12. INCOME TAXES

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

INCOME TAXES

Until its reverse recapitalization on March 31, 2017, the Company was treated as a partnership for federal and state income tax purposes and did not incur income taxes. The Company accounts for income taxes under ASC 740. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is "more likely than not" that some component or all of the benefits of deferred tax assets will not be realized.

The Company did not provide any current or deferred U.S. federal income tax provision or benefit for the periods presented because of operating losses since inception. As of December 31, 2019, the Company has federal net operating loss carryforwards of approximately $11,080,000 to reduce future taxable income that will expire beginning in 2038. Certain changes in stock ownership can result in a limitation on the amount of net operating loss and tax credit carryovers that can be utilized each year. As of December 31, 2019, management has not determined the extent of any such limitations, if any.

The Company provided a full valuation allowance on the net deferred tax asset, consisting of net operating loss carry forwards, because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carry forward period. As a result of the change in future Federal statutory tax rates due to the passing of the Tax Cuts and Jobs Act of 2017, management has determined that the deferred tax assets and liabilities should not be valued at a federal statutory rate of 34% but rather at the rate in which the benefit of the deferred tax asset or liability will be realized by the Company. As such, the Federal statutory rate used to value the Company's deferred tax assets and liabilities is 21%.

The Company has not taken a tax position that, if challenged, would have a material effect on the financial statements for the periods ended December 31, 2018 and 2019 applicable under FASB ASC 740. The Company did not recognize any adjustment to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of accumulated deficit on the balance sheet. All tax returns for the Company remain open.

The provision for (benefit from) income taxes consists of the following:

	Year Ended December 31,
	2019			2018
Current tax benefit	$	-		$	-
Deferred tax benefit		1,800,000			678,000
Change in valuation allowance		(1,800,000	)		(678,000	)
Income tax benefit (provision)	$	-		$	-

A reconciliation of the provision for income taxes at the federal statutory rate of 21% to the Company’s provision for income tax is as follows:

	Year Ended December 31,
	2019			2018
Income taxes benefit computed at federal statutory rate	$	1,748,000		$	701,000
State income taxes, net of federal effect		114,000			-
Research tax credits		-			15,000
Permanent differences and other		(62,000	)		(38,000	)
Change in valuation allowance		(1,800,000	)		(678,000	)
Income tax benefit (provision)	$	-		$	-

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax assets and liabilities for the periods presented:

	December 31,
	2019			2018
Deferred tax assets:
Net operating losses	$	2,430,000		$	756,000
Research tax credits		26,000			23,000
Deferred compensation		-			20,000
Stock compensation		239,000			76,000
Accruals and other		9,000			-
		2,704,000			875,000
Deferred tax liabilities:
Depreciation and other		58,000			29,000
		58,000			29,000
Net deferred tax assets		2,646,000			846,000
Less valuation allowance		(2,646,000	)		(846,000	)
Net deferred taxes after valuation allowance	$	-		$	-

In accordance with ASU 2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, the Company recognizes windfall tax benefits associated with the exercise of stock options as a component of tax expense (rather than equity). Accordingly, our federal and state operating loss carryforwards include windfall tax deductions from stock option exercises of approximately $144,000 during the year ended December 31, 2019.