11. INCOME TAXES

12 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

11. INCOME TAXES

The Company accounts for income taxes in accordance with ASC 740, Income Taxes.  ASC 740 requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carryforwards.  At December 31, 2014 and 2013, the total of all deferred tax assets was approximately $18,133,000 and $17,022,000, respectively, and the total of the deferred tax liabilities was approximately $0 and $143,000, respectively.  The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which cannot be determined.  Because of the uncertainty surrounding the realization of the deferred tax assets, the Company established a valuation allowance of approximately $18,133,000 and $16,879,000 as of December 31, 2014 and 2013, respectively, which has been offset against the deferred tax assets.  The net change in the valuation allowance during the year ended December 31, 2014, was approximately $1,254,000.

The Company has available at December 31, 2014, unused tax operating loss carryforwards of approximately $45,445,000, which may be applied against future taxable income and expire in various years through 2034.  No tax benefit has been reported in the December 31, 2014 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.

Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations.  Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.

The components of income tax expense from continuing operations for the years ended December 31, 2014 and 2013 consist of the following:

	Year Ended December 31,
	2014			2013
Current income tax expense:
Federal	$	-		$	-
State		-			-
Net current tax expense	$	-		$	-
Deferred tax expense (benefit) arising from:
Net operating income (loss)	$	(695,600	)	$	(732,200	)
Excess of tax over financial accounting depreciation		-			113,000
Stock for services		700			36,300
Accrued interest		210,800			178,200
Warranty reserve		(7,500	)		5,600
Amortization of debt discounts		-			25,200
Section 263(A)		13,200			5,700
Other – meals & entertainment, change in allowance for Obsolete inventory, gain on settlement of accrued contingent liability		(46,300	)		79,600
Valuation allowance		524,700			288,600
Net deferred tax expense	$	-		$	-

Deferred income tax expense results primarily from the reversal of temporary timing differences between tax and financial statement income.

The temporary differences gave rise to the following deferred tax asset (liability) at December 31, 2014 and 2013:

	December 31,
	2014			2013
Excess of book accounting depreciation over tax	$	-		$	(142,800	)
Obsolete inventory		145,700			192,600
Accrued interest – related party		975,800			764,900
Warranty reserve		52,200			59,700
263(A) capitalization		8,600			21,800
NOL carryforwards		16,950,900			15,982,800
Valuation allowance		(18,133,200	)		(16,879,000	)
Net deferred tax expense	$	-		$	-

Deferred income tax expense results primarily from the reversal of temporary timing differences between tax and financial statement income.

The Company files income tax returns in the U.S. federal jurisdiction, and North Carolina and Georgia.  With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2011.  The statute of limitations remains open on all years from 2011 going forward.

At December 31, 2014, there are no tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.  Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.