7.	*Income Taxes*

The components of income tax expense (benefit) are as follows:


	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2018			2017		2018			2017
Current Federal expense	$	—		$	16,000	$	—		$	35,000
Current state and local tax expense		18,000			16,000		35,000			188,000
Deferred Federal tax (benefit) expense (A)		(94,000	)		103,000		(128,000	)		(370,000	)
Deferred state and local tax (benefit) expense		(45,000	)		6,000		(72,000	)		(134,000	)

Income tax (benefit) expense (B)	$	(121,000	)	$	141,000	$	(165,000	)	$	(281,000	)

(A)

Includes an alternative minimum tax (“AMT”) deferred (benefit) of $(16,000) and $(35,000) in the three and six months ended June 30, 2017, respectively.

(B)

The income tax (benefit) in the six months ended June 30, 2017 and the lower income tax expense in the three months ended June 30, 2017 resulted from the recognition of a windfall tax benefit on stock options exercised in the six months ended June 30, 2017.

Due to the amount of its net operating loss (“NOL”) and credit carryforwards, the Company does not anticipate paying Federal income taxes for a number of years. The Company expects, in the future, that it will be subject to cash payments for state and local taxes where the Company has established nexus and there are no available NOLs, and for a portion of its state and local income taxes for New York State and New York City due to laws enacted in March 2014 and April 2015, respectively, which limit the amount of existing NOLs which could be used each year.

On December 22, 2017, the Federal government of the United States enacted the U.S. Tax Cuts and Jobs Act (“the Tax Act”) which significantly changed existing U.S. tax laws, including a reduction in the Federal corporate income tax rate from 35% to 21%, repeal of corporate Federal AMT and a refund of certain existing AMT credits over several years, introduction of a capital deduction, limitation of the interest deduction, limitation of the use of net operating losses incurred on or after January 1, 2018 to offset future taxable income, limitation of the deduction for compensation paid to certain executive officers and extensive changes to the U.S. international tax system, as well as other changes. These changes generally took effect on January 1, 2018. The U.S. Treasury department is expected to release regulations implementing the Tax Act and the U.S. tax laws may be further amended in the future. The Company’s Federal net operating losses that have been incurred prior to December 31, 2017 will continue to have a 20-year carryforward limitation applied and will need to be evaluated for recoverability in the future as such. Net operating losses incurred after December 31, 2017 will have an indefinite life, but usage will be limited to 80% of taxable income in any given year. On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to finalize the accounting. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional

estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply its current tax accounting on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Tax Act. While the Company was able to make reasonable estimates of the impact of the reduction in the Federal corporate income tax rate, the final impact of the Tax Act may differ from these estimates, including, but not limited to, changes in our interpretations and assumptions, additional guidance that may be issued by the Internal Revenue Service (“IRS”), return to provision differences and state rate adjustments. The Company is continuing to gather additional information to determine the final impact.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The net deferred tax asset was approximately $11,684,000 and $12,072,000 at June 30, 2018 and December 31, 2017, respectively, all of which was classified as non-current. The significant portion of the deferred tax items relates to deferred tax assets including NOL carryforwards, Federal AMT credit carryforwards and stock based compensation, with the remainder of the deferred tax items relating to liabilities resulting from the intangible assets recorded at the time of the May 2007 merger.

The Company had Federal NOL carryforwards aggregating approximately $37,859,000 at December 31, 2017, as well as significant state and local NOL carryforwards. Approximately $5,140,000 of these Federal NOLs are subject to an annual Internal Revenue Code Section 382 limitation of $2,779,000, whereas the remaining balance of approximately $32,719,000 is not subject to the limitation. The enactment of a 2014 New York State law and a 2015 New York City law limit the amount of existing NOLs which could be used each year in those jurisdictions; however, all such NOLs are expected to be fully utilized in the future.