Note 8. Income Taxes

Prior to the initial public offering in October 2015, the earnings of the Predecessor, which was a limited liability company taxed as a partnership, were taxable to its members. In connection with the contribution of membership interests to the Company (a C-Corporation formed in 2015), the net income or loss of the Company after the initial public offering is taxable to the Company and reflected in the accompanying consolidated financial statements.

The Company performs an evaluation of the realizability of its deferred tax assets on a quarterly basis. The Company considers all positive and negative evidence available in determining the potential of realizing deferred tax assets, including the scheduled reversal of temporary differences, recent and projected future taxable income and prudent and feasible tax planning strategies. The estimates and assumptions used by the Company in computing the income taxes reflected in the accompanying consolidated financial statements could differ from the actual results reflected in the income tax returns filed during the subsequent year.
Adjustments are recorded based on filed returns when finalized or the related adjustments are identified.

Note 8. Income Taxes (Continued)

Significant components of the tax benefit recognized in the accompanying consolidated statements of operations for the period subsequent to the initial public offering (October 23, 2015 to December 31, 2016) are as follows:

	Year Ended			Period Ended
	December 31, 2016			December 31, 2015
Current tax benefit
Federal	$	1,402,230		$	171,007
State		81,611			9,953
		1,483,841			180,960
Deferred tax expense		(172,882	)		(34,405	)
	$	1,310,959		$	146,555

The reconciliation of the income tax computed at the combined federal and state statutory rate of 37.63% to the income tax benefit is as follows:

	Year Ended December 31,						Period Ended December 31,
	2016			2016			2015			2015
Benefit on net loss after initial public offering of $3,681,349 and $166,711	$	1,385,291			37.6	%	$	62,733			37.6	%
Nondeductible expenses		(48,375	)		(1.3	)%		(7,246	)		(4.3	)%
Tax benefit of historical carryover basis at contribution of members' interest		-			0.0	%		91,068			54.6	%
Other items		(25,957	)		(0.7	)%		-			0.0	%
Tax benefit/effective rate	$	1,310,959			35.6	%	$	146,555			87.9	%

The significant components of the Company’s deferred tax liabilities and assets as of December 31, 2016 and December 31, 2015 are as follows:

	As of December 31,
	2016		2015
Deferred tax liabilities:
Tax expense for debt issuance costs	$	37,403	$	-
Tax expense for internally developed software		25,752		34,280
Tax depreciation in excess of book		14,710		7,523
		77,865		41,803
Deferred tax assets:
Loss carryforwards		1,641,485		180,960
Step up in basis at contribution to C-Corp		1,584,758		1,826,688
Stock option expense		108,994		5,369
Step up in basis - purchase of non-controlling interest		96,583		102,325
Allowance for credit losses		47,038		47,038
Accrued liabilities		30,543		-
		3,509,401		2,162,380
Net deferred tax asset	$	3,431,536	$	2,120,577

Note 8. Income Taxes (Continued)

As discussed above, the Predecessor effected a transaction resulting in the contribution of member interests to the Company (a newly formed C-Corporation). This transaction was recorded at the carryover basis of the Predecessor for both tax and financial reporting purposes. In accordance with ASC 740-10-45-19, Income Taxes, the Company accounted for the tax effect of the difference in tax basis and book basis assets and liabilities at contribution date as a direct consequence of a change in tax status. As such, the Company recognized a net deferred tax asset for the tax effect of those basis differences equal to $91,068 with a corresponding increase in tax benefit. As a result of various equity transactions prior to the incorporation, the former members of the Predecessor recognized taxable gains associated with redemption consideration and/or deficit capital accounts totaling approximately $5.25 million. In accordance with ASC 740-20-45-11, the Company accounted for the tax effect of the step up in income tax basis related to these transactions with or among shareholders and recognized a deferred tax asset and corresponding increase in equity of approximately $1.97 million. Federal net operating loss carryforwards of approximately $512,000 related to 2015 and $3,850,000 related to 2016 will expire in 2035 and 2036, respectively.