Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 9. Income Taxes

Deferred income taxes reflect the net 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 Company’s deferred tax assets relate primarily to its net operating loss carryforwards and other balance sheet basis differences. In accordance with ASC 740, the Company recorded a valuation allowance to fully offset the gross deferred tax asset, because it is not more likely than not that the Company will realize future benefits associated with these deferred tax assets at December 31, 2021 and 2020. During the years ended December 31, 2021 and 2020, there was no income tax expense.

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

	December 31, 2021			December 31, 2020
Deferred tax assets:
Net-operating loss carryforwards	$	5,771,000		$	2,008,000
Stock-based compensation		805,000			688,000
Accrued payroll		-			297,000
R&D credit		86,000			10,000
Other		6,000			77,000
Total deferred tax assets		6,668,000			3,080,000
Valuation allowance		(6,668,000	)		(3,080,000	)
Net deferred tax asset	$	—		$

The change in the valuation allowance for the years ended December 31, 2021 and 2020 was an increase of $3,460,000 and $1,254,000, respectively.

The Company’s reconciliation of the federal statutory tax rate and the effective tax rates for the years ended December 31, 2021 and 2020 is as follows:

	December 31, 2021			December 31, 2020
Federal statutory rate		21.0	%		21.0	%
Increase (decrease) in tax expense at federal statutory rate
Change in valuation allowance		(21.8	)%		(21.0	)%
Other		0.8	%		-	%
Effective tax rate		0.0	%		0.0	%

The Company had approximately $19,974,000 of gross net operating loss (“NOL”) carryforwards, for both federal and state, as of December 31, 2021.

The Company’s ability to use net operating loss, other carry forwards and tax credits is subject to limitation in subsequent periods under certain provisions of Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended, upon a more than 50% change in ownership of the Company’s stock by a 5% or greater shareholder. The Company examined the application of Section 382 with respect to ownership changes that took place during 2021, as well as the limitation on the application of net operating loss carry forwards. The Company has determined that a more than 50% ownership change occurred on September 16, 2021. The Company has determined that the recent change in ownership limits the Company’s usage of net operating loss, other carry forwards and tax credits as of the change in ownership date to an annual amount of $4.1 million. The Company’s net carryforwards and tax credits may be further limited in the future if additional ownership changes occur.

From the total of the Company’s federal NOL of $19,974,000, $326,000 expires in 2037, and the remaining NOL has an indefinite carryover period but its usage is limited to 80% of taxable income in any subsequent year. The Company’s state NOL’s of $19,974,000 expire from 2037 through 2041.