NOTE 13. INCOME TAXES

We calculate our provision for federal and state income taxes based on current tax law. U.S. federal tax reform (Tax Act) was enacted on December 22, 2017, and has several key provisions impacting the accounting for and reporting of income taxes. The most significant provision reduced the U.S. corporate statutory tax rate from 35% to 21% beginning on January 1, 2018. We remeasured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. As a result, the gross deferred tax assets and liabilities were adjusted which resulted in an expense for income taxes of $7.1 million which was fully offset by a corresponding change to our valuation allowance in 2017. The Tax Act contains several base broadening provisions that became effective on January 1, 2018, that did not have a material impact on 2018 and 2019 earnings.

Deferred tax asset (liability) is comprised of the following (in thousands):

	December 31
	2019			2018
Net operating loss carryforwards	$	7,672		$	4,541
Stock options and warrants		420			214
Property		138			299
Intangible assets		66			94
Capitalized expenses		54			86
Other		210			164
Operating right-of-use lease assets		(667	)
Operating right-of-use lease liabilities		794
Net deferred tax assets		8,687			5,398
Less: Valuation allowance		(8,687	)		(5,398	)
Deferred tax asset (liability)	$	-		$	-

We have determined it is more likely than not that our deferred tax assets will not be realized. Accordingly, we have provided a valuation allowance for deferred tax assets.

The following table summarizes the change in the valuation allowance (in thousands):

	Year Ended December 31
	2019			2018
Vaulation allowances, beginning of year	$	5,398		$	13,872
Net operating loss		3,284			1,920
Expiration of net operating losses and limitations		(7	)		(9,939	)
Adjustment to deferred taxes		29			(321	)
Impact of state tax rate change		26			(146	)
Other adjusments		(43	)		12
Valuation allowance, end of year	$	8,687		$	5,398

As of December 31, 2019, net operating loss (NOL) carryforwards for U.S. federal tax purposes totaled $31.4 million. Effective with the 2017 Tax Act in December 2017, NOLs generated after December 31, 2017, do not expire. Federal NOLs of $9.9 million expire at various dates from 2020 through 2037 and federal NOLs of $21.5 million do not expire. NOL carryforwards for state tax purposes totaled $40.6 million at December 31, 2019 and expire at various dates from 2020 through 2039.

We experienced several ownership changes as defined in IRC Section 382(g) as a result of offerings and conversions that occurred in 2013 and 2014 and a new shareholder obtaining a greater than 5% interest in the value our equity in September 2017. Our ability to utilize previously accumulated NOL carryforwards is subject to substantial annual limitations due to the change in ownership provisions of the Internal Revenue Code of 1986, as amended, and similar state regulations. In general, the annual limitation is equal to the value of the stock of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate for the month in which the ownership change occurs. Any unused annual limitation may generally be carried over to later years until the NOL carryforwards expire. We completed a formal analysis for the taxable year 2017 to determine the amount of annual limitation on net operations loss carryforwards prior to utilization. The study resulted in a substantial annual limitation on the utilization of net operating loss carryforwards generated before September 13, 2017. Accordingly, we have reduced our net operating loss carryforwards by $13.7 million to reflect these limitations. On November 28, 2017, Nutra S.A. LLC (Nutra SA) redeemed our entire membership interest in Nutra SA which resulted in generating a capital loss of $29.6 million for federal tax purposes. Of this, $23.6 million is subject to an IRC Section 382 annual limitation of $0.3 million. We have determined it is more likely than not that all of the capital loss subject to the IRC Section 382 limitation will expire unused. Accordingly, we have not recognized the deferred tax asset associated with the IRC Section 382 limited capital loss.

We are subject to taxation in the U.S. federal jurisdiction and various state and local jurisdictions. We record liabilities for income tax contingencies based on our best estimate of the underlying exposures. We are open for audit by the IRS for years after 2015 and, generally, by U.S. state tax jurisdictions after 2014.

Reconciliations between the amounts computed by applying the U.S. federal statutory tax rate to loss before income taxes, and income tax expense (benefit) follows (in thousands):

	Year Ended December 31
	2019			2018
Income tax benefit at federal statutory rate	$	(2,928	)	$	(1,692	)
Increase (decrease) resulting from:
State tax benefit, net of federal tax effect		(437	)		(184	)
Effect of change in state tax rate		(26	)		146
Change in valuation allowance		3,341			(8,474	)
Expirations of net operating losses and application of IRC 382 limitation		7			9,939
Adjustments to deferreds		(29	)		321
Other		72			(11	)
Income tax expense	$	-		$	45

We determined no material liabilities related to uncertain income tax positions existed as of December 31, 2019 or 2018, based on our analysis of tax positions taken on income tax returns filed. Although we believe the amounts reflected in our tax returns substantially comply with applicable U.S. federal, state, and foreign tax regulations, the respective taxing authorities may take contrary positions based on their interpretation of the law. A tax position successfully challenged by a taxing authority could result in an adjustment to our provision or benefit for income taxes in the period in which a final determination is made.