Income Taxes

12 Months Ended

Dec. 31, 2022

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 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, 2022 and 2021. During the years ended December 31, 2022 and 2021, there was no income tax expense.

Significant components of the Company’s deferred tax assets at December 31, 2022 and 2021:

	December 31, 2022			December 31, 2021
Deferred tax assets:
Net-operating loss carryforwards	$	8,206,000		$	5,771,000
Capitalized R&D costs		2,868,000			-
Stock-based compensation		922,000			805,000
Accrued expenses		743,000			-
R&D credit		546,000			86,000
Other		6,000			6,000
Total deferred tax assets		13,291,000			6,668,000
Valuation allowance		(13,291,000	)		(6,668,000	)
Net deferred tax asset	$	—		$	—

The Tax Cuts and Jobs Act modified the section 174 rules and beginning in 2022, taxpayers may no longer currently deduct R&D expenditures but instead must amortize specified R&D expenditures ratably over five years (or 15 years for foreign expenditures). Gross capitalized R&D Costs for the year ended December 31, 2022 amounted to approximately $10,559,000.

The change in the valuation allowance for the years ended December 31, 2022 and 2021 was an increase of approximately $6,623,000 and $3,460,000, respectively.

The Company’s reconciliation of the federal statutory tax rate and the effective tax rates for the years ended December 31, 2022 and 2021 is as follows:

	December 31, 2022			December 31, 2021
Federal statutory rate		21.0	%		21.0	%
Increase (decrease) in tax expense at federal statutory rate
State income taxes		7.9	%		7.9	%
Change in valuation allowance		(31.0	)%		(28.7	)%
Other		2.1	%		0.2	%
Effective tax rate		0.0	%		0.0	%

The Company had approximately $28,397,000 of gross net operating loss (“NOL”) carryforwards, for both federal and state, as of December 31, 2022.

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 of approximately $19,417,000 as of the change in ownership date to an annual amount of approximately $4.1 million which will be released by December 31, 2028. 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 $28,397,000, $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 $28,397,000 expire from 2037 through 2042. Additionally, the Company has $546,000 of R&D credits which have a 20 year carryforward period, which will expire from 2038 to 2042.