Income Taxes

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

Income Taxes

Note 8 — Income Taxes

The income tax provision (benefit) for the years ended December 31, 2018 and 2017 consists of the following (in thousands of dollars):

	2018			2017
U.S. federal
Current	$	-		$	-
Deferred		3,515			1,652
State and Local
Current		10			4
Deferred		1,803			(717	)
		5,328			939
Change in valuation allowance		(5,328	)		(939	)
Income tax provision (benefit)	$	-		$	-

The reconciliation between the U.S. statutory federal income tax rate and the Company’s effective rate for the years ended December 31, 2018 and 2017 is as follows:

	2018			2017
U.S. federal statutory rate		21.0	%		34.0	%
State income taxes, net of federal benefit		(7.4	)		2.7
Impairment of goodwill		-			(9.1	)
Incentive stock options		-			(0.3	)
Federal and state rate change and other		(7.1	)		(31.8	)
Other permanent items		(0.8	)		(1.0	)
Change in valuation allowance		(5.8	)		5.5
Effective rate		(0.0	)%		0.0	%

As of December 31, 2018 and 2017, the Company’s deferred tax assets consisted of the effects of temporary differences attributable to the following (in thousands of dollars):

	As of December 31,
	2018			2017
Deferred Tax Assets
Net operating loss carryovers	$	488		$	8,070
Deferred revenue		-			1,448
Fixed assets		-			6
Accrued compensation		18			67
Reserves		201			229
Intangible assets		4,173			557
Other		201			18
Total deferred tax assets		5,081			10,395
Less: valuation allowance		(5,081	)		(10,395	)
Deferred tax assets, net of valuation allowance	$	0		$	0

In accordance with applicable U.S. tax laws, the Spin Off as described in Note 1 was determined to result in a taxable gain to Inpixon. It is expected that Inpixon will make an election pursuant to the Internal Revenue Code Section 336(e) to treat the Distribution as a sale of assets. Accordingly, the tax effects of the changes in the tax basis of assets and liabilities, as offset by a valuation allowance, have been recognized in equity.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”) tax reform legislation. This legislation made significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryovers and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from 34% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the enacted rate. This revaluation resulted in a provision of $5.4 million to income tax expense and a corresponding reduction in the deferred tax asset, which was offset by an equivalent adjustment to the valuation allowance. The other provisions of the Tax Cuts and Jobs Act did not have a material impact on the consolidated financial statements.

The Company completed its analysis of the Act and did not identify any revisions within the measurement period guidance outlined in Staff Accounting Bulletin “SAB 118”. We will continue to assess our provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary.

As of December 31, 2018 and 2017, the Company had approximately $2.3 million and $32.3 million, respectively, of U.S. federal and state net operating loss (“NOL”) carryovers available to offset future taxable income. NOL’s generated prior to the Distribution were charged off to equity. The NOL’s generated in 2018 do not expire and have an indefinite life.

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. In assessing the realization of deferred tax assets, management considers, whether it is “more likely than not”, that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible.

ASC 740, “Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. After consideration of all the information available, management believes that uncertainty exists with respect to future realization of its deferred tax assets and has, therefore, established a full valuation allowance as of December 31, 2018 and 2017. As of December 31, 2018 and 2017, the change in valuation allowance was $1.2 million and $(0.9) million, respectively.

ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.  ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company is required to file federal and state income tax returns. Based on the Company’s evaluation, it has been concluded that there are no material uncertain tax positions requiring recognition in the Company’s consolidated financial statements for the years ended December 31, 2018 and 2017.

The Company’s policy for recording interest and penalties associated with unrecognized tax benefits is to record such interest and penalties as interest expense and as a component of general and administrative expense, respectively.  There were no amounts accrued for interest or penalties for the years ended December 31, 2018 and 2017.  Management does not expect any material changes in its unrecognized tax benefits in the next year. 

The Company operates in multiple tax jurisdictions and, in the normal course of business, its tax returns are subject to examination by various taxing authorities. Such examinations may result in future assessments by these taxing authorities. The Company is subject to examination by U.S. tax authorities beginning with the year ended December 31, 2018. Currently, the Company is not subject to any examinations.