Note 13 - Income Taxes

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 13- INCOME TAXES

The Company was classified as a partnership through the Closing Date, and therefore, not subject to entity level tax. After the Closing Date, the Company is taxed as a C corporation and files a consolidated return with Charlie’s Holdings, Inc.  This tax footnote also includes the tax impact of the Company’s VIE, Don Polly, LLC, which is also taxed as a C corporation, but which files a separate return from Charlie’s Holdings, Inc.

The table below presents the components of the provision for income taxes.  The Company's provision is driven primarily current year operating income, nontaxable derivative fair value adjustments, and state taxes (in thousands).

	As of December 31,
	2021		2020
Current
US Federal	$	110	$	-
US State		232		-
Total current provision		342		-
Deferred
US Federal		-		-
US State		-		-
Total deferred benefit		-		-
Total provision for income taxes	$	342	$	-

The tax effects of temporary differences and tax loss carryovers that give rise to significant portions of deferred tax assets and liabilities at December 31, 2021 and 2020 are comprised of the following (in thousands):

	As of December 31,
	2021			2020
Deferred tax assets:
Bad Debt	$	47		$	119
Inventory		43			48
Accrued Expenses		222			16
Lease liability		208			341
Stock compensation		255			201
Transaction costs		-			-
Net operating loss carryovers		1,224			1,835
Other		9			3
Contribution		-			1
Derivatives		56			287
Total deferred income tax assets		2,064			2,851
Deferred income tax liabilities:
ROU assets		(206	)		(336	)
Fixed assets		(18	)		(56	)
Total deferred income tax liabilities		(224	)		(359	)
Net deferred income tax assets		1,840			2,459
Valuation allowance		(1,840	)		(2,459	)
Deferred tax asset, net of allowance	$	0		$	0

The Company recognizes Federal, and state deferred tax assets or liabilities based on the Company's estimate of future tax effects attributable to temporary differences and carryovers.  The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.  In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.  The Company considers projected future taxable income and planning strategies in making this assessment.  As of December 31, 2021, as a result of a three-year cumulative loss and lack of sufficient positive evidence, we concluded that a full valuation allowance was necessary to offset our deferred tax assets. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.  The Company will continue to evaluate its deferred tax balances to determine any assets that are more likely than not to be realized.

At December 31, 2021, the Company had federal and state net operating loss carryovers for income tax purposes of approximately $4.2 million and $6.1 million, respectively. The Federal net operating losses can be carried forward indefinitely but are limited to offsetting only 80% of taxable income each year. The state net operating losses expire at various dates through 2041, if not utilized beforehand.

The utilization of net operating loss carryforwards and research tax credit carryovers could be subject to annual limitations under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state tax provisions, due to ownership change limitations that may have occurred previously or that could occur in the future.  These ownership changes limit the amount of net operating loss carryforwards and other deferred tax assets that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percent points over a three-year period.  The Company has not conducted an analysis of an ownership change under section 382.  The Company experienced an ownership change in 2019.  Absent an analysis, the Company has assumed that net operating losses generated prior to the change are not available to offset income subsequent to the ownership change date.  To the extent that a study is completed, and certain pre-acquisition losses are deemed to be available to be utilized to offset taxable income, the Company's tax liabilities could be reduced.  To the extent that a study is completed and additional or future ownership changes are deemed to occur, the Company's net operating losses and tax credits could be further limited.

A reconciliation of the statutory income tax rates and the Company's effective tax rate for the years ended December 31, 2021, and December 31, 2020, are as follows:

	Year ended December 31, 2021			Year ended December 31, 2020
Statutory federal income tax rate		21.0	%		21.0	%
Non-taxed loss from VIE		0.0	%		0.0	%
State taxes, net of federal tax benefit		3.3	%		5.1	%
Stock compensation		10.1	%		(3.5	)%
Permanent Items		(4.3	)%		(0.1	% )
Section 382 NOL Adjustments		3.1	%		0.0	%
Derivatives		(11.1	)%		(0.7	)%
Return to provision adjustments		(2.2	)%		(19.8	)%
Other		(1.3	)%		0.0	%
Change in valuation allowance		(12.0	)%		(2.0	% )
Income taxes provision (benefit)		6.6	%		0.0	%

ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits at the beginning and end of the years ended December 31, 2021, and December 31, 2020 (in thousands):

	Year ended December 31, 2021		Year ended December 31, 2020
Gross unrecognized tax benefits at the beginning of the year	$	-	$	-
Increases related to current year positions		-		-
Increases related to prior year positions		32		-
Decreases related to prior year positions		-		-
Expiration of unrecognized tax benefits		-		-
Gross unrecognized tax benefits at the end of the year	$	32	$	-

The unrecognized tax benefit amounts are reflected in the determination of the Company’s deferred tax assets.  If recognized, none of these amounts would affect the Company’s effective tax rate, since it would be offset by an equal corresponding adjustment in the deferred tax asset valuation allowance.  The Company does not foresee material changes to its liability for uncertain tax benefits within the next twelve months.

The Company policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. As of December 31, 2021, and December 31, 2020, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statement of operations.

The Company’s tax years from 2018 and 2017 forward remain open for examination by the Federal and state taxing authorities, respectively.  In addition, to the extent that the Company's tax attributes are utilized in future years to offset income or income taxes, those years which generated the tax attributes are open and subject to examination by the taxing authorities.  The Company is not aware of any examinations that are currently taking place by federal or state taxing authorities.