a significant “ownership change” as defined in the IRC. During 2005 and in prior years, the Company may have experienced such ownership changes that could have impos  ed such limitations.

 

The limitation imposed by Section 382 would place an annual limitation on the amount of NOL and tax credit carryovers that can be utilized. When the Company completes the necessary studies, the amount of NOL carryovers available may be reduced significantly. However, since the valuation allowance fully reserves for all available carryovers, the effect of the reduction would be offset by a reduction in the valuation allowance.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is generally no longer subject to U.S. federal income tax examinations by tax authorities for years before 2010 and various states before 2010. Although these years are no longer subject to examination by the Internal Revenue Service (IRS) and various state taxing authorities, net operating loss carryforwards generated in those years may still be adjusted upon examination by the IRS or state taxing authorities if they have been or will be used in a future period.

 

The Company follows the provisions of uncertain tax positions as addressed in FASB Accounting Standards Codification 740-10-65-1. The Company recognized no change in the liability for unrecognized tax benefits. The Company has no tax positions at December 31, 2014 or 2013 for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expense. No such interest or penalties were recognized during the periods presented. The Company had no accruals for interest and penalties at December 31, 2014 or 2013. The Company’s utilization of any net operating loss carryforwards may be unlikely due to its continuing losses.