Income Taxes

9 Months Ended

Sep. 30, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 6. Income Taxes

Prior to the Company’s 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.

Under ASC 740-10-30-5, Income Taxes, deferred tax assets should be reduced by a valuation allowance if, based on the weight of available evidence, it is more-likely-than-not (i.e., a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The Company considers all positive and negative evidence available in determining the potential realization of deferred tax assets including, primarily, the recent history of taxable earnings or losses. Based on operating losses reported by the Company during 2020 and 2019, the Company concluded there was not sufficient positive evidence to overcome this recent operating history. As a result, the Company believed that a valuation allowance was necessary based on the more-likely-than-not threshold noted above. The Company had recorded a valuation allowance of approximately $2,432,000 as of September 30, 2021 and $4,658,000 as of December 31, 2020.

Significant components of the tax expense (benefit) recognized in the accompanying consolidated statements of operations for the Three and Nine Months ended September 30, 2021 and September 30, 2020 are as follows:

	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Current tax benefit
Federal	$	(1,159,524	)	$	(712,977	)	$	2,078,774		$	(861,234	)
State		(321,397	)		(147,519	)		348,622			(178,194	)
Total current tax benefit		(1,480,921	)		(860,496	)		2,427,396			(1,039,428	)
Deferred tax expense		12,619			53,114			34,614			92,371
Valuation allowance (expense)		1,480,921			807,382			(2,432,127	)		947,057
Income tax (reduction) benefit	$	12,619		$	-		$	29,883		$	-

The reconciliation of the income tax computed at the combined federal and state statutory rate of 24.5% for the Three and Nine Months ended September 30, 2021 and 2020 to the income tax benefit is as follows:

	Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
	September 30, 2021				September 30, 2020				September 30, 2021				September 30, 2020
Benefit on net loss	$	(1,469,827	)	26.9%	$	(808,436	)	29.4%	$	2,458,947		24.5%	$	(948,111	)	25.3%
Nondeductible expenses		1,525		0.0%		1,054		0.0%		3,063		0.0%		1,054		0.0%
Valuation allowance (expense)		1,480,921		(27.1)%		807,382		(29.3)%		(2,432,127	)	(24.3)%		947,057		(25.3)%
Other items		-		0.0%		-		0.0%		-		0.0%		-		0.0%
Tax benefit/effective rate	$	12,619		(0.20)%	$	-		0.1%	$	29,883		0.2%	$	-		(—)%

The significant components of the Company’s deferred tax liabilities and assets as of September 30, 2021 and December 31, 2020 are as follows: 

	As of September 30, 2021			As of December 31, 2020 (Audited)
Deferred tax liabilities:
Tax expense for internally developed software	$	-		$	(1,814	)
Tax depreciation in excess of book		-			(2,916	)
Total deferred tax liabilities		-			(4,730	)
Deferred tax assets:
Loss carryforwards		1,359,074			3,913,579
Step up in basis at contribution to C-Corp		487,692			511,052
Stock option expense		120,820			124,876
Step up in basis - purchase of non-controlling interest		44,956			49,950
Allowance for credit losses		32,378			33,466
Accrued liabilities		-			20,573
Total deferred tax asset		2,044,920			4,653,496
Tax rate change		151,296			-
Valuation allowance		(2,226,099	)		(4,658,226	)
Net deferred tax asset (liability)	$	(29,883	)	$	-

During the Three months ended September 30, 2021, the Company offset $1.5 million of it’s tax recovery with $1.5 million of its valuation allowance. During the Nine Months ended September 30, 2021, the Company offset $2.4 million of it’s tax expense with $2.2 million of its valuation allowance.