TAXES

9 Months Ended

Sep. 30, 2018

Income Tax Disclosure [Abstract]

TAXES

NOTE 9 - TAXES

A. Corporate Income Taxes (“CIT”)

Prior to January 1, 2018, Han Feng, TT, MFD, Kirnsway, Chinesetg, NSF and BB had elected under the Internal Revenue Code to be S corporations. R&N Holdings, R&N Lexington and HG realty are formed as partnerships. An S corporation or partnership is considered a flow-through entity and is generally not subject to federal or state income tax on corporate level. In lieu of corporate income taxes, the stockholders and members of these entities are taxed on their proportionate share of the entities’ taxable income. Kirnland did not elect to be treated as S corporation and is the only entity that is subject to corporate income taxes under this report.

Effective January 1, 2018, all of the above-listed S corporation and partnership entities have been converted to C corporations and will be taxed at corporate level going forward. Accordingly, the Company shall account for income taxes of all these entities under ASC 740. The Company has recognized the impact on deferred income tax assets and liabilities from the future conversion of the above-mentioned S corporations and partnership entities to C corporations in the consolidated financial statements as of December 31, 2017.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. The Company expects the new federal income tax rate will significantly lower the Company’s income tax expenses going forward. The Company does not expect the repatriation tax and new minimum tax on certain future foreign earnings to have any impact on the Company’s operations since it currently has no foreign income and does not expect to generate any foreign income in the future.

(i) The Income tax provision (benefit) of the Company for the nine and three months ended September 30, 2018 and 2017 consists of the following:

	For the Nine Months Ended
	September 30, 2018			September 30, 2017
Current:
Federal	$	1,345,253		$	403,676
State		365,822			75,047
Current income tax provision		1,711,075			478,723
Deferred:
Federal		(120,728	)		(3,806)
State		(48,140)			1,707
Deferred income tax benefit		(168,868	)		(2,099)
Total income tax provision	$	1,542,207		$	476,624

	For the three Months Ended
	September 30, 2018		September 30, 2017
Current:
Federal	$	360,016	$	403,676
State		124,118		75,047
Current income tax provision		484,134		478,723
Deferred:
Federal		309,176		(8,221)
State		46,837		(1,856)
Deferred income tax provision (benefit)		356,013		(10,077)
Total income tax provision	$	840,147	$	468,646

(ii) Temporary differences and carryforwards of the Company that created significant deferred tax assets and liabilities are as follows:

	As of September 30, 2018			As of December 31, 2017
Deferred tax assets:
Allowance for doubtful accounts	$	158,404		$	139,947
Inventories		122,292			1,750
Section 481(a) adjustment		41,795			140,310
Other accrued expenses		671,395			237,550
Others		45,468			—
Total deferred tax assets		1,039,354			519,557
Deferred tax liabilities:
Property and equipment		(1,306,698	)		(955,769	)
Total deferred tax liabilities		(1,306,698	)		(955,769	)
Net deferred tax assets (liabilities)	$	(267,344)		$	(436,212	)

The above-disclosed deferred income assets and liabilities as of December 31, 2017 included deferred tax assets in the amount of $398,699 and deferred tax liabilities in the amount of $934,529 derived from the effect of future conversion of the above-mentioned S corporations and partnership entities to C corporations.

(iii) Reconciliations of the statutory income tax rate to the effective income tax rate are as follows:

	For the Nine Months Ended
	September 30, 2018			September 30, 2017
Federal statutory tax rate		21.0	%		34.0	%
State statutory tax rate		4.7	%		4.0	%
U.S. permanent difference		1.2	%		0.2	%
Others		2.1	%		(0.5	)%
Effect of flow-through entities		—			(31.2	)%
Effective tax rate		29	%		6.5	%

B. Pro forma Income Taxes information

As mentioned before, prior to January 1, 2018, Han Feng, TT, MFD, Kirnsway, Chinesetg, NSF and BB have elected under the Internal Revenue Code to be S corporations. R&N Holdings, R&N Lexington, and HG realty are formed as partnerships. Starting January 1, 2018, all of the above-mentioned entities have been converted to C corporations and will be subject to regular corporate income tax rate going forward.

The following pro forma financial information presents the income tax expenses and EPS for the nine months ended September 30, 2017, as if all of these S corporation and partnership entities had been converted to C corporations as of the beginning of each period presented:

(i) The Pro forma Income tax provision of the Company for the nine and three months ended September30, 2017 consists of the following:

	For the Nine Months Ended September 30, 2017		For the Three Months Ended September 30, 2017
Current:
Federal	$	2,479,849	$	881,604
State		315,392		136,450
Current income tax provision		2,795,241		1,018,054
Deferred:
Federal		40,358		12,832
State		8,837		976
Deferred income tax provision		49,195		13,808
Total income tax provision	$	2,844,436	$	1,031,862

(ii) The Pro forma earnings per share:

	For the Nine Months ended September 30, 2017		For the Three Months ended September 30, 2017
	(Unaudited)		(Unaudited)
Pro Forma Net Income	$	4,535,864		1,689,985
Less: net income (loss) attributable to noncontrolling interest		256,132		277,386
Pro Forma Net Income Attributable to HF Group Holding Corporation		4,279,732		1,412,599
Pro Forma Earnings per common share - basic and diluted	$	0.21		0.07
Pro Forma Weighted average shares - basic and diluted		19,969,831		19,969,831