Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Note 6 — Income Taxes

The income tax provision (benefit) for the years ended December 31, 2020 and 2019 consists of the following (in thousands of dollars):

	2020			2019
U.S. federal
Current	$	-		$	-
Deferred		(793	)		(745	)
State and Local
Current		-			-
Deferred		751			(1,176	)
		(42	)		(1,921	)
Change in valuation allowance		42			(1,921	)
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, 2020 and 2019 is as follows:

	2020			2019
Pretax Income		21.0	%		21.0	%
State Taxes, net of federal benefit		4.7			5.2
Federal and State rate change and other		(25.1	)		11.6
Prior year Deferred True-up		0.0			(3.6	)
Other permanent items		0.1			1.3
Change in valuation allowance		(0.7	)		(35.5	)
Effective rate		(0.0	)%		(0.0	)%

As of December 31, 2020 and 2019, 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,
	2020			2019
Deferred Tax Assets
Net operating loss carryovers	$	2,025		$	1,681
Fixed assets		3			2
Accrued compensation		84			4
Reserves		187			180
Intangible assets		4,038			4,826
Business interest limitation		682			305
Total deferred tax assets		7,019			6,998
Less: valuation allowance		(7,019	)		(6,998	)
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. Inpixon made 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.

As of December 31, 2020 and 2019, the Company had approximately $8.3 million and $6.3 million, respectively, of U.S. federal net operating loss ("NOL") carryovers available to offset future taxable income. As of December 31, 2020 and 2019, the Company had approximately $7.7 million and $6.2 million, respectively, of state 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 2019 and 2020 do not expire and have an indefinite life. Although some state NOLs begin to expire in 2038, $7.2 million state NOLs 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, 2020 and 2019. As of December 31, 2020 and 2019 the change in valuation allowance was $20 thousand and $1.9 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, 2020 and 2019.

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 December 31, 2020 and 2019. 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.

On March 27, 2020, the CARES Act was enacted in response to COVID-19 pandemic. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The CARES Act made various tax law changes including among other things (i) increasing the limitation under Section 163(j) of the Internal Revenue Code of 1986, as amended (the "IRC") for 2019 and 2020 to permit additional expensing of interest (ii) enacting a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k), (iii) making modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and (iv) enhancing the recoverability of alternative minimum tax credits The CARES Act did not have a material impact on the Company.