Note 11 – Income Taxes

New Tax Legislation

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). The legislation significantly changed U.S. tax law by, among other things, lowering the corporate income tax rate from 35% to 21% and changing the carryforward and utilization of net operating losses. We will monitor future interpretations of the TCJA as they develop, and accordingly our estimates may change.

As a result of the reduction in federal corporate income tax rates provisioned by the TCJA the Company recorded a reduction to its deferred tax assets of $19.0 million at December 31, 2017 and a corresponding reduction to its valuation allowance. The Company’s net deferred tax asset at December 31, 2019 and 2018 reflect the current reduced federal income tax rates. In addition, the Company will file a claim for a federal tax refund of approximately $0.2 million for its AMT credit carryforward in tax years 2018 to 2021 pursuant to the applicable provisions of the TCJA.

Net loss before income taxes consists of the following (in thousands):


	For the Years Ended
	December 31,
	2019		2018
Domestic, current	$	(4,298)	$	(9,542)
Total	$	(4,298)	$	(9,542)

The tax effects of significant items comprising the Company’s deferred taxes are as follows (numbers are in thousands):


	For the Years Ended
	December 31,
	2019		2018
Deferred tax assets:
Federal and state net operating loss carryforwards	$	30,428	$	30,350
Research and development tax credit carryforwards		2,479		2,438
Stock based compensation		1,632		1,470
Other provision and expenses not currently deductible		1,327		1,345
Total deferred tax assets		35,866		35,603
Deferred tax liabilities:
Depreciation and amortization		(693)		(726)
Prepaid expenses		(195)		(151)
Total deferred liabilities		(888)		(877)
Less: valuation allowance		(34,978)		(34,726)
Net deferred tax asset	$	—	$	—

The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The effect on deferred tax assets and liabilities of changes in tax rates will be recognized as income or expense in the period that the change occurs. A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. Changes in circumstances, assumptions and clarification of uncertain tax regimes may require changes to any valuation allowances associated with the Company’s deferred tax assets.

As of December 31, 2019, the Company’s deferred tax assets were generated primarily from the federal and state net operating loss, stock based compensation and research and development tax credits. In assessing the realizability of deferred tax assets, management determined that it is more likely than not that none of the deferred tax assets will be realized. Therefore, the Company has provided a full valuation allowance against the deferred tax assets at December 31, 2019 and 2018.

As of December 31, 2019 and 2018, the Company had net deferred tax assets before its valuation allowance of $35.0 million and $34.7 million, respectively.

During the year ended December 31, 2019, the Company did not utilize its prior years’ net operating loss carryforwards and the net operating loss of $5.3 million that originated in 1998 expired. As of December 31, 2019, eMagin has federal and state net operating loss carryforwards of $142.7 million and federal research and development tax credit carryforwards of $2.5 million. Pursuant to provisions of the TCJA, the net operating losses originating in years subsequent to 2017 totaling $14.7 million can be carried forward indefinitely.

The federal net operating losses and tax credit carryforwards will expire as follows (in thousands):


		Net		Research and
		Operating		Development
		Losses		Tax Credits
2019-2020	$	24,931	$	653
2021-2024		41,283		-
2025-2037		61,755		1,826
No Expiration		14,705		-
	$	142,674	$	2,479

The utilization of net operating losses can be subject to a limitation due to the change of ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation may result in the expiration of the net operating losses before their utilization. The Company has done an analysis regarding prior year ownership changes, and it has been determined that the Section 382 limitation on the utilization of net operating losses will currently not materially affect the Company's ability to utilize its net operating losses.

The difference between the statutory federal income tax rate on the Company's pre-tax loss and the Company's effective income tax rate is summarized as follows:


	For the Years Ended
	December 31,
	2019		2018
U.S. Federal income tax benefit at federal statutory rate	21	%	21	%
Change in valuation allowance	(6)		(21)
Permanent differences	7		(3)
NOL Expiration - 1998	(26)		-
Other, net	4		3
Effective tax rate	-	%	-	%

The Company did not have unrecognized tax benefits at December 31, 2019 and 2018. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2019 and 2018, the Company recognized no interest and penalties.

The Company files income tax returns in the U.S. federal jurisdiction and in certain U.S. states. Generally, the Company’s tax filings are subject to tax examinations by major taxing jurisdictions during the three years period subsequent to the due date of such returns, or if later, when the return is filed. However, due to the Company's operating losses, the utilization of a net operating loss subjects the year that such loss originated to being open for examination by major taxing jurisdictions to which the Company is subject.