Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

8. Income Taxes

The Company accounts for uncertain tax positions in accordance with ASC Topic 740, Income Taxes. The application of income tax law and regulations is inherently complex. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in the Company’s subjective assumptions and judgments can materially affect amounts recognized in its financial statements.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest and penalties on the balance sheet at December 31, 2021. The Company has an uncertain tax position (“UTP”) of approximately $2.0 million related to California net operating losses at December 31, 2021. The Company is subject to taxation in the United States and state jurisdictions, and the Company’s tax years beginning 2007 to date are subject to examination by taxing authorities.

Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense.

A reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows for the years ended December 31, 2021 and 2020:

	December 31,
	2021			2020
	(%)			(%)
Federal statutory rate	21				21
Change in valuation allowance		5			(3	)
Research and development credits	—				(1	)
Removal of net operating losses and other credits		(25	)		(11	)
Impact of state tax rate change	—				(2	)
Stock compensation and other permanent items		(1	)		(4	)
Effective income tax rate	—			—

Pursuant to Internal Revenue Code of 1986 (“IRC”) Sections 382 and 383, annual use of the Company’s net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has not completed an IRC Section 382/383 analysis regarding the limitation of net operating loss and research and development credit carryforwards. Until this analysis has been completed, the Company has excluded the deferred tax assets for net operating losses of approximately $22.5 million and a research and development credit of approximately $3.6 million generated through December 31, 2021 from its deferred tax asset. When this analysis is finalized, the Company plans to update its unrecognized tax benefits accordingly. The Company does not expect this analysis to be completed within the next twelve months and, as a result, the Company does not expect that the unrecognized tax benefits will change within twelve months of this reporting date. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

Significant components of the Company’s deferred tax assets at December 31, 2021 and 2020 are as follows:  

	December 31,
	2021			2020
Deferred tax assets:
Acquired technology	$	543,000		$	1,089,000
Stock compensation expense		1,413,000			1,139,000
Lease liability		3,000			59,000
Accruals and other		110,000			214,000
Total deferred tax assets		2,069,000			2,501,000
Deferred tax liabilities:
Right of use asset		(3,000	)		(59,000	)
Total deferred tax liabilities		(3,000	)		(59,000	)
Less valuation allowance		(2,066,000	)		(2,442,000	)
Net deferred tax assets (liabilities)	$	—		$	—

At December 31, 2021, the Company corrected the balance of deferred tax assets at December 31, 2020 relating to stock compensation expense as well as the valuation allowance related to those assets by an equal and offsetting amount. The deferred tax assets and valuation allowance as of December 31, 2020 has been increased in the table above by $444,000 due to the impact of the misclassification of stock option type for tax purposes. The Company carries a full valuation allowance against these deferred tax assets, therefore, the adjustments had no effect on the balance sheets, statements of operations and cash flows for the periods presented.

At December 31, 2021, the Company has federal and California net operating loss carryforwards of approximately $91.3 million and $47.8 million, respectively. The federal and California net operating loss carryforwards begin to expire in 2027 and 2028, respectively, unless previously utilized. The portion of federal net operating losses created after 2017 of approximately $29.4 million do not expire and will carry forward indefinitely. At December 31, 2021, the Company also has federal and California research tax credit carryforwards of approximately $2.4 million and $1.5 million, respectively. The federal research credit carryforwards will begin expiring in 2027 unless previously utilized. The California research credit will carry forward indefinitely. Furthermore, under U.S. tax legislation enacted in December 2017, although the treatment of tax losses generated before December 31, 2017 has generally not changed, tax losses generated in calendar year 2018 and beyond do not expire, but may only offset 80% of the Company’s taxable income. This change may require us to pay federal income taxes in future years despite generating a loss for federal income tax purposes in prior years.

The CARES Act, among other things, permits net operating loss carryforwards generated in taxable years beginning after December 31, 2017, to offset 100% of taxable income for taxable years beginning before January 1, 2021, and 80% of taxable income in taxable years beginning after December 31, 2020. The CARES Act did not have a material impact on the Company’s financial results for the year ended December 31, 2021.

California Assembly Bill 85 (“AB 85”), which intends to close a gap in the budget created by the COVID-19 pandemic, was signed into law on June 29, 2020. AB 85 disallows California net operating losses for any taxable year beginning on or after January 1, 2020 and before January 1, 2023 for any corporation with a net business or modified adjusted gross income of more than $1 million for the taxable year. This bill also limits any business credit to offset a maximum of $5 million of California tax, including the California research credit. The Company has a taxable loss for the year ended December 31, 2021, and therefore is not affected by the limitation.

There were no changes to unrecognized tax benefits in 2021 and 2020. As such, the balance of unrecognized tax benefits (excluding interest and penalties) was approximately $2.0 million at December 31, 2021 and 2020. The Company will recognize interest and penalties related to unrecognized tax benefits as income tax expense when incurred. To date, since no benefit has been taken related to the UTP, there has been no interest and penalties recognized.

Due to the full valuation allowance that the Company has on the deferred tax assets, there are no unrecognized tax benefits that would impact the effective tax rate, if recognized.