Note 12 – Income Taxes

Prior to July 22, 2013, FSA’s and FSHA’s member had elected to have FSA’s and FSHA’s income taxed as an S Corporation under provisions of the Internal Revenue Code and a similar section of the state income tax law. Therefore, taxable income or loss is reported to the individual member for inclusion in its tax returns and no provision for income taxes is included in the Company’s consolidated financial statements for periods prior to July 22, 2013. The pro forma income information provides an adjustment for income tax expense as if FSA and FSHA had been a C Corporation prior to July 22, 2013 at an assumed combined federal and state effective tax rate of 38%, which approximates the calculated statutory tax rates for the periods.

The income tax provision for the years ended December 31, 2014 and 2013 consists of:

	2014			2013
Current (provision) benefit	$	(302,464	)	$	(4,078,826	)
Deferred benefit		1,619,321			378,781
Increase in valuation allowance		(465,069	)		(77,068	)
Total (provision) benefit	$	851,788		$	(3,777,113	)
Tax benefit, discontinued operations	$	219,083		$	514,371

Deferred income tax assets and liabilities as of December 31, 2014 and 2013 are comprised of:

	2014			2013
Deferred income tax assets:
Accounts receivable	$	4,512		$	135,983
Accounts payable		712,683			1,131,070
Accrued liabilities		260,655			338,901
Deferred rent and lease incentives		3,856,114			2,353,514
Stock compensation		—			202,453
Other assets		54,836			54,836
Total deferred tax assets		4,888,800			4,216,757
Valuation allowance		(779,358	)		(314,289	)
Net deferred tax assets		4,109,442			3,902,468
Deferred income tax liabilities:
Fixed assets		(1,267,740	)		(1,158,897	)
Intangible assets		(1,103,847	)		(1,725,099	)
Equity investments in affiliates		(861,869	)		(1,330,295	)
Prepaid and other current assets		(207,976	)		(174,419	)
Total deferred tax liabilities		(3,441,432	)		(4,388,710	)
Net deferred tax asset (liability)	$	668,010		$	(486,242	)

The balance sheet classification of deferred income tax assets (liabilities) at December 31, 2014 and 2013 follows:

	2014			2013
Current	$	775,248		$	2,118,637
Long-term		(107,238	)		(2,604,879	)
Total	$	668,010		$	(486,242	)

The change in the Company’s valuation allowance on deferred tax assets during the years ended December 31, 2014 and 2013 follows:

	2014		2013
Beginning valuation allowance	$	314,289	$	—
Reverse acquisition		—		237,221
Change in valuation allowance		465,069		77,068
Ending valuation allowance	$	779,358	$	314,289

The Company’s effective income tax rate for continuing operations differs from the U.S. Federal statutory rate as follows:

	2014			2013
Federal statutory rate		34	%		34	%
State		4	%		4	%
Adjustment to prior year accrual		-23	%		—
Permanent and other adjustments		-10	%		—
Changes in valuation allowances		23	%		-1	%
Noncontrolling		-72	%		16	%
Impairment of goodwill		—			-79	%
Impairment of investment		—			-6	%
Other		2	%		-4	%
Effective income tax rate		-42	%		-36	%

The amount of income taxes the Company pays is subject to ongoing examinations by federal and state tax authorities. To date, there have been no reviews performed by federal or state tax authorities on any of the Company’s previously filed returns. The Company’s 2008, 2009 and 2011 and later tax returns are still subject to examination.

At the time of the Foundation reverse acquisition, Graymark had federal and state net operating loss carryforwards in excess of $30 million. Due to the change of control resulting from the Foundation reverse acquisition, the Company will not be able to utilize the loss carryforwards.