NOTE

- INCOME TAXES

The Company accounts for income taxes in accordance with FASB ASC Topic

740,

Accounting for Income Taxes, which 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 carry-forwards. 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. In accordance with prevailing accounting guidance, the Company is required to recognize and disclose any income tax uncertainties. The guidance provides a

two

-step approach to recognizing and measuring tax benefits and liabilities when realization of the tax position is uncertain. The

first

step is to determine whether the tax position meets the more-likely-than-

not

condition for recognition and the

second

step is to determine the amount to be recognized based on the cumulative probability that exceeds

50%.

Actual results could differ from these estimates.

As of

December 31, 2019,

the Company had net operating loss carry-forward of approximately

$19,258,541

for U.S. federal tax purposes expiring through

2037;

approximately

$8,228,823

for Danish tax purposes, which do

not

expire; approximately

$464,022

for German tax purposes, which do

not

expire; and approximately

$602,887

for Singapore tax purposes, which do

not

expire.

As of

December 31, 2019

and

December 31, 2018,

the Company established a valuation allowance of

$3,845,000

and

$3,428,000

for the tax components of LiqTech International Inc. and Liqtech NA, respectively;

$1,209,000

and

$1,846,000

for the tax components of LiqTech International AS and LiqTech Systems AS, respectively,

$129,000

and

$132,000

for the tax components of LiqTech Germany and

$102,000

and

$105,000

for the tax components of LiqTech Singapore as management could

not

determine that it was more than likely

not

that sufficient income could be generated by these components to realize the resulting net operating loss carry-forwards and other deferred tax assets of these components. The change in the valuation allowance for the year ended

December 31, 2019

was

$416,000,

637,000

), $(

3,000

) and $(

2,000

) for the US, Danish, German and Singapore components. The change in the valuation allowance for the year ended

December 31, 2018

was

$460,000,

$42,000,

7,000

) and $(

5,000

) for the US, Danish, German and Singapore components.

The temporary differences, tax credits and carry forwards gave rise to the following deferred tax asset and liabilities at

December 31, 2019

and

December 31, 2018:

	2019			2018
Vacation accrual	$	3,908		$	3,814
Allowance for doubtful accounts		-			734
Reserve for excess and obsolete inventory		152,680			241,624
Business tax credit carryover		30,935			-
Deferred compensation		17,943			24,451
Net operating loss carryover		5,889,088			5,184,992
Excess of book over tax depreciation		(300,805	)		(33,182	)
Excess of book over tax work in progress		(847,290	)		-
Valuation allowance		(5,285,222	)		(5,422,433	)
	$	(338,763	)	$	-
Distributed as:
Long-term deferred tax asset		-			-
Long-term deferred tax liability		(338,763	)		-
	$	(338,763	)	$	-

A reconciliation of income tax expense at the federal statutory rate to income tax expense at the Company’s effective rate is as follows for the years ended

December 31, 2019

and

2018:

	2019			2018
Computed tax at expected statutory rate	$	(54,104	)	$	(877,791	)
State and local income taxes, net of federal benefit		(2,971	)		(9	)
Non-US income taxed at different rates		14,635			(15,535	)
Effect of change in corporate tax rate		-			321,925
Deferred compensation		(6,508	)
Non-deductible expenses		4,794			14,580
Valuation allowance		(227,182	)		193,584
Other		(25,916	)		(2,184	)
Income tax expense (benefit)	$	(297,252	)	$	(365,430	)

The components of income tax expense (benefit) from continuing operations for the years ended

December 31, 2019

and

2018

consisted of the following:

	2019			2018
Current income taxes:
Danish	$	(311,189	)	$	(365,430	)
Federal		-			-
State		-			-
Current tax (benefit)	$	(311,189	)	$	(365,430	)

Deferred income taxes:
Book in excess of tax depreciation	$	(61,808	)	$	(40,231	)
Allowance for doubful accounts		752			-
Work in progress		848,000			-
Net operating loss carryover		(344,870	)		(729,928	)
Valuation allowance		(507,935	)		704,876
Deferred compensation		(6,508	)		13,127
Accrued vacation		(2	)		(949	)
Reserve for obsolete inventory		86,308			53,105
Deferred tax expense (benefit)	$	13,937		$	-
Total tax expense (benefit)	$	(297,252	)	$	(365,430	)

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

The Company files Danish, U.S. federal and Minnesota state income tax returns. LiqTech International AS and LiqTech Systems AS are generally

longer subject to tax examinations for years prior to

2014

for their Danish tax returns. LiqTech NA is generally

longer subject to tax examinations for years prior to

2014

for U.S. federal and state tax returns.